Completion Report

Project Number: 45067-005 Loan Number: 2781 September 2020

Uzbekistan: Central Asia Regional Economic Cooperation Corridor 6 (Marakand–Karshi) Railway

Electrification Project

This document is being disclosed to the public in accordance with ADB’s Access to Information Policy.

CURRENCY EQUIVALENTS

Currency unit – Uzbekistan sum (SUM)

At Appraisal At Project Completion 28 Sep 2011 31 Dec 2018 SUM1.00 = $0.000573 $0.00012 $1.00 = SUM1 ,746.60 SUM8 ,339.55

ABBREVIATIONS

ADB – Asian Development Bank AEFS – audited entity financial statements APFS – audited project financial statement CAREC – Central Asia Regional Economic Cooperation EIRR – economic internal rate of return EMR – environmental monitoring report FIDIC – International Federation of Consulting Engineers FIRR – financial internal rate of return ICB – international competitive bidding km – kilometer LIBOR – London interbank offered rate NOKS – JSC O‘zbekiston Temir Yo‘llari Directorate on Capital Construction O&M – operation and maintenance PESC – project engineering and supervision consultants PIU – project implementation unit SCADA – supervisory control and data acquisition UTY – O‘zbekiston Temir Yo‘llari State Joint-Stock Railway Company

NOTES

(i) The fiscal year (FY) of the Government of Uzbekistan ends on 31 December. “FY” before a calendar year denotes the year in which the fiscal year ends, e.g., FY2019 ends on 31 December 2019.

(ii) In this report, “$” refers to United States dollars.

Vice -President Shixin Chen, (Operations 1) Director General Werner Liepach, Central and West Asia Department (CWRD) Director Cindy Malvicini, Uzbekistan Resident Mission (URM), CWRD

Team leader Shokhimardon Musaev, Senior Project Officer, URM, CWRD Team members Feruza Insavalieva, Associate Safeguards Officer, URM, CWRD Mekhri Khudayberdiyeva, Senior Social Development Officer (Gender), URM, CWRD Rustam Zakhidov, Associate Project Analyst, URM, CWRD

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

BASIC DATA i I. PROJECT DESCRIPTION 1 II. DESIGN AND IMPLEMENTATION 2 A. Project Design and Formulation 2 B. Project Outputs 3 C. Project Costs and Financing 5 D. Disbursements 6 E. Project Schedule 6 F. Implementation Arrangements 6 G. Technical Assistance 7 H. Consultant Recruitment and Procurement 7 I. Safeguards 7 J. Monitoring and Reporting 8 III. EVALUATION OF PERFORMANCE 9 A. Relevance 9 B. Effectiveness 9 C. Efficiency 10 D. Sustainability 10 E. Development Impact 12 F. Performance of the Borrower and the Executing Agency 13 G. Performance of the Asian Development Bank 13 H. Overall Assessment 13 IV. ISSUES, LESSONS, AND RECOMMENDATIONS 14 A. Issues and Lessons 14 B. Recommendations 14

APPENDIXES

1. Design and Monitoring Framework 16 2. Project Cost at Appraisal and Actual 17 3. Project Cost by Financier 18 4. Contract Awards of ADB Loan Proceeds 20 5. Disbursement of ADB Loan Proceeds 21 6. Chronology of Main Events 22 7. Status of Compliance with Loan Covenants 23 8. Economic Reevaluation 36 9. Financial Reevaluation 40 10. Contribution to ADB Results Framework 43

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BASIC DATA

A. Loan Identification 1. Country Uzbekistan 2. Loan number and financing source 2781 -UZB 3. Project title Central Asia Regional Economic Cooperation Corridor 6 (Marakand-Karshi) Railway Electrification Project 4. Borrower Republic of Uzbekistan 5. Executing agency O‘zbekiston Temir Yo‘llari Joint-Stock Railway Company 6. Amount of loan $100 million

7. Financing modality Project loan

B. Loan Data 1. Appraisal – Date started 6 June 2011 – Date completed 18 June 2011 2. Loan negotiations – Date started 26 August 2011 – Date completed 26 August 2011 3. Date of Board approval 28 September 2011 4. Date of loan agreement 16 February 2012 5. Date of loan effectiveness – In loan agreement 1 April 2012 – Actual 28 March 2012 – Number of extensions 0 6. Project completion date – Appraisal 30 March 2016 – Actual 6 July 2018 7. Loan closing date – In loan agreement 30 September 2016 – Actual 31 December 2018 – Number of extensions 2 8. Financial closing date – Actual 31 December 2018 9. Terms of loan – Interest rate London Interbank Offered Rate (LIBOR) + 0.6% per annum, less credit of 0.2% – Commitment charge 0.15% per annum – Maturity 25 years – Grace period 5 years 10. Terms of relending (if any) – Interest rate LIBOR + 0.6% per annum, less credit of 0.2% – Maturity 25 years – Grace period 5 years – Second-step borrower O‘zbekiston Temir Yo‘llari Joint Stock Company

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11. Disbursements a. Dates Initial Disbursement Final Disbursement Time Interval 13 November 2012 17 August 2018 69 months

Effective Date Actual Closing Date Time Interval 28 March 2012 31 December 2018 81 months

b. Amount ($ million) Increased Canceled Last Original during during Revised Amount Undisbursed Allocation Implementation Implementation Allocation Disbursed Balance Category (1) (2) (3) (4=1+2 –3) (5) (6 = 4–5) 1. Works 64.10 12.46 76.56 76.56 2. Goods 24.60 (5.59) 19.01 19.01 3. Consulting 5.30 (0.87) 4.43 4.43 Services 4. Unallocated 6.00 (6.00) Total 100.00 100.00 100.00 0.00

C. Project Data 1. Project cost ($ million) Cost Appraisal Estimate Actual Foreign exchange cost 100.0 100.00 Local currency cost 76.0 93.78 Total 176.0 193.78

2. Financing plan ($ million) Cost Appraisal Estimate Actual Implementation cost Borrower financed 76.0 93.78 ADB financed 100.0 100.00 Other external financing Total implementation cost 176.0 193.78 Interest during construction costs Borrower financed 4.0 6.00 ADB financed Other external financing Total interest during construction cost 4.0 6.00

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3. Cost breakdown by project component ($ million) Component Appraisal Estimate Actual A. Base Cost 1. Electrification System Installation 144.00 171.97 a. Base structure 25.6 76.39 b. Signaling and Interlocking 60.8 47.70 c. Power Supply Facilities 50.5 28.87 d. Machinery, Tools, and Equipment 7.1 19.01 2. Project Management Consultant 8.0 5.53 3. Incremental Recurrent Cost 0.5 0.41 4. Taxes and Duties 10.3 9.88 Subtotal (A) 162.8 187.79 B. Contingencies 1. Physical 9.0 - 2. Price 0.2 - Subtotal (B) 9.2 - C. Financial Charges during Construction 4.0 6.00

Total 176.0 193.78

4. Project schedule Item Appraisal Estimate Actual Consulting Services for project management and institutional capacity improvement Date of award Q1 2012 10 August 2012 Date of completion Q1 2016 19 September 2016

Turnkey Contract for Design, Supply, Installation, and Commissioning of Transformer Substation, Sectioning Posts, and Catenary System (B021) Date of award Q2 2013 18 April 2013 Date of completion Q2 2014 22 September 2015

Supply depot equipment and maintenance machinery (B01) Date of award Q2 2013 18 April 2013 Date of completion Q2 2014 22 September 2015

Turnkey Contract for Design, Supply, Installation, and Commissioning of Traction Substations, Signaling and Telecommunication Equipment, and SCADA system (B02) Date of award Q3 2013 16 December 2013 Date of completion Q1 2016 31 May 2016

Procurement of machinery and equipment (B03) Date of award 7 March 2017 Date of completion 6 July 2018

Start of operations Completion of tests and commissioning State acceptance of Transformer Substation, Q1 2016 17 September 2015 a Sectioning Posts, and Catenary System State acceptance of Traction Substations, Signaling Q1 2016 22 November 2017 and Telecommunication Equipment, and SCADA system

Q = quarter, SCADA = supervisory control and data acquisition. a Although the State acceptance was on 17 September 2015, the electrified train operations started on 5 September 2015.

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5. Project performance report ratings Implementation Period Ratings From 28 March 2012 to 31 December 2012 On track From 01 January 2013 to 31 December 2013 On track From 01 January 2014 to 31 December 2014 On track From 01 January 2015 to 31 December 2015 On track From 01 January 2016 to 31 December 2016 On track From 01 January 2017 to 31 December 2017 Potential Problem From 01 January 2018 to 31 December 2018 On track

D. Data on Asian Development Bank Missions No. of No. of Name of Mission Date Specialization of Members a Persons Person -Days Consultation mission 12 – 22 6 10 a, b, d, g, i, j April 2011

Fact-finding 6 – 18 6 19 d, g, i, j, k, l June 2011 Loan Inception 15 – 20 6 12 c, d, g, h, i April 2012 Special Loan 3 – 7 3 10 d, g, h Administration December 2012

Project review 26 – 30 4 4 d, g, h, i November 2013

Project review 30 April – 8 8 5 d, g, h, i May 2014 Mid-term project review 13 – 17 5 15 a, c, f, g, i, April 2015

Project review 9 – 17 4 9 a, f, i, international consultant (railway policy December specialist) 2015 Project review 1 – 5 May 4 4 a (2), e, f 2017

Project review 17 – 21 3 3 a, e, f July 2017

Project review 30 – 31 1 3 a, e, f Oct 2017

Project review 7 –18 May 11 33 a, e, f 2018

Project completion review 23 – 31 9 18 e, f May 2019 a a = transport specialist; b = environment specialist; c = operations/project assistant; d = principal safeguards specialist; e = senior project officer; f = project analyst; g = transport specialist/mission leader; h = senior transport specialist; i = senior portfolio management officer; j = senior social development officer (gender); k = counsel; l = lead transport specialist

I. PROJECT DESCRIPTION

1. Uzbekistan is a double landlocked country; however, with three Central Asia Regional Economic Cooperation (CAREC) corridors crossing its territory, it is a key transit country for trade in Central Asia. Roads and railways are the dominant modes of transport, with railways being vital to Uzbekistan’s economy for the bulk haul of minerals and freight, and intercity passenger services in urban areas. Given the importance of the speed and capacity of the railways for the country’s economic development, the entire rail system of the country needed to be modernized and restructured. The completed and ongoing investments in the system, including electrification, would revitalize the railway system. At the same time, replacing diesel locomotives with electric locomotives would increase the system throughput, reduce operation and maintenance (O&M) costs, improve connectivity, and reduce greenhouse gas emissions.

2. To support Uzbekistan’s railway development and strengthen trade cooperation with its neighbors, the project financed the electrification of the 140 kilometer (km) Marakand–Karshi section of CAREC Corridor 6 that runs north-south and links Europe through Central Asia to the Middle East and South Asia. The project area was in the remote and less developed districts of Samarkand and Kashkadarya provinces. Inside Uzbekistan, 830 km of CAREC Corridor 6 goes from Keles, on the border with Kazakhstan, to Tashkent, Samarkand, Karshi, and Kumkurgan, before reaching Termez on the border with Afghanistan. This makes it one of the country’s key routes for transporting bulky goods such as oil and oil products, minerals, agricultural products, and textiles.

3. Afghanistan was expecting more traffic from Uzbekistan and its northern neighbors via this corridor, especially after completion of the Asian Development Bank (ADB)-funded Hairatan to Mazar-e-Sharif railway in northern Afghanistan in 2010. The corridor would also help Uzbekistan provinces, particularly Samarkand, Kashkadarya, and Surkhandarya, to increase their exports of cotton and its by-products, horticulture products, marble, oil, and gas. Overall, rail traffic was increasing and inadequate rail line capacity in some sections of the route was causing a bottleneck. As part of CAREC Corridor 6, the railway line between Keles and Marakand (365 km) was already electrified, and the section between Karshi and Termez (325 km) was also being electrified under co-financing from Japan International Cooperation Agency (JICA). 1 Complete electrification of the whole route from Keles to Termez would result in uninterrupted electric traction for end-to-end movement of rail traffic, which would be beneficial for regional cooperation and development.

4. In 1997, the government started reforming the railway sector of Uzbekistan and ADB supported its efforts by providing technical assistance (TA). As a result of the sector reforms, ancillary services were largely separated from the core rail operations, and state-owned and private forwarding organizations with marketing responsibilities were established. The reforms started yielding results, but institutional constraints needed to be reduced to realize the sector’s full potential. Overall, the railway system’s operations were profitable and O‘zbekiston Temir Yo‘llari Joint-Stock Railway Company (UTY) was able to finance the railway infrastructure rehabilitation and modernization using its own resources.

1 On 9 January 2018 the ceremony of start of operation of the electrified Karshi and Termez railway section was held. Electrification of the 325 km section was implemented according to the Resolution of the President of Uzbekistan No. PR-1712 dated 21 February 2012. (ref. https://www.railway.uz/ru/informatsionnaya_sluzhba/novosti/8662/)

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5. On 28 September 2011, ADB approved a $100 million loan to finance the project. 2 The loan agreement was signed on 16 February 2012 and the project became effective on 28 March 2012. UTY was the executing agency. 3 The impact of the project was increased regional trade and accelerated economic growth. The outcome was improved railway operation on the Marakand-Karshi rail line. The two project outputs were: (i) 140 km electrified rail line from Marakand to Karshi; and (ii) improved management capacity of UTY.

II. DESIGN AND IMPLEMENTATION

A. Project Design and Formulation

6. The project design was relevant to Uzbekistan’s railway needs. The project was in line with the (i) government’s railway development strategy;4 (ii) Uzbekistan Transport Sector Strategy, 2006–2020;5 (iii) ADB’s Strategy 2020 6 and country partnership strategy, 2012–2016;7 and (iv) CAREC Transport and Trade Facilitation Strategy and Action Plan. 8 As CAREC Corridor 6 connects Tashkent and Samarkand to Karshi and the southern part of Uzbekistan, its complete electrification was important for national and regional economic development. The project electrified the final section of the corridor, thereby improving connectivity and reducing transportation costs to promote regional cooperation and trade.

7. The project design incorporated the key lessons from ADB’s experience in the transport sector of Uzbekistan. These included completing tenders and price verifications before obtaining ADB’s endorsement of the bid evaluation reports and contract awards; strengthening UTY’s project implementation capacity through consulting services for construction supervision; and obtaining the government and UTY assurances of adequate funding for O&M of the project railway line to ensure the safe operation of freight and passenger train services.

8. The project achieved all the targets in the project design and monitoring framework (Appendix 1). The project design was sound, adequately formulated, and the financing modality was appropriate to deliver the project outputs. No changes were made to the project design.

9. At appraisal, the project aimed to have a positive socioeconomic impact based on its contribution to the economic development of Karshi city and the successful launching of high- speed passenger trains, which started daily runs between Tashkent and Samarkand on 5 September 2015. 9 The project expanded the use of innovative and modern railway technologies, which included procurement of modern locomotives, applying the latest technology in train traction, installing modern automatic passenger transportation controls and automatic train

2 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. 3 UTY was determined as the Executing Agency per the Resolution of President of the Republic of Uzbekistan No.PR- 1676 dated 5 January 2012. 4 The government has formulated the Railway Electrification Program up to 2020 (Decree of the President of the Republic of Uzbekistan No. PP-993, 5 November 2008) and prioritized under Decree of the President of the Republic of Uzbekistan No. PP-1446, 21 December 2010, a three-part 5-year railway capital investment plan, 2011–2015 with an estimated cost of $1.87 billion: (i) further development of railway infrastructure, (ii) railway electrification, and (iii) modernization of rolling stock. 5 ADB. 2006. Transport Sector Strategy (2006–2020) . Consultant’s Report. Manila (TA 4659-UZB). 6 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank, 2008–2020. Manila 7 ADB. 2011 . Country Partnership Strategy: Uzbekistan, 2012–2016. Manila 8 ADB. 2008. CAREC Transport and Trade Facilitation Strategy and Action Plan . Manila. 9 UTY procured high-speed Talgo-250 (Spain) passenger trains with running speeds up to 250 km/h that were named “Afrosiob”.

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operation systems, and reconstructing and modernizing the railway infrastructure. The project resulted in an increased average running speed for passenger and freight trains; and its transformative effect, which was reflected in the improved competitiveness of the railway system and the quality of service, led to increases in railway freight volumes and carrying capacity, and strengthening capacity of the trans-Afghan corridor.

10. Rail electrification is an important part of the country’s plans to reduce greenhouse gas emissions, according to the government’s commitments to international agreements on climate change. 10 On average, an electric-powered train increases hauling capacities and emits between 20% to 35% less carbon per passenger-mile than a diesel-powered train. 11 In addition, electric- powered trains have zero emissions at the point of use.

11. At project completion, a 140 km section of the railway along CAREC Corridor 6 was electrified. The project helped to (i) increase the role of the railways in external and internal transportation services; (ii) optimize O&M costs through the introduction of modern railway technologies; (iii) reduce travel time for passengers and freight traffic and increase the reliability and safety of transportation; (iv) collect surplus income from the transit transportation of international freight and passengers by increasing the competitiveness of railway services at external markets; (v) improve the ecology and environment by reducing pollution and carbon emissions; (vi) improve the performance of the unified railway network of Uzbekistan; and (vii) support the conditions for accelerating the project region’s social and economic development and boost further development of transportation and communication between the regions of Uzbekistan.

B. Project Outputs

12. The project had the following two outputs: (i) 140 km electrified rail line from Marakand to Karshi; and (ii) improved management capacity of UTY.

13. Output 1: 140 km electrified rail line from Marakand to Karshi. This output was achieved as the rail line was electrified and became operational. The following were output 1’s target indicators: by 2016 (i) 140 km rail line of CAREC Corridor 6 between Marakand and Karshi is electrified and operational; (ii) Karshi depot is refitted for maintenance of electric locomotives; and (iii) specialized maintenance equipment is procured. In addition, the loan savings were utilized by 2017 to procure additional specialized maintenance equipment to further increase the efficiency of maintenance activities and the safety and reliability of the railway’s operations. The project works included constructing an overhead catenary system (OCS); constructing three traction substations in the project section; providing local and remote controls for monitoring and supervision of power supply using the supervisory control and data acquisition system; upgrading associated railway track facilities; and upgrading the railway signaling system with computer- based interlocking and communications systems to facilitate efficient operations. 12 The project developed maintenance facilities for electric locomotives by refitting the Karshi depot that was being used to maintain diesel locomotives. By consolidating the facilities of the existing depot and

10 The Parliament of Uzbekistan ratified the Kyoto Protocol to the United Nations Framework Convention on Climate Change on 20 August 1999 and the Paris Agreement on 2 October 2018. 11 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. 12 The telecommunication system allows close communication between various parts of the railway system: railway stations and/or strategic railway locations (e.g., level crossings, operations control center, freight stations, depot areas, traction substations).

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subdepot, which were located 3 km away from each other, the project improved O&M efficiency by reducing downtime for maintenance and improving asset use. Specialized equipment, including motor and breakdown vehicles, motor vehicle-mounted drilling machines, protection facilities, and a small powered plant for inspection, maintenance, and attending to major breakdowns of OCS, which were procured under the project, increased UTY’s O&M capacity.

14. All three target indicators of output 1 were achieved. The project initially envisaged design speeds of 160 km/hour for passenger services and 100 km/hour for freight services on the project route. During project implementation, the government enhanced the design for the high-speed passenger trains to enable speeds of up to 250 km/hour. This reduced the travel time from Tashkent to Karshi to 3 hours from 8 hours before the project.

15. Output 2: Improved management capacity of UTY. This project output was measured by three indicators: (i) UTY management and key technical staff (including 20% female) are trained on corporate governance and a sex-disaggregated corporate database is developed by 2014; (ii) UTY allocates resources to implement cost optimization by 2014; and (iii) the UTY project implementation unit (PIU) is functioning effectively with contract awards and disbursements achieved on time.

16. The project aimed to improve the institutional capacity of UTY through (i) workshops and gender-sensitive training sessions for its management and key technical staff to improve corporate governance and managerial skills and optimize costs to improve corporate social responsibility and profitability; (ii) training of UTY staff, specifically in project management and crosscutting areas relevant to railway development; and (iii) upgrading of technology and the skills of UTY staff through training in the use and maintenance of state-of-the-art equipment procured from international sources, including the testing and commissioning of equipment under actual conditions of operation.

17. To meet the output targets for the corporate governance training, the project engineering and supervision consultants (PESC) mobilized an expert to conduct a training program from 8 February to 29 April 2016. The training program included modules to improve UTY staff’s professional skills for the supervision and management of railway projects and for the application of international contracting standards and conditions of contract promoted by the International Federation of Consulting Engineers (FIDIC). It also included a set of training sessions for 10 UTY and PIU staff, including two women, who were overseeing the implementation of projects financed by international financial institutions and international contractors. The training program achieved its goals. The training results showed increased interest in and improved knowledge of FIDIC among the UTY executives and officers. Improved preparation and implementation of subsequent ADB-funded projects serve as evidence of the improved procurement and project management capacity of the PIU. 13

18. A financial costing expert, who was engaged under the PESC contract in 2013 and in 2016, (i) assessed UTY’s accounting framework, standards, and reporting requirements, (ii) reviewed transactions between UTY and its subsidiaries, and made recommendations for cost optimization and revenue maximization, and (iii) reviewed and improved procedures and policies for supporting good governance and compliance with regulations and accounting standards. The expert worked closely with UTY’s Economic and Finance Department staff and provided UTY with (i) an illustrative management reporting package that comprised detailed analysis of UTY’s

13 Loan 3527-UZB: CAREC Corridor 2 (Pap-Namangan-Andijan) Railway Electrification Project and Loan 3785-UZB: Railway Efficiency Improvement Project .

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management reporting system, and (ii) a cost analysis matrix to analyze operating expenditures, including fixed and variable costs.

19. Promotion of gender equality. The project was categorized as some gender elements (SGE). Measures to promote gender equality and women’s empowerment included (i) appointing a gender focal point in UTY; (ii) gathering sex-disaggregated baseline data, (iii) conducting information campaigns on HIV/AIDS; (iv) training UTY management and key technical staff (including 20% female) on corporate governance; and (v) developing a sex-disaggregated corporate database. During project implementation, a gender focal point from the UTY Human Resource (HR) division was assigned to promote gender mainstreaming activities such as encouraging female staff to participate in the project trainings, creating favorable working conditions for women staff, and addressing their concerns related to social allowances and benefits. A sex-disaggregated HR corporate database was developed and used for the trainings and capacity building of the key technical staff including women. HIV/AIDS information campaigns were not feasible because UTY did not have a relevant specialist and no funds were allocated for this activity during project implementation.

20. The PIU establishment. The PIU functioned effectively with project contract awards and disbursements being made on time. Following the internal administrative order of the company, UTY established the PIU and staffed it mostly with experienced specialists. 14 The PIU staff’s technical knowledge of the railway sector and proactive approach to project implementation ensured smooth and efficient interaction with other UTY departments and contributed significantly to successful project implementation.

C. Project Costs and Financing

21. At appraisal, the total project cost was estimated at $176 million including taxes, duties, and charges. The foreign exchange cost accounted for $100 million (about 56% of the estimated total) and the local currency cost was $76 million (about 44%), including taxes and duties. The project was to be financed through a loan of $100 million from ADB’s ordinary capital resources, to cover the whole foreign exchange cost, and government counterpart funding of $76 million. The appraisal estimate included physical contingencies and provisions for price escalation on the foreign exchange and local currency costs, as well as an estimate of the government taxes and financing charges during construction.

22. Upon completion, the actual cost was $193.78 million, i.e., 10% above the estimated project cost at appraisal. The actual project financing was $100 million (51.6%) from ADB and $93.78 million (49.4%) from UTY’s own funds. The original allocation for consulting services was $5.3 million, with $4.43 million (83.5%) being utilized.

23. All foreign exchange costs were funded by ADB and the government financed the local currency costs. Actual interest during construction amounted to $6 million and was covered by UTY. The actual cost of physical works and equipment was $172 million compared to the appraisal estimate of $144 million; the contracted amount of project management and consultancy services was $5.53 million compared to $8 million estimated at appraisal. A detailed summary of the actual versus appraisal costs for each project component and the related financing plan is in Appendix 2. The actual costs and appraisal estimates by component and by financier are in Appendix 3. A summary of contracts financed by ADB is in Appendix 4.

14 The internal order of UTY No. 76-H dated 28 February 2011 "On establishment of PIU for electrification projects".

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24. During implementation, the project incurred foreign exchange cost savings that derived from lower bid prices as a result of international competitive bidding (ICB). The savings were reallocated for the procurement of railway maintenance equipment and machines to further strengthen UTY’s O&M capacity. On 27 September 2016, in response to the government request to utilize the loan savings of $7.5 million, ADB approved the ICB-based procurement of (i) a track leveling, tamping, and lining machine; and (ii) a rail welding machine. UTY uses these types of machine for operating in arid desert regions to maintain safe and efficient railway operations.

D. Disbursements

25. The loan proceeds were disbursed in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time). At appraisal, the loan was planned to be disbursed over 3.5 years from 2012 to 2016. The first disbursement was the 13 November 2012 advance payment to the PESC. Overall, $92 million (92%) of the loan was disbursed within 3.5 years. The remaining loan proceeds of $7.99 million (7.8%) were disbursed in 2017 and 2018, during the loan extension. Direct payment procedures were used for the plant design, supply, and install contracts, goods contracts, and consulting services. The use of the imprest (advance) account and procedures for statement of expenditures were not allowed under this loan. Through the UTY’s support, as well as the PIU’s experience and efforts, the original disbursement projections and schedule were adhered to, despite the stringent and time-consuming government contract registration and management procedures. Details of the original projections and actual disbursements are in Appendix 5. The comparison of projections and actual disbursements confirms that the initial projected disbursement schedule was achievable and realistic.

E. Project Schedule

26. The loan was approved on 28 September 2011, the loan agreement was signed on 16 February 2012, and the loan became effective on 28 March 2012. At appraisal, it was envisaged that the project would be completed by 30 September 2016. All the project outputs envisaged at appraisal were achieved as scheduled and before the originally envisaged loan closing date. The operation of the electrified railway section started with the test operation on 25 August 2015 and the scheduled passenger commute between Tashkent and Kashi on the high-speed trains started on 5 September 2015 using UTY’s temporary traffic management arrangement. However, works on traction substations, signaling and telecommunication equipment, and the supervisory control and data acquisition (SCADA) system were only completed in May 2016.

27. At the government’s request, the loan was extended twice to fully utilize the loan savings (para. 24). The project was physically completed on 6 July 2018 and the loan was financially closed on 31 December 2018.

F. Implementation Arrangements

28. Overall, the project’s implementation arrangements were sufficient and effective. UTY established the PIU to manage project implementation. The PESC helped the PIU in contract management. A productive relationship and efficient coordination among UTY, the PIU, and the consultant contributed to successful project implementation. Since the PIU was staffed with UTY’s own staff, turnover was low, which was important for lessons to be learned and project improvements to be made. The direct reporting line of the PIU head to UTY’s management also ensured close coordination among the relevant departments.

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G. Technical Assistance

29. On 6 April 2011, ADB approved a small-scale project preparatory technical assistance (TA) to fine-tune the project feasibility study prepared by UTY (aided by a consortium of Japan and national consultants) and undertake due diligence of the electrification of the Marakand- Karshi railway line.15 The ADB project officer closely coordinated the consultants’ inputs for project preparation.

H. Consultant Recruitment and Procurement

30. The PESC were recruited in accordance with ADB’s Guidelines on the Use of Consultants (2010, as amended from time to time). On 21 July 2011, UTY advertised an invitation to submit expressions of interest for project engineering and supervision consulting services. A contract with the selected consulting firm was signed on 9 August 2012 and it started work on 6 November 2012. During project implementation, the consulting services contract was amended three times. Based on the results of UTY’s capacity development needs assessments, the consultant’s terms of reference were amended to include the FIDIC training-related details. The PESC carried out all the tasks in accordance with the terms of reference and its performance was rated satisfactory .

31. Project procurement conformed to the ADB’s Procurement Guidelines (2010, as amended from time to time). Two turnkey contracts and one goods contract were procured through ICB. Additionally, two goods contracts were procured using ICB to utilize the loan savings. ADB’s standard bidding documents were used for procurement. The turnkey contracts were advertised on 18 April 2013, awarded on 16 December 2013, and signed on 5 and 10 February 2014.

32. The performance of the contractors was overall satisfactory. UTY provided acceptance certificates with no claims.

I. Safeguards

33. Environmental safeguards. In accordance with ADB’s Safeguard Policy Statement (2009), the project was classified as Category B for the environment. An initial environmental examination was prepared during project preparation and the project was not expected to have adverse environmental impacts. During implementation, the contractors implemented all safeguard-related measures specified in the initial environmental examination and the contracts. A grievance redress mechanism was established at the construction site. During implementation, UTY did not receive any complaints from the public. Regular environmental monitoring reports (EMRs) were prepared and submitted to ADB. Three EMRs were disclosed on the ADB website. The final EMR was disclosed in September 2016. The regular ADB loan review missions did not identify any significant environmental issues. The overall implementation of environmental safeguard measures was satisfactory .

34. Involuntary resettlement. As the project did not involve any land acquisition and involuntary resettlement, it was classified as Category C for involuntary resettlement in accordance with ADB’s Safeguard Policy Statement (2009). Land use along the railway line did not change during construction or at completion. There is no outstanding grievance for involuntary resettlement.

15 TA 7799-UZB: Railway Electrification Investment Program of $225,000 financed from ADB’s Technical Assistance Special Fund.

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35. Indigenous peoples. In accordance with ADB’s Safeguard Policy Statement (2009), the project was classified as Category C for indigenous peoples as no ethnic minority or indigenous people lived in the project areas or were affected by the project. There is no outstanding grievance for indigenous peoples.

J. Monitoring and Reporting

36. All project monitoring activities, including compliance with environmental and other safeguards, and financial requirements were described in the project administration manual. The project design and monitoring framework was formulated with appropriate impact, outcome, and output statements and with relevant targets and performance indicators. The baseline environmental monitoring information was collected at appraisal. The PESC conducted independent monitoring and reporting of environmental impacts associated with project implementation. The PIU coordinated the implementation of the environmental management plans and mitigation activities, including obtaining permission to comply with national regulations. The PESC supervised environmental protection activities at all construction sites.

37. The government and UTY complied with almost all the loan covenants, excepting the ones for the preparation of the project completion report and compliance with the required financial ratio for fiscal year 2018. Project performance was not affected by the covenants that were partially complied with and not complied with. The status of compliance with all general and special loan covenants is in Appendix 7. During implementation, the government provided adequate oversight, coordination, and counterpart funding. The PIU operated with adequate staff and resources. The civil works, procurement, and engagement of consultants were carried out in accordance with the respective ADB guidelines and procedures (paras 30-32). The implementation of measures for environmental and social safeguards was satisfactory (paras 33- 35).

38. All audited project financial statements (APFSs) were submitted to ADB with delays of between 2.4 and 4.7 months. The maximum delay in APFS submission was 13.3 months. The audited entity financial statements (AEFSs) were submitted with delays of between 2.1 and 5.9 months (Table 1). The main reasons for the late submissions of the APFS and AEFS were (i) revisions of the reports because of insufficient quality, and (ii) resubmissions because of missing audit opinions on the use of loan proceeds. All reports for the FY2012 to FY2017 AEFSs and AFPSs had unqualified auditor opinions. The FY2018 AEFS had a qualified auditor’s opinion because (i) UTY did not have a unified accounting policy, and (ii) UTY did not comply with the requirements of IFRS 3 “Business Combinations” for those businesses acquired by the entity during 2016–2018. There is a risk that the AEFS might not provide reliable information for the calculation of financial covenants. This may require financial management assessment of auditor reports for future projects with UTY.

39. The issue of delays in compliance with financial covenants was raised with the government and UTY management in ADB country portfolio review meetings, with discussions focusing on the need for close monitoring and remedial action. Joint efforts resulted in shorter delays in the submission of APFSs and AEFSs.

9

Table 1. Submission of Audited Project and Entity Financial Statements Financial Year Period Due Submission details 2012 28 Mar to 31 30 Sep 2013 APFS: submitted on 20 Feb 2014, delay 4.7 months Dec 2012 AEFS: submitted on 27 Mar 2014, delay 5.9 months 2013 1 Jan to 31 30 Sep 2014 APFS: submitted on 10 Feb 2015, delay 4.4 months Dec 2013 AEFS: submitted on 2 Dec 2014, delay 2.1 months 2014 1 Jan to 31 30 Sep 2015 APFS: submitted on 7 Nov 2016, delay 13.3 months Dec 2014 AEFS: submitted on 26 Oct 2015, delay 26 days 2015 1 Jan to 31 30 Sep 2016 APFS: submitted on 18 Apr 2017, delay 6.6 months Dec 2015 AEFS: submitted on 13 Jul 2017, delay 9.5 months 2016 1 Jan to 31 30 Sep 2017 APFS: submitted on 11 Dec 2017, delay 2.4 months Dec 2016 AEFS: submitted on 11 Dec 2017, delay 2.4 months 2017 1 Jan to 31 30 Sep 2018 APFS: submitted on 15 Jan 2019, delay 3.5 months Dec 2017 AEFS: submitted on 12 Dec 2018, delay 2.4 months 2018 1 Jan to 31 30 Sep 2019 APFS: submitted on 13 Sep 2019, delay 0 days Dec 2018 AEFS: submitted on 5 Mar 2020, delay 3.5 months

III. EVALUATION OF PERFORMANCE

A. Relevance

40. The project is rated as relevant at both appraisal and completion, as the intended project outcome and outputs were consistent with the government’s development objectives, ADB’s Strategy 2020 and country partnership strategy, 2012–2016, and the CAREC Transport and Trade Facilitation Strategy and Action Plan. 16 Electrification of the Marakand-Karshi railway section aimed to improve connectivity, reduce costs, upgrade the railway throughput along CAREC Corridor 6, promote regional cooperation, and benefit neighboring countries. The project was part of the government’s railways development and modernization program, and was aligned with the Uzbekistan Transport Sector Strategy, 2006–2020. 17 In accordance with the CAREC strategy, the project added capacity to CAREC Corridor 6 and opened up alternative supply routes for national and international trade, as well as for humanitarian relief to Afghanistan. Therefore, the project design was sound and adequately reflected the existing political and economic risks in the region. In addition, the project had substantial demonstration value for other ADB-funded projects and played a transformative role in upgrading the entire railways sector of Uzbekistan.

41. As perceived at appraisal, the project promoted economic growth and contributed to poverty reduction by providing employment and income generating opportunities in rural areas. The project contributed to regional integration and cooperation and supported UTY’s transition to a commercially oriented enterprise. At completion, the electrified railway section was being intensively used for domestic and transit freight and passenger traffic, as well as for the export and import of goods, including to and from Afghanistan and Tajikistan.

B. Effectiveness

42. The project is rated as effective as all the outcome and output targets were met . The main outcome of improved railway operation on the Marakand–Karshi rail line was substantially achieved. By 2016, railway freight transportation reached 1,132.5 million tons, which exceeded

16 CAREC Transport and Trade Facilitation Strategy and Action Plan and the Uzbekistan Transport Sector Strategy, 2006–2020. 17 ADB. 2006. Transport Sector Strategy (2006–2020) . Consultant’s Report. Manila (TA 4659-UZB).

10

the target planned at appraisal. 18 In addition, the average running speed for passenger trains increased to 120 km/h against the 110 km/h planned at appraisal, and the average speed for freight trains increased to 70 km/h against the 60 km/h planned at appraisal. The electrified railway section allows passenger trains to travel at speeds of up to 250 km/h and freight trains up to 160 km/h. Passengers commuting on the high-speed trains also acknowledged a huge improvement in travel conditions. 19 Electrification of the whole section between Tashkent and Karshi decreased the travel time from 8 hours to about 3 hours.

C. Efficiency

43. The project is rated as efficient because the project outcome was achieved with the efficient use of resources, and the project remained economically viable at completion. At appraisal, the project was evaluated as viable with an economic internal rate of return (EIRR) of 14.7%. The sensitivity analysis showed the robustness of the project under various unfavorable scenarios.

44. Economic efficiency at completion . The EIRR was recalculated at completion. The following economic benefits were estimated: (i) energy cost savings, (ii) travel time savings, (iii) pollution reduction, (iv) benefits from diverted traffic, (v) benefits from not using diesel locomotives, and (vi) benefits from maintenance cost savings. The analysis covered the period from 2011 to 2042, including project implementation from 2011 to 2019 to cover the Karshi- Termez Railway Electrification Project for consistency with the analysis at appraisal. The ADB- financed project outputs were implemented without any delays. The recalculated EIRR for the project is 16.97%, which is higher than the rate at appraisal. Details of the economic reevaluation are in Appendix 8.

45. Assessment of process efficiency. The process efficiency was as expected, with no significant delays occurring during project implementation. The originally planned outputs were achieved either as scheduled or earlier. The operation of the electrified railway section started with the test operation on 25 August 2015 and the scheduled passenger commute between Tashkent and Kashi on the high-speed trains started on 5 September 2015. This gave UTY ample time to check and eliminate potential operational and technical issues and to achieve the targeted project outcome as scheduled. Hence, ADB’s project administration incurred no extra costs. After completion of the original outputs, all the subsequent loan review missions were fielded to review the procurement of specialized equipment using the loan savings.

D. Sustainability

46. The project is rated as likely sustainable .

47. Financial sustainability. At appraisal, the project was viable as the financial appraisal for 2017–2042 showed an expected financial internal rate of return (FIRR) of 13.2%, which was higher than the weighted average cost of capital of 2.6%. At completion, the FIRR was recalculated as 19.6%. Details of the financial reevaluation are in Appendix 9.

18 The State Committee of the Republic of Uzbekistan on Statistics. Freight statistics - https://stat.uz/en/234- ofytsyalnaia-statystyka-en/sfera-usluh-en/4357-freight-transportation-and-freight-turnover-by-transport-type (accessed on 15 July 2020). 19 Interviews were conducted by Department of External Relations of the ADB during the mission fielded on 15-23 September 2016. Materials and photos are accessible at https://www.adb.org/news/videos/electric-train-brings- uzbekistan-one-step-closer-silk-railroad-dreams and https://www.flickr.com/photos/asiandevelopmentbank/sets/72157681565268596 .

11

48. The project section will be operated as part of the whole railway network. UTY keeps good track of O&M costs and is focused on modernization of the railway system and infrastructure. Higher margin freight traffic is expected to generate most of the project railway section revenues. With the government’s support, UTY is taking proactive measures to boost the passenger commute and associated revenues. A significant increase in passenger traffic has been observed since the start of high-speed train operations in 2015.

49. The AEFS for FY2018 indicated an operating income ratio of 0.14, which is below the financial covenant of 0.2. Following the government’s decision in 2017, several state-owned non- core low margin businesses, including coal mining companies, were transferred to UTY.20 As a result of such transfers, UTY’s operating income fell below 0.2 in 2018. However, in 2019, to improve corporate management and the sustainability of the transport sector, the government embarked on sector reforms. 21 As part of the reforms, the government is focusing on sustainability of the railway sector and privatization of non-core assets including coal business units.22 Reforms in the railway sector and actions to strengthen UTY’s financial sustainability are expected to increase its operating income ratio.

50. Environmental sustainability. The replacement of diesel locomotives with electric ones saves about 7,500 tons of diesel fuel per hauling operation, and reduces the emission of pollutants, including carbon dioxide. At appraisal, the emission calculation simulation showed that carbon dioxide emissions would be reduced by 5,700 tons/year. During implementation, the EMRs identified limited adverse environmental impacts.

51. Technical sustainability. The installed project components and the procured equipment and machinery are based on proven technologies. The railway electrification technology, such as high-speed railway operation and signaling systems, follows industry standards and there is no evidence that they will become outdated in the near future.

52. Institutional sustainability. UTY, the executing agency and railway system owner, is a state-owned enterprise. It is expected to continue its functions and be responsible for O&M of the project section, which was upgraded within the framework of the railway electrification program of the government. UTY has been operating other electrified railway sections and has adequate staffing with sufficient practical experience of operating both electrified railways and an electric locomotive fleet. This ensures institutional sustainability of the project.

53. Political and economic risks. As the project impact targeted increased trade with Afghanistan, project sustainability will also be affected by the political developments in Afghanistan. Achievement of political consensus and establishment of peace in the country will contribute to the increased regional trade and economic cooperation between the countries in the region, which will result in increased freight via the project railway line. If internal conflict and

20 Resolution of the President of the Republic of Uzbekistan No 3380 dated 8 November 2017 “On organizational measures for the transfer of JSC "Uzbeko‘mir" and JSC "Shargunko‘mir" to JSC " O‘zbekiston Temir Yo‘llari" and financial recovery of enterprises of the coal sector”. 21 Decree of the President of the Republic of Uzbekistan №DP-5647 dated 1 February 2019 “On measures for fundamental improvement of state administration of transport sector”. 22 According to the Resolution of the President of the Republic of Uzbekistan No. PR-4234 dated 7 March 2019, to improve the financial situation of the coal sector the government started to transform sector business units with the aim of achieving not less than 10% profit margin. In 2020, the Government decided to attract foreign investors to JSC UzbekCoal under a management contract. https://www.davaktiv.uz/uz/yangiliklar/asset-news/5395-agentlik- faoliyati-a-ida-matbuot-anzhumani (accessed on 3 August 2020).

12 political instability continue in Afghanistan, the regional trade and economic development may be affected, which will impact the project’s sustainability.

E. Development Impact

54. The project has had a positive impact on various activities in Karshi as this city is now efficiently linked to two other large and important cities in Uzbekistan: Samarkand and Tashkent. The development and installation of the new systems for high-speed train operations, railway signaling and telecommunication, and SCADA increased the demand for and recruitment of highly qualified engineers and technicians.

55. Social impacts. The regions connected to the project railway section have a population of about 10 million, which constitutes 27% of the country’s population. 23 The travel time of the high-speed railway passenger service connecting Tashkent and Karshi more than halved, substantially increasing their mobility. This resulted in socio-economic benefits for the local inhabitants, including women. Uzbekistan is focusing on the development of tourism in Kashkadarya and Surkhandarya regions, which are important locations in terms of historical, ecological, and gastronomic tourism. The increase in passenger traffic and tourism is leading to the development and opening of private hotels, small souvenir shops, and food outlets, thereby creating employment opportunities in Karshi and the surrounding project area.

56. During construction, many local contractors and suppliers of materials for civil works provided services and acquired new construction knowledge. In addition, they learned about environmental controls as these were integrated into the project. The project information, education, and communication campaign against sexually transmitted diseases and infections increased the local population’s knowledge about HIV and other sexually-transmitted infections, including symptoms, ways of transmission, treatments, prevention, and testing procedures.

57. Kashkadarya and Surkhandarya regions are rich with natural resources and the key agriculture regions of the country. Uzbekistan is rapidly developing its mineral resources in the project area, and the project rail line will support this endeavor. The potassium fertilizer plant in Dekhkanabad district of Kashkadarya is an example of a large enterprise built in the region. Hence, the project is also expected to generate jobs for the local population by boosting the region’s industrial potential.

58. Impact on trade volumes. At appraisal, the project impact was increased trade with Kazakhstan to $3.6 billion and with Afghanistan to $1.8 billion by 2020. The actual 2019 foreign trade turnover was $3.37 billion with Kazakhstan and $618 million with Afghanistan. 24 At appraisal, the project team tried to adequately factor in the economic and political developments in Afghanistan. At evaluation, these turned out to be much worse than expected at appraisal. Hence, the actual trade volumes between Uzbekistan and Afghanistan were lower than the estimates. Both Uzbekistan and Afghanistan are making considerable efforts to increase trade volumes between the countries. However, the overall trade volumes estimated at appraisal may

23 The State Committee of the Republic of Uzbekistan on Statistics. Number of resident population as of 1 January 2018 https://stat.uz/en/518-ofytsyalnaia-statystyka-en/r-osrd-mvf-en/tablitsa-svodnykh-dannykh-en/social- demographic-data/population/3258-number-of-resident-population-as-of-1-january-2018 (accessed on 15 July 2020) 24 The State Committee of the Republic of Uzbekistan on Statistics. Foreign trade turnover of the Republic of Uzbekistan, January-December 2019. https://stat.uz/en/press-center/news-committee/8324-foreign-trade-turnover- of-the-republic-of-uzbekistan-january-december-2019 (accessed on 15 July 2020)

13 not be achieved in 2020 because of the worldwide economic slowdown and market volatility caused by the coronavirus disease (COVID-19).25

59. As expected at appraisal, the project has had positive development impacts and no negative impacts. Hence, the rating for development impact is satisfactory . The contribution of the project to the ADB results framework is in Appendix 10.

F. Performance of the Borrower and the Executing Agency

60. The performance of the borrower and the executing agency is rated satisfactory . The original project outputs were implemented according to the arrangements envisaged at appraisal. Although UTY was not able to meet the deadlines for submission of the APFSs and AEFSs, this is a general issue for the overall country project portfolio.

G. Performance of the Asian Development Bank

61. ADB’s performance is satisfactory . During project implementation, ADB fielded 12 missions, including 8 missions for project implementation review in addition to those for loan inception and project completion. Communication and coordination between ADB and UTY were effective. ADB provided prompt and constructive responses to requests from the government and UTY. During project implementation, ADB helped UTY resolve implementation issues.

H. Overall Assessment

62. Overall, the project is rated successful . The project is relevant to the government’s development objectives, ADB’s country partnership strategy for Uzbekistan and the CAREC Transport and Trade Facilitation Strategy and Action Plan. The project was designed appropriately and implemented without any changes in scope. The intended project outcome of an improved railway operation on the Marakand-Karshi rail line has been achieved. The project reduced travel time and train operating costs and increased the carrying capacity of the railway line. It also brought substantial socioeconomic benefits to the population in the project area. The project is rated effective in achieving its outcomes and efficient in achieving its outcomes and outputs. The recalculated EIRR of 16.7% is robust and indicates that the project is economically viable. The project is rated likely sustainable with a significant positive impact on the economy.

Overall Ratings Criteria Rating Relevance Relevant Effectiveness Effective Efficiency Efficient Sustainability Likely sustainable Overall Assessment Successful Development impact Satisfactory Borrower and executing agency Satisfactory Performance of ADB Satisfactory ADB = Asian Development Bank. Source: Asian Development Bank.

25 Asian Development Bank. Updated Assessment of the Potential Economic Impact of COVID-19. https://www.adb.org/publications/updated-assessment-economic-impact-covid-19

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IV. ISSUES, LESSONS, AND RECOMMENDATIONS

A. Issues and Lessons

63. The project, which was the first ADB-funded railway electrification project in Uzbekistan, enjoyed strong government ownership and support. The financial structure of the project was balanced, with ADB’s financing adding value by (i) reducing the capital expenditure costs through procurement based on the ICB modality; (ii) promoting the implementation and use of innovative technologies; and (iii) increasing the executing agency’s capacity and knowledge of international standards of procurement, contract management, and construction supervision, and ensuring its strict compliance with the environmental and social safeguards. The main challenges concerned the submission of APFSs and AEFSs and the collection of data for evaluation purposes.

64. The project’s success and the positive lessons learned have helped to strengthen cooperation in the railway sector. The same model is being adopted for the ongoing Pap- Namangan-Andijan Railway Electrification Project and the pipeline Bukhara-Miskin-Urgench- Khiva Railway Electrification Project. 26

65. Legislation requirements. During project appraisal and implementation, ADB had to learn, adapt, and respond to the country’s legislation requirements. In particular, the rigid and bureaucratic procedures for contract registration and variations took time because of unnecessary financial and technical due diligence, even though the contracts were awarded through ICB. This caused delays in project implementation. 27

66. Areas for improvement. Project implementation also highlighted several areas needing improvement. These include (i) coordination between the PIU and other UTY departments for project monitoring and reporting, and (ii) UTY’s financial reporting and auditing system to ensure better compliance with international financial management, reporting, and audit requirements.

B. Recommendations

67. Follow-up actions. In a few years’ time, ADB should re-evaluate the project traffic and re-assess local business activity and the O&M of assets financed by the ADB loan. ADB and UTY should continue discussing any additional assistance that may be required to ensure further improvement and continuity of railway operations and to identify and respond to emerging sector needs.

68. Improving project monitoring and reporting . For the implementation of future ADB- funded projects, UTY needs to strengthen project-related data collection and monitoring for evaluation and assessment. This is also necessary for future cooperation in the railway sector.

69. Timing of the project performance evaluation report. The project performance evaluation report needs to be carried out after 2021 when the project facilities have been

26 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; ProposedP53271-UZB: CAREC Corridor 2 (Bukhara-Miskin-Urgench-Khiva) Railway Electrification Project . 27 The contract registration process was simplified and streamlined by the Resolution of the President No. 3857 dated 16 July 2018 “On measures to increase the effectiveness of preparation and implementation of projects with participation of international financial institutions and foreign governmental financial organizations”.

15 operational for at least four years so the project infrastructure performance and the project impact can be properly assessed.

16 Appendix 1

DESIGN AND MONITORING FRAMEWORK

Performance Indicators and Targets Project Achievements Impact By 2020 As of 2019 partially achieved . Increased regional trade Increased trade with Kazakhstan to In 2019 with Kazakhstan total trade of $3.37 and accelerated economic $3.6 billion billion was achieved with imports of $1.94 growth (2010 baseline: $1.8 billion) billion and exports of $1.43 billion. Increased trade with Afghanistan to In 2019, total trade of $618.0 million with $1,800 million Afghanistan was achieved with imports of (2010 baseline: $876 million) $2.9 million and exports of $615.1 million. Outcome By 2016 Achieved. Improved railway operation Increased freight transported to 1,130 Total freight transported was 1,132.5 million on the Marakand–Karshi million ton tons in 2016. rail line (2010 baseline: 960.9 million ton-km) Increased average running speed for Average running speed for passenger trains passenger trains to 110 km/h reached 120 km/h. (2010 baseline: 77 km/h) Increased average running speed for Average running speed for freight trains freight trains to 66 km/h reached 70 km/h. (2010 baseline: 40 km/h) Outputs 1. 140 km electrified rail By 2016 line from Marakand to 140 km rail line of CAREC Corridor 6 Achieved. Karshi from Marakand to Karshi electrified and operational Karshi depot refitted for maintenance Achieved. of electric locomotives Specialized maintenance equipment Achieved. procured 2. Improved management UTY management and key technical Achieved. capacity of UTY staff (including 20% female) are trained on corporate governance and sex-disaggregated corporate database is developed by 2014 UTY allocates resources to implement Achieved. cost optimization by 2014 UTY project implementation unit is Achieved. effectively functioning with contract awards and disbursements achieved on time Source: Asian Development Bank.

Appendix 2 17

PROJECT COST AT APPRAISAL AND ACTUAL ($'000 000)

Appraisal Estimate Actual Item Foreign Local Foreign Local Total Cost Total Cost Exchange Currency Exchange Currency

A. Base Cost 1. Electrification System Installation 98.4 45.7 144.0 95.57 76.39 172.0 a. Base structure 7.7 17.8 25.6 0.0 76.39 76.4 b. Signaling and interlocking 47.3 13.5 60.8 47.7 0.0 47.7 c. Power Supply Facilities 36.1 14.4 50.5 28.9 0.0 28.9 d. Machinery and equipment 7.1 0.0 7.1 19.0 0.0 19.0 2. Project Management Consultant 5.3 2.8 8.0 4.43 1.1 5.53 3. Incremental recurrent cost 0.00 0.5 0.5 0.0 0.4 0.41 4. Taxes and duties 0.00 10.3 10.3 0.0 9.9 9.9

Subtotal (A) 103.6 59.2 162.8 100.00 87.8 187.8

B. Contingencies 1. Physical 6.1 2.9 9.0 0.0 0.0 0.0 2. Price 0.2 0.0 0.2 0.0 0.0 0.0 Subtotal (B) 6.3 0.0 9.2 0.0 0.0 0.0

C. Financial charges during construction 4.0 0.0 4.0 0.0 6.0 6.0

Total (A+B+C) 113.9 62.1 176.0 100.0 93.8 193.78

Sources: Asian Development Bank; UTY

18 Appendix 3

PROJECT COST BY FINANCIER Table A3.1: Project Cost at Appraisal by Financier ($'000 000)

ADB Government Total Item % of Cost % of Cost Cost Amount Amount Category Category A. Base Cost 1. Electrification System Installation 144.0 88.8 61.7 55.3 38 a. Base structure 25.6 0.0 0 25.6 100 b. Signaling and interlocking 60.8 47.3 78 13.5 22 c. Power Supply Facilities 50.5 34.3 68 16.3 32 d. Machinery and equipment 7.1 7.1 100 0.0 0 2. Project Management Consultant 8.0 5.3 65 2.8 35 3. Incremental recurrent cost 0.5 0.0 0 0.5 100 4. Taxes and duties 10.3 0.0 0 10.3 100 Subtotal (A) 162.8 94.0 58 68.8 42 B. Contingencies 1. Physical 9.0 6.0 67 3.0 33 2. Price 0.2 0.0 0 0.2 100 Subtotal (B) 9.2 6.0 65 3.2 35

C. Financial charges during construction 4.0 0.0 100 4.0 0

Total (A+B+C) 176.0 100.0 57 76.0 43

Note: Numbers may not sum precisely because of rounding. Sources: Asian Development Bank; UTY

Appendix 3 19

Table A3.2: Project Cost at Completion by Financier

ADB Government Total Item % of Cost % of Cost Cost Amount Amount Category Category A. Base Cost 1. Electrification System Installation 172.0 95.6 55.6 76.4 44.4 a. Base structure 76.4 0.0 0 76.4 100 b. Signaling and interlocking 47.7 47.7 100 0.0 0 c. Power Supply Facilities 28.9 28.87 100 0.0 0 d. Machinery and equipment 19.0 19.0 100 0.0 0 2. Project Management Consultant 5.53 4.43 80.1 1.1 19.9 3. Incremental recurrent cost 0.41 0.0 0.41 4. Taxes and duties 9.9 0.0 0 9.9 100 Subtotal (A) 187.8 100.0 53.2 87.8 100 B. Contingencies 1. Physical 0.0 0.0 - 0.0 - 2. Price 0.0 0.0 - 0.0 - Subtotal (B) 0.0 0.0 - 0.0 -

C. Financial charges during construction 6.0 0.0 0.0 6.0 100

Total (A+B+C) 193.8 100.0 51.6 93.8 48.4

Note: Numbers may not sum precisely because of rounding. Sources: Asian Development Bank; UTY

20 Appendix 4

CONTRACT AWARDS OF ADB LOAN PROCEEDS

Table 4.1: Annual and Cumulative Contract Awards of ADB Loan Proceeds

Annual Contract Awards Cumulative Contract Awards Year Amount % of Total Amount % of Total 2012 4.43 4.4% 4.43 4.4% 2013 11.47 11.5% 15.90 15.9% 2014 76.56 76.6% 92.46 92.5% 2015 0.00 0.0% 92.46 92.5% 2016 0.00 0.0% 92.46 92.5% 2017 6.47 6.5% 98.94 98.9% 2018 1.06 1.1% 100.00 100.0%

Total 100.0 100.0% 100.0 100.0% ADB = Asian Development Bank. Source: Asian Development Bank.

Figure 4.1: Projection and Cumulative Contract Awards of ADB Loan Proceeds ($ million)

The comparison of contract award projections at the loan effectiveness and actual contract awards at completion are shown in the figure below.

120.00 100.00 80.00 60.00 40.00 20.00 0.00 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 2018 Q3 2018 Q4

Original projections Actual contract awards

Appendix 5 21

DISBURSEMENT OF ADB LOAN PROCEEDS

Table 5.1: Annual and Cumulative Disbursement of ADB Loan Proceeds ($ million) Annual Disbursement Cumulative Disbursement Year Amount % of Total Amount % of Total 2012 0.8 0.8% 0.79 0.8% 2013 2.61 2.6% 3.39 3.4% 2014 25.51 25.5% 28.90 28.9% 2015 50.53 50.5% 79.43 79.4% 2016 12.57 12.6% 92.01 92.0% 2017 6.93 6.9% 98.94 98.9% 2018 1.06 1.1% 100.00 100.0%

Total 100 .00 100.0% 100.00 100.00% ADB = Asian Development Bank. Source: Asian Development Bank.

Figure 5.1: Projection and Cumulative Disbursement of ADB Loan Proceeds ($ million)

The comparison of disbursement projections at the loan effectiveness and actual cumulative disbursements at completion are shown in the figure below.

120.00 100.00 80.00 60.00 40.00 20.00 0.00 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 2018 Q3 2018 Q4

Original projections Actual Disbursements

22 Appendix 6

CHRONOLOGY OF MAIN EVENTS

Date Event 2011 12 – 22 April Consultation mission 6 – 18 June Fact-finding mission fielded. 17 August Management Review Meeting held. 26 August Loan negotiation held. 28 September ADB Loan 2781 approved. 2012 16 February ADB Loan 2781 signed. 28 March ADB Loan 2781 became effective 10 August Contract on consulting services for Project Management and Institutional Capacity Improvement awarded. Contract for supply of track maintenance machinery, and supply and installation of track safety equipment awarded. 15 – 22 April Project/Loan inception mission held. First training workshop on project accounting and financial management was held. Contract for design, supply, installation, and commissioning of power supply, signaling and telecommunication equipment awarded. 3-7 December Special Loan Administration mission held. 2013 26-30 November Project review mission held.

2014 30 April – 8 May Project review mission held. 2015 13 –17 April Project mid-term review mission held. 9 –17 December Project review mission held. 2016 19 September Contract for consulting services for project management and institutional capacity improvement was completed. 31 August Project was completed.

2017 1 – 5 May Three Project review missions held. 17 – 21 July 30 – 31 October Operational acceptance certificate was issued. 2018 7 – 18 May Project review mission held. 31 December The loan was closed. 31 December Actual closing of the loan. 2019 23 – 31 May Project completion review mission held. Source: Asian Development Bank.

Appendix 7 23

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenant Reference Status of Compliance Section 4.01. (a) The Borrower shall cause the Project to be Loan Complied with. carried out with due diligence and efficiency and in Agreement, conformity with sound applicable technical, financial, Article IV business, and development practices. Section 4.01. (b) In the carrying out of the Project and Loan Complied with. operation of the Project facilities, the Borrower shall perform, Agreement, or cause to be performed, all obligations set forth in Article IV Schedule 5 to this Loan Agreement and the Project Agreement. Section 4.02. The Borrower shall make available, or cause Loan Complied with. to be made available, promptly as needed, and on terms and Agreement, conditions acceptable to ADB, the funds, facilities, services, Article IV land and other resources, as required, in addition to the proceeds of the Loan, for the carrying out of the Project. Section 4.03. (a) In the carrying out of the Project, the Loan Complied with. Borrower shall cause competent and qualified consultants Agreement, and contractors, acceptable to ADB, to be employed to an Article IV extent and upon terms and conditions satisfactory to the Borrower and ADB. Section 4.03. (b) The Borrower shall cause the Project to be Loan Complied with. carried out in accordance with plans, design standards, Agreement, specifications, work schedules and construction methods Article IV acceptable to the Borrower and ADB, as applicable. The Borrower shall furnish, or cause to be furnished, to ADB, promptly after their preparation, such plans, design standards, specifications and work schedules, and any material modifications subsequently made therein, in such detail as ADB shall reasonably request. Section 4.04. The Borrower shall ensure that the activities of Loan Complied with. its departments and agencies with respect to the carrying out Agreement, of the Project and operation of the Project facilities are Article IV conducted and coordinated in accordance with sound administrative policies and procedures. Section 4.05 The Borrower shall enable ADB's Loan Complied with. representatives to inspect the Project, the Goods and Agreement, Works, and any relevant records and documents. Article IV Section 4.06. The Borrower shall ensure and cause UTY, Loan Complied with. that any facilities relevant to the Project are operated, Agreement, maintained and repaired in accordance with sound Article IV applicable technical, financial, business, development, operational and maintenance practices. Section 4.07. The Borrower shall take all actions which shall Loan Complied with. be necessary on its part to enable UTY to perform its Agreement, obligations under the Project Agreement, and shall not take Article IV or permit any action which would interfere with the performance of such obligations. Section 4.08. (a) The Borrower shall exercise its rights under Loan Complied with. the Subsidiary Loan Agreement in such a manner as to Agreement, protect the interests of the Borrower and ADB and to Article IV accomplish the purposes of the Loan. (b) No rights or obligations under the Subsidiary Loan Complied with. Agreement shall be assigned, amended, abrogated or waived without the prior concurrence of ADB. Implementation Arrangements: The Borrower shall ensure Loan Complied with. that the Project is implemented in accordance with the Agreement detailed arrangements set forth in the PAM. Any subsequent Schedule 5 change to the PAM shall become effective only after Para. 1 approval of such change by the Borrower and ADB. In the

24 Appendix 7

Covenant Reference Status of Compliance event of any discrepancy between the PAM and this Loan Agreement, the provisions of this Loan Agreement shall prevail. Operational Covenants: The Borrower through UTY shall Loan Complied with. ensure that (i) the Project facilities are installed in Agreement accordance with design specifications and construction Schedule 5 norms; and (ii) construction supervision, quality control and Para. 2 contract management are performed in accordance with applicable standards and best international practices. Goods and Works: Except as ADB may otherwise agree, Loan Complied with. Goods and Works shall only be procured on the basis of the Agreement method of procurement set forth below: (a) International Schedule 4 Competitive Bidding. Para. 3 Operational Covenants: The Borrower shall ensure that Loan Complied with. According to internal domestic freight and passenger tariffs are adjusted to enable Agreement counting system, the tariffs for UTY to maintain financial sustainability covering market Schedule 5 passenger and freight traffic are risks, including adequate debt-service coverage, and Para. 3 adjusted on annual basis taking into inflation, foreign exchange and interest risks. The Borrower account all internal and external shall ensure that UTY applies for domestic tariff adjustment influence factors. in a timely manner. Goods and Works: The method of procurement is subject to, Loan Complied with. among other things, the detailed arrangements and Agreement threshold values set forth in the Procurement Plan. The Schedule 4 Borrower may only modify the method of procurement or Para. 4 threshold values with the prior agreement of ADB, and modifications must be set out in updates to the Procurement Plan. Operational Covenants: The Borrower shall cause UTY to (i) Loan Complied with. Contracts B021 and ensure that all contracts include contractor's obligation to Agreement B022 for turn keys works were comply with railway safety measures, (ii) conduct safety Schedule 5 prepared according to ADB awareness on the railway electrification for local residents Para. 4 procedure and with the help of along the rail line, (iii) set up adequate safety signs, and (iv) SYSTRA consulting company. These regularly monitor and report the accident rate and traffic contracts included labor safety plan, volume. environmental monitoring plan, and sexually transmitted infections preventions plan. All contractors were obliged to present reports according to each of this plan on regular basis. Condition for Withdrawals from Loan Account: Loan Complied with. Notwithstanding any other provision of this Loan Agreement, Agreement no withdrawals shall be made from the Loan Account for the Schedule 3 Works and Goods until the subsidiary Loan Agreement shall Para. 5 have been signed and become effective in accordance with its terms. Operational Covenants: The Borrower shall cause UTY to (i) Loan Complied with. set up procedures for operations and maintenance of Agreement electrification, signaling and telecommunication equipment Schedule 5 procured under the Project and (ii) ensure that the structure Para. 5 and conditions of track and other Project facilities are satisfactorily maintained to ensure safe operation of railway operation. Conditions for Award of Contract: The Borrower shall not Loan Complied with. award any Works contract which involves environmental Agreement impacts until the Borrower has incorporated the relevant Schedule 4 provisions from the EMP into the Works contract. Para. 5 Operational Covenants: (a) Except as ADB shall otherwise Loan Partially complied. agree, the Borrower shall ensure that UTY maintains an Agreement 2012: 0.26 operating income ratio of not less than 0.2 starting from the Schedule 5 2013: 0.26 2012 financial year onwards. Para. 6 2014: 0.21 2015: 0.22 2016: 0.203

Appendix 7 25

Covenant Reference Status of Compliance 2017: 0.31 2018: 0.14 There were no audit opinions provided but only reports on factual findings on financial covenants. Conditions for Award of Contract: The Borrower shall not Loan Not applicable. There is no land award any Works contract which involves involuntary Agreement acquired for any civil works. resettlement impacts, until the Borrower has prepared and Schedule 4 submitted to ADB the final RP based on the Project's Para. 6 detailed design, and obtained ADB's clearance of such RP. Operational Covenants: The Borrower shall ensure that the Loan Complied with. Project railway is assured reliable power supply. In this Agreement regard, the Borrower shall cause UTY to ensure that Schedule 5 engineering design and construction of (i) 110kV Para. 7 transmission line from Ishtihan power substation to Marakand railway transformer substation site; (ii) 110Kv transmission line from Kasan power substation to Ayritam railway transformer substation site; and (iii) 110Kv transmission line from Kasan power substation to Kashkadarya railway transformer substation site, are: (a) completed with due diligence and efficiency and in conformity with the Involuntary Resettlement Safeguards, applicable technical norms and standards, and sound financial, business, and development practices and (b) commissioned prior to the Project completion. The Borrower shall cause UTY to furnish to ADB periodic reports and updates on construction works, resettlement activities and environmental mitigation measures (if any) related to such external power transmission facilities. Consulting Services: Except as ADB may otherwise agree, Loan Complied with. and except as set forth in the paragraph below, the Borrower Agreement shall apply quality- and cost-based selection for selecting Schedule 4 and engaging Consulting Services. Para. 7 Operational Covenants: The Borrower shall ensure that Loan Complied with. No issues ADB's consent is obtained at least 6 months prior to the Agreement encountered. implementation of any of the following: (i) any change in Schedule 5 ownership of any asset, facility or structure financed under Para. 8 the Project; (ii) any sale, transfer, or assignment of interest or control in any asset, facility or structure financed under the Project; or (iii) any lease or other contract or modification of the functions and authority of UTY over O&M of any such asset, facility or structure financed under the Project. The Borrower shall ensure that any such changes will be carried out in a legal and transparent manner. Consulting Services: The Borrower shall apply the following Loan Complied with. As agreed in the method for selecting and engaging the specified Consulting Agreement PAM, for the external audit, UTY Services, in accordance with, among other things, the Schedule 4 recruited the consulting service procedures set forth in the Procurement Plan: (a) Least-Cost Para. 8 acceptable to ADB from its own Selection for auditing. resources. Consulting Services: The Borrower shall recruit the Loan Not applicable. No individual individual consultants for incremental project management Agreement consultants were required or funded support in accordance with procedures acceptable to ADB Schedule 4 by the loan. for recruiting individual consultants. Para. 9 Environment: The Borrower shall ensure and cause UTY to Loan Complied with. ensure, that the preparation, design, construction, Agreement implementation, operation and decommissioning of the Schedule 5 Project and its associated facilities comply with (a) all Para. 9 applicable laws and regulations of the Borrower relating to environment, health and safety; (b) the Environmental Safeguards; and (c) all measures and requirements set forth

26 Appendix 7

Covenant Reference Status of Compliance in the IEE, the EMP, and any corrective or preventative actions set forth in a Safeguards Monitoring Report. Land Acquisition and Involuntary Resettlement: The Loan Not applicable. There was no land Borrower shall ensure and cause UTY to ensure, that all land Agreement acquired for any civil works. and all rights-of-way required for the Project are made Schedule 5 available to the Works contractor in accordance with the Para. 10 schedule agreed under the related Works contract, and all land acquisition and resettlement activities are implemented in compliance with (a) all applicable laws and regulations of the Borrower relating to land acquisition and involuntary resettlement; (b) the Involuntary Resettlement Safeguards; and (c) all measures and requirements set forth in the RP, and any corrective or preventative actions set forth in a Safeguards Monitoring Report. Industrial or Intellectual Property Rights: (b) The Borrower Loan Complied with. shall ensure that all contracts for the procurement of Goods Agreement and Works contain appropriate representations, warranties Schedule 4 and, if appropriate, indemnities from the contractor or Para. 10 supplier with respect to the matters referred to in subparagraph (a) of this paragraph. Industrial or Intellectual Property Rights: (a) The Borrower Loan Complied with. shall ensure that all Goods and Works procured (including Agreement without limitation all computer hardware, software and Schedule 4 systems, whether separately procured or incorporated within Para. 10 other goods and services procured) do not violate or infringe any industrial property or intellectual property right or claim of any third party. Land Acquisition and Involuntary Resettlement: Without Loan Not applicable. There was no land limiting the application of the Involuntary Resettlement Agreement acquired for any civil works. Safeguards or the RP, the Borrower shall ensure and cause Schedule 5 UTY to ensure, that no physical or economic displacement Para. 11 takes place in connection with the Project until: (a) compensation and other entitlements have been provided to affected people in accordance with the RP; and (b) a comprehensive income and livelihood restoration program has been established in accordance with the RP. Industrial or Intellectual Property Rights: The Borrower shall Loan Complied with. ensure that all ADB-financed contracts with consultants Agreement contain appropriate representations, warranties and, if Schedule 4 appropriate, indemnities from the consultants to ensure that Para. 11 the Consulting Services provided do not violate or infringe any industrial property or intellectual property right or claim of any third party. ADB's Review of Procurement Decisions: Contracts Loan Complied with. procured under international competitive bidding procedures Agreement and contracts for Consulting Services shall be subject to Schedule 4 prior review by ADB, unless otherwise agreed between the Para. 12 Borrower and ADB and set forth in the Procurement Plan. Human and Financial Resources to Implement Safeguards Loan Complied with. The PIU appointed an Requirements: The Borrower shall make available and/or Agreement environmental consultant in its team. cause UTY to make available Schedule 5 necessary monetary and human resources to fully Para. 12 implement the EMP and the RP by recruiting an environmental consultant to monitor implementation of EMP, and a social development consultant to implement RP and to issue a report of the completion of RP. The Borrower shall seek ADB's approval before it (a) grants Loan Complied with. any extension of the stipulated time for completion of a Agreement contract for Goods or Works; or (b) agrees to any Schedule 4 modification or waiver of the conditions of a contract for Para. 13 Goods or Works, including any change order that falls under

Appendix 7 27

Covenant Reference Status of Compliance (c) or (d); or (c) issues any change order under a contract for Goods or Works that will in aggregate increase the original contract price (for the avoidance of doubt, such aggregate shall take into account any previous or simultaneous change order or orders under such contract); or (d) issues any change order under a contract for Goods or Works that will affect more than 15% of the original contract price (either through increases or decreases), even if the net effect of such change order will not in aggregate increase the original contract price. For the avoidance of doubt, such aggregate shall take into account any previous or simultaneous change order or orders under such contract. Safeguards-Related Provisions in Bidding Documents and Loan Complied with. Works Contracts: The Borrower shall ensure and cause UTY Agreement to ensure, that all bidding documents and contracts for Schedule 5 Works contain provisions that require contractors to: (a) Para. 13 comply with the measures relevant to the contractor set forth in the IEE, the EMP, and the RP (to the extent they concern impacts on affected people during construction), and any corrective or preventative actions set forth in a Safeguards Monitoring Report; (b) make available a budget for all such environmental and social measures; (c) provide the Borrower with a written notice of any unanticipated environmental, resettlement or indigenous peoples risks or impacts that arise during construction, implementation or operation of the Project that were not considered in the IEE, the EMP, and the RP; (d) adequately record the condition of roads, agricultural land and other infrastructure prior to starting to transport materials and construction; and (e) reinstate pathways, other local infrastructure, and agricultural land to at least their pre-project condition upon the completion of construction. Safeguards Monitoring and Reporting: The Borrower shall, Loan Complied with. The first bi-annual or cause UTY to: (a) submit quarterly Safeguards Monitoring Agreement EMR was submitted and disclosed on Reports on implementation of the RP, and semiannually Schedule 5 ADB website in October 2015. It was Safeguard Monitoring Reports on implementation of EMP, to Para. 14 agreed by the UTY and ADB on 24 ADB and disclose relevant information from such reports to April 2015 that after the first bi-annual affected persons promptly upon submission; (b) if any EMR, succeeding EMRs will be unanticipated environmental and/or social risks and impacts submitted in January and July every arise during construction, implementation or operation of the year. The EMRs will be disclosed on Project that were not considered in the IEE, the EMP, and ADB website and in UZB at UTY. The the RP, promptly inform ADB of the occurrence of such risks second EMR was disclosed on ADB or impacts, with detailed description of the event and website in August 2016 while the third proposed corrective action plan; and (c) report any actual or and final EMR in September 2016. potential breach of compliance with the measures and requirements set forth in the EMP or the RP promptly after becoming aware of the breach. ADB's Review of Procurement Decisions: ADB shall respond Loan Complied with. to each request for approval under paragraph 13 above Agreement within 10 business days (in Manila) of ADB‟s receipt of such Schedule 4 request. Such response will indicate that the request is (a) Para. 14 approved, (b) declined, (c) pending receipt of additional information or documentation, or (d) pending consideration by ADB's Procurement Committee, in each case as determined by ADB. If ADB fails to respond within 10 business days (in Manila) of ADB's receipt of such request, the request shall be deemed to have been approved by ADB (except if it relates to consideration by the Procurement Committee). In the case of (c), the Borrower shall promptly provide the requested information or documentation to ADB and ADB shall respond to the relevant request within 10

28 Appendix 7

Covenant Reference Status of Compliance business days (in Manila) upon receipt of such requested information or documentation satisfactory to ADB. In the case of (d), ADB shall notify the Borrower of the decision by the Procurement Committee within 10 business days (in Manila) of such decision by the Procurement Committee. The Borrower shall, or shall ensure that the Project Loan Complied with. Executing Agency will: (a) provide to ADB within 7 days a Agreement copy of all time extensions, modifications or waivers to the Schedule 4 contracts (including change orders) following ADB's Para. 15 approval in accordance with paragraph 13 above and amendment of the contracts; and (b) maintain a record of all change orders under all contracts for Goods or Works which do not require ADB's prior approval under paragraph 13 above and submit such record for ADB's review every 6 months. Prohibited List of Investments: The Borrower shall ensure Loan Complied with. that no proceeds of the Loan are used to finance any activity Agreement included in the list of prohibited investment activities Schedule 5 provided in Appendix 5 of the SPS. Para. 15 Health and Labor Standards: The Borrower shall cause UTY Loan Complied with. to ensure that contractors engaged under the Project (i) Agreement comply with all applicable labor laws; (ii) use their best efforts Schedule 5 to employ women and local people, including disadvantaged Para. 16 people, living in the vicinity of the Project; (iii) provide equal pay to men and women for work of equal type; (iv) provide and adequately equip first-aid, health and sanitation, and personal hygiene facilities for male and female workers at the Project site; (v) maximize female training and employment; (vi) conduct an information and education campaign on sexually transmitted diseases and HIV/AIDS for construction workers as part of the health and safety program at campsites and adjacent communities during Project implementation; and (vii) abstain from child labor. Relevant contracts financed under the Project must include specific clauses on these undertakings. Gender and Development: The Borrower shall ensure that Loan Complied with. UTY conforms to the principles of ADB's Policy on Gender Agreement The project has SGE category. and Development (1998) during implementation of the Schedule 5 Measures to promote gender equality Project, including (i) appointment of a gender focal point in Para. 17 and women’s empowerment the executing agency for the implementation of gender- included: (i) appointing a gender focal related activities; (ii) gathering the baseline sex- point in the executing agency; (ii) disaggregated data as part of surveys and assessments; (iii) gathering the baseline sex- providing gender awareness training for UTY; (iv) integration disaggregated data, (iii) conducting of the gender-related content into capacity building activities information campaigns on HIV/AIDS; and communication strategies, wherever appropriate; (v) (iv) training of UTY management and proactively encouraging and promoting women’s key technical staff (including 20% employment in UTY; and (vi) conducting the information female) on corporate governance; campaigns on HIV/AIDS. The Borrower, through UTY, shall and (v) development of a sex- ensure that sufficient funds are available to implement these disaggregated corporate database. activities. During the project implementation a gender focal point from the UTY’ HR division was assigned to promote gender mainstreaming activities such as encouragement of female staff to participate in the project trainings, creating favorable working conditions for women staff and addressing their concerns related to the social allowances and benefits. Sex- disaggregated HR corporate database was created and used for

Appendix 7 29

Covenant Reference Status of Compliance the trainings and capacity building of key technical staff including women. HIV/AIDS information campaigns were not feasible due to the absence of relevant specialist in UTY and no funds allocated for this low priority activity during the project implementation. Counterpart Support: The Borrower shall ensure that the Loan Complied with. Reference: counterpart funding, land, rights-of-way, facilities and human Agreement Presidential Decree No. 1676 dated 5 resources required for the Project, including cost overruns, Schedule 5 January 2012. are promptly provided for purposes of successful Project Para. 18 implementation. Governance and Anticorruption: The Borrower, shall, and Loan Complied with. shall ensure that UTY and relevant implementing agencies, Agreement (i) comply with ADB's Anticorruption Policy (1998, as Schedule 5 amended to date) and acknowledge that ADB reserves the Para. 19 right to investigate directly, or through its agents, any alleged corrupt, fraudulent, collusive or coercive practice relating to the Project; and (ii) cooperate with any such investigation and extend all necessary assistance for satisfactory completion of such investigation. Governance and Anticorruption: The Borrower through UTY Loan Complied with. shall ensure that the anticorruption provisions acceptable to Agreement ADB are included in all bidding documents and contracts, Schedule 5 including provisions specifying the right of ADB to audit and Para. 20 examine the records and accounts of the executing and implementing agencies and all contractors, suppliers, consultants, and other service providers as they relate to the Project. Section 2.01. (a) UTY shall carry out the Project with due Project Complied with. diligence and efficiency, and in conformity with sound Agreement applicable technical, financial, business, and development Article II practices. Section 2.01. (b) In the carrying out of the Project and Project Complied with. operation of the Project facilities, UTY shall perform all Agreement obligations set forth in the Loan Agreement to the extent that Article II they are applicable to UTY, and all obligations set forth in the Schedule to this Project Agreement Section 2.02. UTY shall make available, promptly as Project Complied with. needed, the funds, facilities, services, land and other Agreement resources as required, in addition to the proceeds of the Article II Loan, for the carrying out of the Project. Section 2.03. (a) In the carrying out of the Project, UTY shall Project Complied with. employ competent and qualified consultants and contractors Agreement (including own resources), acceptable to ADB, to an extent Article II and upon terms and conditions satisfactory to ADB. (b) Except as ADB may otherwise agree, UTY shall procure Project Complied with. all items of expenditures to be financed out of the proceeds Agreement of the Loan in accordance with the provisions of Schedule 4 Article II to the Loan Agreement. ADB may refuse to finance a contract where any such item has not been procured under procedures substantially in accordance with those agreed between the Borrower and ADB or where the terms and conditions of the contract are not satisfactory to ADB Section 2.04. UTY shall ensure that the Project is carried out Project Complied with. in accordance with plans, design standards, specifications, Agreement work schedules and construction methods acceptable to the Article II Borrower and ADB, as applicable. UTY shall furnish, or cause to be furnished, to ADB, promptly after their preparation, such plans, design standards, specifications

30 Appendix 7

Covenant Reference Status of Compliance and work schedules, and any material modifications subsequently made therein, in such detail as ADB shall reasonably request. Section 2.05. (a) UTY shall ensure provision of, or take out Project Complied with. and maintain with responsible insurers, or make other Agreement arrangements satisfactory to ADB for, insurance against Article II such risks and in such amounts as shall be consistent with sound practice. (b) Without limiting the generality of the foregoing, UTY Project Complied with. undertakes to insure, or cause to be insured, the Goods to Agreement be imported for the Project against hazards incident to the Article II acquisition, transportation and delivery thereof to the place of use or installation, and for such insurance any indemnity shall be payable in a currency freely usable to replace or repair such Goods. Section 2.07. (a) ADB and UTY shall cooperate fully to Project Complied with. ensure that the purposes of the Loan will be accomplished. Agreement Article II Section 2.07. (b) UTY shall promptly inform ADB of any Project Complied with. condition which interferes with, or threatens to interfere with, Agreement the progress of the Project, the performance of its obligations Article II under this Project Agreement or the Subsidiary Loan Agreement, or the accomplishment of the purposes of the Loan. Section 2.07. (c) ADB and UTY shall from time to time, at the Project Complied with. request of either party, exchange views through their Agreement representatives with regard to any matters relating to the Article II Project, UTY and the Loan. Section 2.09. (a) UTY shall (i) maintain separate accounts Project Complied with. for the Project and for its overall operations; (ii) have such Agreement accounts and related financial statements (balance sheet, Article II statement of income and expenses, and related statements) audited annually, in accordance with appropriate auditing standards consistently applied, by independent auditors whose qualifications, experience and terms of reference are acceptable to ADB; and (iii) furnish to ADB, promptly after their preparation but in any event not later than 9 months after the close of the fiscal year to which they relate, certified copies of such audited accounts and financial statements and the report of the auditors relating thereto (including the auditors' opinion on the use of the Loan proceeds and compliance with the financial covenants of the Loan Agreement and the Project Agreement), all in the English language. UTY shall furnish to ADB such further information concerning such accounts and financial statements and the audit thereof as ADB shall from time to time reasonably request. Section 2.06. UTY shall maintain, or cause to be maintained, Project Complied with. records and accounts adequate to identify the items of Agreement expenditure financed out of the proceeds of the Loan, to Article II disclose the use thereof in the Project, to record the progress of the Project (including the cost thereof) and to reflect, in accordance with consistently maintained sound accounting principles, its operations and financial condition. Section 2.09. (c) UTY shall enable ADB, upon ADB's Project Complied with. request, to discuss UTY's financial statements and its Agreement financial affairs from time to time with the auditors appointed Article II by UTY pursuant to subsection (a) hereinabove, and shall authorize and require any representative of such auditors to participate in any such discussions requested by ADB, provided that any such discussion shall be conducted only

Appendix 7 31

Covenant Reference Status of Compliance in the presence of an authorized officer of UTY unless UTY shall otherwise agree. Section 2.09. (b) In addition to annual audited financial Project Partially complied with. There were statements referred to in subsection (a) hereinafter, UTY Agreement delays in submission of AEFS and shall furnish to ADB: (i) within 3 months after the end of each Article II APFS. fiscal year, unaudited annual financial statements on its operations for such fiscal year; and (ii) within 9 months after the end of each fiscal year, financial projections of its operations (including income statements, balance sheets and cash flow statements) for the ensuing 1 year. Section 2.08. (c) Promptly after physical completion of the Project Not complied with. Project, but in any event not later than 3 months thereafter Agreement ADB has provided general or such later date as ADB may agree for this purpose, UTY Article II requirements for the report shall prepare and furnish to ADB a report, in such form and preparation and systematically in such detail as ADB shall reasonably request, on the followed-up on the status of the EA’s execution and initial operation of the Project, including its project completion report. cost, the performance by UTY of its obligations under this Project Agreement and the accomplishment of the purposes of the Loan. Section 2.08. (b) Without limiting the generality of the Project Complied with. foregoing, UTY shall furnish to ADB periodic reports on the Agreement execution of the Project and on the operation and Article II management of the Project facilities. Such reports shall be submitted in such form and in such detail and within such a period as ADB shall reasonably request, and shall indicate, among other things, progress made and problems encountered during the period under review, steps taken or proposed to be taken to remedy these problems, and proposed program of activities and expected progress during the following period. Section 2.08. (a) UTY shall furnish to ADB all such reports Project Complied with. and information as ADB shall reasonably request concerning Agreement (i) the Loan and the expenditure of the proceeds thereof; (ii) Article II the items of expenditure financed out of such proceeds; (iii) the Project; (iv) the administration, operations and financial condition of UTY; and (v) any other matters relating to the purposes of the Loan. Section 2.10. UTY shall enable ADB's representatives to Project Complied with. inspect the Project, the Goods and Works and any relevant Agreement records and documents. Article II Section 2.11. (a) UTY shall, promptly as required, take all Project Complied with. action within its powers to maintain its corporate existence, Agreement to carry on its operations, and to acquire, maintain and Article II renew all rights, properties, powers, privileges and franchises which are necessary in the carrying out of the Project or in the conduct of its operations. Section 2.11. (b) UTY shall at all times conduct its operations Project Complied with. in accordance with sound applicable technical, financial, Agreement business, development and operational practices, and under Article II the supervision of competent and experienced management and personnel. Section 2.11. (c) UTY shall at all times operate and maintain Project Complied with. its plants, equipment and other property, and from time to Agreement time, promptly as needed, make all necessary repairs and Article II renewals thereof, all in accordance with sound applicable technical, financial, business, development, operational and maintenance practices. Section 2.12. Except as ADB may otherwise agree, UTY Project Complied with. shall not sell, lease or otherwise dispose of any of its assets Agreement which shall be required for the efficient carrying on of its Article II operations or the disposal of which may prejudice its ability

32 Appendix 7

Covenant Reference Status of Compliance to perform satisfactorily any of its obligations under this Project Agreement. Section 2.13. Except as ADB may otherwise agree, UTY Project Complied with. shall apply the proceeds of the Loan to the financing of Agreement expenditures on the Project in accordance with the Article II provisions of the Loan Agreement and this Project Agreement, and shall ensure that all items of expenditures financed out of such proceeds are used exclusively in the carrying out of the Project. Section 2.14. Except as ADB may otherwise agree, UTY Project Complied with. shall duly perform all its obligations under the Subsidiary Agreement Loan Agreement, and shall not take, or concur in, any action Article II which would have the effect of assigning, amending, abrogating or waiving any rights or obligations of the parties under the Subsidiary Loan Agreement. Section 2.15. UTY shall promptly notify ADB of any proposal Project Complied with. to amend, suspend or repeal any provision of its foundation Agreement documents, which, if implemented, could adversely affect Article II the carrying out of the Project or the operation of the Project facilities. UTY shall afford ADB an adequate opportunity to comment on such proposal prior to taking any affirmative action thereon. Implementation Arrangements Project Complied with. 1. UTY shall ensure that the Project is implemented in Agreement, accordance with the detailed arrangements set forth in the Schedule, PAM. Any subsequent change to the PAM shall become para. 1 effective only after approval of such change by the Borrower and ADB. In the event of any discrepancy between the PAM and this Loan Agreement, the provisions of this Loan Agreement shall prevail. Operational covenants Project Complied with. 2. UTY shall ensure that (i) the Project facilities are Agreement, installed in accordance with design specifications and Schedule, construction norms; and (ii) construction supervision, para. 2 quality control and contract management are performed in accordance with applicable standards and best international practices. 3. UTY shall apply for domestic tariff adjustment in a timely Project Complied with. manner. Agreement, Schedule, para. 3 4. UTY shall (i) ensure that all contracts include contractor’s Project Complied with. obligation to comply with railway safety measures, (ii) Agreement, conduct safety awareness on the railway electrification for Schedule, local residents along the rail line, (iii) set up adequate para. 4 safety signs, and (iv) regularly monitor and report the accident rate and traffic volume. 5. UTY shall (i) set up procedures for operations and Project Complied with. maintenance of electrification, signaling and Agreement, telecommunication equipment procured under the Project Schedule, and (ii) ensure that the structure and conditions of track para. 5 and other Project facilities are satisfactorily maintained to ensure safe operation of railway operation. 6. (a) Except as ADB shall otherwise agree, UTY shall Project Partially complied. maintain an operating income ratio of not less than 0.2 Agreement, 2012: 0.26 starting from the 2012 financial year onwards. Schedule, 2013: 0.26 para. 6 2014: 0.21 2015: 0.22 2016: 0.203 2017: 0.31

Appendix 7 33

Covenant Reference Status of Compliance 2018: 0.14 There were no audit opinions provided but only reports on factual findings on financial covenants. (b) For purposes of subparagraph (a) above, Project Complied with. (i) the term “operating income ratio” means operating Agreement, income divided by operating revenues; Schedule, (ii) the term "operating income" means the difference para. 6 between operating revenue and operating expenses; (iii) the term "operating expenses" means all expenses related to operations, including administration, maintenance, and depreciation but excluding interest and other charges on debt; (iv) the term "operating revenue" means revenues from all sources related to operations; and (v) the terms "operations" or "operating" refer to UTY's core business of providing railway transport services including other services auxiliary to railway transport. 7. UTY shall ensure that the Project railway is assured Project Complied with. reliable power supply. In this regard, UTY shall ensure that Agreement, engineering design and construction of (i) 110kV Schedule, transmission line from Ishtihan power substation to para. 7 Marakand railway transformer substation site; (ii) 110Kv transmission line from Kasan power substation to Ayritam railway transformer substation site; and (iii) 110Kv transmission line from Kasan power substation to Kashkadarya railway transformer substation site, are (a) completed with due diligence and efficiency and in conformity with the Involuntary Resettlement Safeguards, applicable technical norms and standards, and sound financial, business, and development practices and (b) commissioned prior to the Project completion. UTY shall furnish to ADB periodic reports and updates on construction works, resettlement activities and environmental mitigation measures (if any) related to such external power transmission facilities. 8. UTY shall ensure that ADB’s consent is obtained at least Project Complied with. 6 months prior to the implementation of any of the Agreement, following: (i) any change in ownership of any asset, facility Schedule, or structure financed under the Project; (ii) any sale, para. 8 transfer, or assignment of interest or control in any asset, facility or structure financed under the Project; or (iii) any lease or other contract or modification of the functions and authority of UTY over operation and maintenance of any such asset, facility or structure financed under the Project. UTY shall ensure that any such changes will be carried out in a legal and transparent manner.

Environment Project Complied with. 9. UTY shall ensure, that the preparation, design, Agreement, construction, implementation, operation and Schedule, decommissioning of the Project and its associated facilities para. 9 comply with (a) all applicable laws and regulations of the Borrower relating to environment, health and safety; (b) the Environmental Safeguards; and (c) all measures and requirements set forth in the IEE, the EMP, and any corrective or preventative actions set forth in a Safeguards Monitoring Report. Land Acquisition and Involuntary Resettlement Project Complied with. 10. UTY shall ensure, that all land and all rights-of-way Agreement, required for the Project are made available to the Works Schedule,

34 Appendix 7

Covenant Reference Status of Compliance contractor in accordance with the schedule agreed under para. 10 the related Works contract and all land acquisition and resettlement activities are implemented in compliance with (a) all applicable laws and regulations of the Borrower relating to land acquisition and involuntary resettlement; (b) the Involuntary Resettlement Safeguards; and (c) all measures and requirements set forth in the RP, and any corrective or preventative actions set forth in a Safeguards Monitoring Report. 11. Without limiting the application of the Involuntary Project Complied with. Resettlement Safeguards or the RP, UTY shall ensure, that Agreement, no physical or economic displacement takes place in Schedule, connection with the Project until: para. 11 (a) compensation and other entitlements have been provided to affected people in accordance with the RP; and (b) a comprehensive income and livelihood restoration program has been established in accordance with the RP. Human and Financial Resources to Implement Safeguards Project Complied with. Requirements Agreement, 12. UTY shall make available necessary monetary and Schedule, human resources to fully implement the EMP and the RP para. 12 by recruiting an environmental consultant to monitor implementation of EMP, and a social development consultant to implement RP and to issue a report of the completion of RP. Safeguards – Related Provisions in Bidding Documents Project Complied with. and Works Contracts Agreement, 13. UTY shall ensure, that all bidding documents and Schedule, contracts for Works contain provisions that require para. 13 contractors to: (a) comply with the measures relevant to the contractor set forth in the IEE, the EMP, and the RP (to the extent they concern impacts on affected people during construction), and any corrective or preventative actions set forth in a Safeguards Monitoring Report; (b) make available a budget for all such environmental and social measures; (c) provide the Borrower with a written notice of any unanticipated environmental, resettlement or indigenous peoples risks or impacts that arise during construction, implementation or operation of the Project that were not considered in the IEE, the EMP, and the RP; (d) adequately record the condition of roads, agricultural land and other infrastructure prior to starting to transport materials and construction; and (e) reinstate pathways, other local infrastructure, and agricultural land to at least their pre-project condition upon the completion of construction. 14. UTY shall: Project Complied with. (a) submit quarterly Safeguards Monitoring Reports on Agreement, implementation of the RP, and semiannually Safeguard Schedule, Monitoring Reports on implementation of EMP, to ADB and para. 14 disclose relevant information from such reports to affected persons promptly upon submission ; (b) if any unanticipated environmental and/or social risks and impacts arise during construction, implementation or operation of the Project that were not considered in the IEE, the EMP, and the RP, promptly inform ADB of the occurrence of such risks or impacts, with detailed description of the event and proposed corrective action plan; and

Appendix 7 35

Covenant Reference Status of Compliance (c) report any actual or potential breach of compliance with the measures and requirements set forth in the EMP or the RP promptly after becoming aware of the breach. Prohibited List of Investments Project Complied with. 15. UTY shall ensure that no proceeds of the Loan are Agreement, used to finance any activity included in the list of prohibited Schedule, investment activities provided in Appendix 5 of the SPS. para. 15 Health and Labor Standards Project Complied with. 16. UTY shall ensure that contractors engaged under the Agreement, Project (i) comply with all applicable labor laws; (ii) use their Schedule, best efforts to employ women and local people, including para. 16 disadvantaged people, living in the vicinity of the Project; (iii) provide equal pay to men and women for work of equal type; (iv) provide and adequately equip first-aid, health and sanitation, and personal hygiene facilities for male and female workers at the Project site; (v) maximize female training and employment; (vi) conduct an information and education campaign on sexually transmitted diseases and HIV/AIDS for construction workers as part of the health and safety program at campsites and adjacent communities during Project implementation; and (vii) abstain from child labor. Relevant contracts financed under the Project must include specific clauses on these undertakings. Gender and Development Project Complied with. 17. UTY shall ensure conformity with the principles of Agreement, ADB's Policy on Gender and Development (1998) during Schedule, implementation of the Project, including (i) appointment of a para. 17 gender focal point in the executing agency for the implementation of gender-related activities; (ii) gathering the baseline sex-disaggregated data as part of surveys and assessments; (iii) providing gender awareness training for UTY; (iv) integration of the gender-related content into capacity building activities and communication strategies, wherever appropriate; (v) proactively encouraging and promoting women’s employment in UTY; and (vi) conducting the information campaigns on HIV/AIDS. UTY shall ensure that sufficient funds are available to implement these activities. Counterpart Support Project Complied with. 18. UTY shall ensure that the counterpart funding, land, Agreement, rights-of-way, facilities and human resources required for Schedule, the Project, including cost overruns, are promptly provided para. 18 for purposes of successful Project implementation. Governance and Anticorruption Project Complied with. 19. UTY shall ensure that it (i) complies with ADB’s Agreement, Anticorruption Policy (1998, as amended to date) and Schedule, acknowledge that ADB reserves the right to investigate para. 19 directly, or through its agents, any alleged corrupt, fraudulent, collusive or coercive practice relating to the Project; and (ii) cooperates with any such investigation and extend all necessary assistance for satisfactory completion of such investigation. 20. UTY shall ensure that the anticorruption provisions Project Complied with. acceptable to ADB are included in all bidding documents Agreement, and contracts, including provisions specifying the right of Schedule, ADB to audit and examine the records and accounts of the para. 20 executing and implementing agencies and all contractors, suppliers, consultants, and other service providers as they relate to the Project.

36 Appendix 8

ECONOMIC REEVALUATION

A. Introduction

1. The economic evaluation of the project considered all project components including those under ADB financing, JICA financing as well as by the government. The evaluation also included all the project benefits including energy cost savings, travel time savings, reduction in pollution, benefits from diverted traffic, benefits from avoidable diesel locomotives, and a reduction in maintenance costs.

B. Economic Evaluation

2. The economic evaluation was undertaken per the ADB guidelines and included an assessment of the project economic costs and economic benefits. The economic evaluation uses constant 2011 economic prices, the world price numeraire, and all costs are expressed in US dollars. However, when undertaking an economic reevaluation the key is to compare the forecast costs and benefits with the actual benefits and costs in the year in which they actually occur. To ensure this, the economic reevaluation was also undertaken at 2020 prices.

3. The project costs were revalued in economic terms by separating the cost items into tradable materials and equipment, non-tradable materials, skilled labour, and unskilled labour. A standard conversion factor (SCF) of 0.95 was used to convert domestic market price values to border price equivalent values. It is confirmed that this SCF value is still relevant and valid 1.

C. Traffic Growth

4. The original feasibility study of the Marakand-Karshi Railway Electrification Project envisaged a freight traffic growth as given in Table 1:

Table 1: Freight Traffic Annual Growth Rates Year Growth Rate 2009 -2011 5.4% 2012-2014 4.9% 2015 -2019 4.5% 2020 -2042 4.3% Source: CAREC Corridor 6 (Marakand–Karshi) Railway Electrification Project (RRP UZB 45067-05)

5. The original economic analysis for Marakand-Karshi section envisaged an annual growth rate of freight traffic of between 5.4% and 4.5% between 2009 and 2019. Although the disaggregated traffic data for the project section was not available at evaluation, there is evidence based on the JICA Project Status Report on Karshi-Termez Railway Electrification Project and freight statistics of the country 2 that freight traffic have experienced significant increase since the commencement of the project section operation. The observed freight traffic on the Karshi- Termez Railway section grew at an annual rate of 9.02% between 2009 and 2019, which is significantly higher that the forecasted traffic growth on the Marakand-Karshi section at appraisal.

1 The SCF was re-estimated for the analysis. 2 The State Committee of the Republic of Uzbekistan on Statistics. www.stat.uz: freight statistics - https://stat.uz/en/234- ofytsyalnaia-statystyka-en/sfera-usluh-en/4357-freight-transportation-and-freight-turnover-by-transport-type (accessed on 15 July 2020).

Appendix 8 37

D. Economic Costs

6. The project CAPEX included track structure, signaling and interlocking, power supply facility, machinery and equipment, resettlement, environmental mitigation and monitoring, and project management including consulting services for implementation supervision. The purchase of electric locomotives to operate the electrified project route is considered a capital investment cost.

7. The project CAPEX was revised based on the actual expenditure during the project construction period. The original economic capex was $534.2 million spread over the construction period from 2011 to 2017. Based on the actual expenditure, the economic capex was revised to $530.8 million spread over the construction period from 2011 to 2019. The economic capex was estimated at 2020 prices.

8. The O&M cost for the electrified rail track was considered an offset item to calculate the project benefit for energy cost savings and maintenance cost savings. The O&M costs were estimated at 2020 prices.

E. Economic Benefits

9. The following economic benefits were estimated: (i) energy cost savings, (ii) travel time savings, (iii) pollution reduction, (iv) benefits from diverted traffic, (v) benefits from avoidable diesel locomotives, and (vi) benefits from maintenance cost savings. All the parameters used to estimate these benefits were reviewed as part of the reevaluation.

10. The energy cost for electrical locomotives is cheaper than that of diesel locomotives. The energy cost savings were calculated by comparing unit fuel costs of electrical and diesel locomotives. The fuel and power consumption rates of electric and diesel locomotives used in the economic analysis were deemed to be appropriate and hence were not changed. In the average unit costs of diesel and electric power used in the analysis were at 2011 prices. These were uplifted to 2020 prices in the economic reevaluation.

11. The travel time savings were based on the assumption that the electrification would enable a 1-hour time saving for freight traffic along project route. The time savings were estimated based on an average economic value of cargo per ton of $310 and an opportunity cost of capital of 12% per annum. The economic value of the cargo was at 2011 prices, and in the economic reevaluation this was uplifted to reflect 2020 prices.

12. The pollution reduction benefits were based on carbon dioxide emissions of both diesel and electric locomotives (in grams per ton-km). These were deemed to be appropriate and hence not changed. The CO 2 emission was valued by applying $19.4/ton, the prevailing 2011 price for CO 2 emission trading. In the economic reevaluation this was uplifted to $38.6/ton in 2020 prices.

13. The benefits from diverted traffic was based on a transit tariff of $9.5 per ton for traffic from Turkmenistan, and $25 per ton for the diverted traffic from the Pakistan transit cargo to Afghanistan. These were in 2011 prices. In the economic reevaluation this was uplifted to 2020 prices.

14. The benefits from avoidable diesel locomotives was based on the cost of diesel locomotives that would not have to be purchased due to the project, in 2011 prices. In the economic reevaluation this was uplifted to 2020 prices.

38 Appendix 8

15. The maintenance cost savings as due to the fact that electric locomotives incur cheaper maintenance costs than diesel locomotives. These costs were estimated in 2011 prices and taken from the financial model. In the economic reevaluation this was uplifted to 2020 prices.

F. Discount Rate

16. The original economic evaluation was undertaken using a 12% discount rate, which was in line with the then ADB economic appraisal guidelines. This guidance has subsequently been revised and the current discount rate to be used for economic appraisal is 9%. However, to ensure consistency with the original economic analysis, the economic reevaluation was also undertaken using a 12% discount rate.

G. Appraisal Results

17. The original appraisal showed an EIRR of 14.7% and an ENPV of $83.7 million, and hence the project was viable. The economic appraisal was undertaken in 2011 prices. For the economic benefits, all the parameters applied including the energy consumption of locomotives, time saved for freight traffic and the CO 2 emissions of locomotives were all found to be reasonable and did not require to be changed. They were however uplifted to 2020 prices.

18. Based on a discount rate to 12%, the economic reevaluation resulted in an EIRR of 16.97% and an ENPV of $249.9 million at 2020 prices, which is higher than the value at appraisal attributed to increase in freight traffic and CO 2 emissions savings. Overall, the project remains viable from an economic perspective. The detailed economic re-appraisal results are given in Annex A .

Appendix 8 39

Annex A

Economic Reevaluation Results (USD millions)

Costs Benefits Project Electric Total Energy Time Pollution Diverted Avoided Maint. Total Net Year Capital Loco Cost Cost Saving Reduction Traffic Diesel Cost Benefits Benefits Cost Saving Locos Savings 2011 2.1 2.1 (2.1) 2012 35.4 35.4 (35.4) 2013 132.5 132.5 (132.5) 2014 200.9 200.9 (200.9) 2015 316.5 316.5 (316.5) 2016 137.7 137.7 (137.7) 2017 82.8 337.2 420.0 60.8 5.0 13.1 64.7 585.0 1.9 730.6 310.6 2018 53.3 38.1 91.3 63.6 5.3 10.5 66.0 7.5 15.3 168.2 76.9 2019 15.0 12.8 27.7 66.4 5.5 10.7 67.4 0.0 13.3 163.4 135.6 2020 0.0 12.8 12.8 69.4 5.7 11.1 68.7 7.5 14.2 176.7 163.9 2021 0.0 12.8 12.8 72.2 6.0 11.3 70.2 0.0 12.2 172.0 159.2 2022 0.0 12.8 12.8 75.6 6.3 11.5 71.5 7.5 12.2 184.6 171.8 2023 0.0 12.8 12.8 78.6 6.5 11.9 72.9 0.0 10.8 180.7 168.0 2024 0.0 12.8 12.8 82.2 6.7 12.3 74.3 0.0 9.7 185.4 172.6 2025 0.0 12.8 12.8 85.6 7.0 12.5 75.9 7.5 10.8 199.4 186.6 2026 0.0 12.8 12.8 89.4 7.3 12.9 77.3 0.0 11.9 199.0 186.2 2027 0.0 12.8 12.8 93.1 7.7 13.3 78.9 7.5 6.1 206.7 193.9 2028 0.0 12.8 12.8 97.2 8.0 13.7 80.5 0.0 4.7 204.2 191.4 2029 0.0 12.8 12.8 101.4 8.3 14.1 82.1 7.5 6.4 219.8 207.0 2030 0.0 12.8 12.8 105.6 8.8 14.5 83.8 0.0 6.9 219.6 206.8 2031 0.0 25.3 25.3 110.3 9.2 14.9 85.5 0.0 5.0 224.9 199.6 2032 0.0 12.8 12.8 115.0 9.5 15.3 87.1 0.0 2.5 229.4 216.6 2033 0.0 12.8 12.8 120.0 9.9 15.9 89.0 0.0 (1.9) 232.8 220.1 2034 0.0 12.8 12.8 125.0 10.3 16.3 90.7 0.0 (6.9) 235.4 222.6 2035 0.0 12.8 12.8 130.6 10.8 16.9 92.6 0.0 (9.2) 241.6 228.8 2036 0.0 0.0 0.0 136.1 11.2 17.1 94.3 0.0 (16.7) 242.0 242.0 2037 0.0 0.0 0.0 141.9 11.8 17.1 96.3 0.0 (19.7) 247.4 247.4 2038 0.0 151.9 151.9 148.1 12.2 17.3 98.1 0.0 (22.2) 253.5 101.5 2039 0.0 0.0 0.0 154.4 12.8 17.3 100.2 0.0 (25.0) 259.7 259.7 2040 0.0 0.0 0.0 161.1 13.3 16.9 102.2 0.0 (28.6) 264.9 264.9 2041 0.0 0.0 0.0 168.1 13.9 16.5 104.2 0.0 (31.4) 271.3 271.3 2042 (53.4) (248.6) (302.0) 175.3 14.5 16.5 106.2 0.0 (34.7) 277.7 579.8 ENPV 249.9 EIRR 16.97%

40 Appendix 9

FINANCIAL REEVALUATION

A. Introduction

1. The financial evaluation of the project considered all project components including those under ADB financing, JICA financing as well as by the government. The analysis was carried out to compare the “with-project” scenario (electrification for electric traction) and the “without-project” scenario (status quo with diesel traction). Under both scenarios, capital costs and O&M costs required to bear the forecast traffic was estimated.

B. Financial Evaluation

2. The financial evaluation was undertaken in accordance with the Handbook for Borrowers on the Financial Management and Analysis of Projects of the ADB. It included an assessment of the project costs and revenues. The financial evaluation used constant 2011 prices and all costs and revenues were expressed in US dollars. The financial reevaluation was also undertaken at 2020 prices.

C. Traffic Forecasts and Revenues

3. The traffic forecasts were based on four streams of freight traffic being carried on the railway line. These included (i) traffic between Surkhandarya and other provinces in Uzbekistan (local traffic); (ii) import traffic to Uzbekistan from Tajikistan, Afghanistan, and third countries; (iii) export traffic from Uzbekistan to Tajikistan, Afghanistan, and third countries; and (iv) transit traffic, mainly to Tajikistan and Afghanistan.

4. The traffic forecasts estimated a total of 5,420 ton-kms would be carried on the line in 2017, rising to 14,946 ton-kms by 2041. The original analysis for Marakand-Karshi section envisaged an annual growth rate of freight traffic of between 5.4% and 4.5% between 2009 and 2019. As per the JICA Project Status Report on Karshi-Termez Railway Electrification Project, the freight traffic on this section grew at an annual rate of 9.02% between 2009 and 2019. This is significantly higher that the forecasted growth on the Marakand-Karshi section. The freight revenue was adjusted to 2020.

D. Capital Cost and Operating and Maintenance Costs

5. Under the with-project scenario, the capital cost included (i) electrification, signalling, and telecommunication; (ii) electric locomotives; and (iii) track rehabilitation including physical contingency and excluding price contingency and financing charges. Under the without-project scenario, the capital cost covers (i) workshop, signalling, and telecommunication; (ii) diesel locomotives; and (iii) track rehabilitation including physical contingency and excluding price contingency and financing charges. The capital assets are assumed to have 10% residual value after the 25-year operation.

6. The O&M costs included fuel and traction electricity costs, as well as maintenance costs for infrastructure, locomotives, and wagons.

7. As part of the financial reevaluation the CAPEX and OPEX was re-estimated at 2020 prices. The project capex was revised based on the actual expenditure during the project construction period. The original economic capex was $534.2 million spread over the construction

Appendix 9 41 period from 2011 to 2017. Based on the actual expenditure, the CAPEX was revised to $1,027.6 million spread over the construction period from 2011 to 2019.

E. Weighted Average Cost of Capital

8. The Weighted Average Cost of Capital (WACC) is recalculated based on 2020 data. The WACC is based on the following: (i) ADB debt carrying an interest at 2.5%; (ii) UTY debt carrying an interest rate of 1.2%; and (iii) the cost of government financing at 20% is based on local risk- free interest of 10% plus a risk premium of 10% for country market risk and railway sector risk. The total WACC is 4.2%.

F. Financial Appraisal Results

9. The original appraisal showed an FIRR of 13.2%, which was higher than the WACC off 2.6%, and hence the project was viable.

10. Financial reevaluation resulted in an FIRR of 19.6%, which is higher than the WACC of 4.2%. At completion, the project remains viable from a financial perspective. The detailed financial re-appraisal results are given in Annex A.

42 Appendix 9

Annex A Financial Reevaluation (USD millions)

Electirfication Scenario Diesel Scenario Capital Cost Capital Cost Incremental Year O&M Total Expected Net O&M Total Expected Net Electrification Electric Track Workshop Diesel Track Cash Flow Cost Cost Revenue Cash Flow Cost Cost Revenue Cash Flow and Signaling Locomotives Rehabiltation and Signaling Locomotives Rehabiltation 2011 2.2 0.0 0.0 0.0 2.2 0.0 (2.2) 5.8 0.0 0.0 0.0 5.8 0.0 (5.8) 3.6 2012 37.3 0.0 3.1 0.0 40.3 0.0 (40.3) 28.3 20.1 2.7 0.0 51.1 0.0 (51.1) 10.8 2013 139.5 0.0 31.1 0.0 170.6 0.0 (170.6) 85.8 98.4 24.9 0.0 209.1 0.0 (209.1) 38.5 2014 211.5 0.0 38.1 0.0 249.6 0.0 (249.6) 78.4 114.1 27.9 0.0 220.4 0.0 (220.4) (29.1) 2015 333.2 0.0 41.9 0.0 375.1 0.0 (375.1) 79.5 105.2 28.4 0.0 213.0 0.0 (213.0) (162.1) 2016 145.0 0.0 0.0 0.0 145.0 0.0 (145.0) 15.4 89.2 0.0 0.0 104.6 0.0 (104.6) (40.4) 2017 87.1 337.2 0.0 12.8 437.1 36.9 (400.2) 2.9 41.5 40.9 23.9 109.2 33.6 (75.6) (324.6) 2018 56.1 38.1 0.0 101.7 195.8 364.7 168.9 0.0 3.6 0.0 179.7 183.3 332.5 149.2 19.7 2019 15.8 12.8 0.0 105.6 134.1 381.4 247.3 0.0 0.0 0.0 182.5 182.5 346.4 163.9 83.4 2020 0.0 12.8 0.0 109.7 122.5 397.2 274.7 0.0 2.8 0.0 188.6 191.4 359.4 168.0 106.7 2021 0.0 12.8 0.0 115.6 128.3 413.9 285.6 0.0 0.0 0.0 193.6 193.6 373.3 179.7 105.8 2022 0.0 12.8 0.0 117.2 130.0 431.1 301.1 0.0 7.8 0.0 196.7 204.4 387.8 183.3 117.8 2023 0.0 12.8 0.0 123.9 136.7 449.4 312.8 0.0 0.0 15.0 203.1 218.1 403.0 185.0 127.8 2024 0.0 12.8 0.0 126.7 139.4 468.6 329.2 0.0 0.0 0.0 206.1 206.1 418.9 212.8 116.4 2025 0.0 12.8 0.0 130.6 143.3 488.6 345.3 0.0 7.8 0.0 212.8 220.6 435.5 215.0 130.3 2026 0.0 12.8 0.0 132.8 145.6 509.4 363.9 0.0 0.0 15.0 217.5 232.5 453.0 220.6 143.3 2027 0.0 12.8 0.0 141.7 154.4 531.4 376.9 0.0 7.8 0.0 221.7 229.4 471.1 241.7 135.3 2028 0.0 12.8 0.0 148.3 161.1 554.4 393.3 0.0 0.0 0.0 228.3 228.3 490.3 261.9 131.4 2029 0.0 12.8 0.0 151.7 164.4 578.3 413.9 0.0 7.8 0.0 235.3 243.1 510.3 267.2 146.7 2030 0.0 12.8 0.0 156.1 168.9 603.6 434.7 0.0 0.0 15.0 242.2 257.2 531.4 274.2 160.6 2031 0.0 25.3 0.0 163.3 188.6 630.3 441.7 0.0 0.0 0.0 249.4 249.4 553.3 303.9 137.8 2032 0.0 12.8 0.0 168.9 181.7 657.8 476.1 0.0 0.0 0.0 249.4 249.4 553.3 303.9 172.2 2033 0.0 12.8 0.0 175.8 188.6 686.9 498.3 0.0 0.0 0.0 249.4 249.4 553.3 303.9 194.4 2034 0.0 12.8 0.0 184.2 196.9 717.5 520.5 0.0 0.0 0.0 249.4 249.4 553.3 303.9 216.7 2035 0.0 12.8 102.2 189.4 304.4 749.4 445.0 0.0 0.0 0.0 249.4 249.4 553.3 303.9 141.1 2036 0.0 0.0 148.1 202.8 350.8 779.4 428.6 0.0 0.0 0.0 249.4 249.4 553.3 303.9 124.7 2037 0.0 0.0 0.0 211.7 211.7 811.1 599.4 0.0 0.0 0.0 249.4 249.4 553.3 303.9 295.6 2038 0.0 151.9 95.0 220.3 467.2 844.2 376.9 0.0 0.0 95.0 249.4 344.4 553.3 208.9 168.1 2039 0.0 0.0 15.0 229.4 244.4 878.9 634.4 0.0 0.0 0.0 249.4 249.4 553.3 303.9 330.5 2040 0.0 0.0 0.0 239.4 239.4 915.3 675.8 0.0 0.0 0.0 249.4 249.4 553.3 303.9 371.9 2041 0.0 0.0 0.0 250.0 250.0 961.1 711.1 0.0 0.0 0.0 249.4 249.4 553.3 303.9 407.2 2042 (53.4) (248.6) (202.5) 261.7 (242.8) 996.6 1,239.5 (40.0) (89.4) (98.3) 249.4 21.7 553.3 531.7 707.8 FIRR 19.6%

( ) = negative, FIRR = financial internal rate of return, O&M = operation and maintenance. Source: ADB. 2011. Preparing the Railway Electrification Investment Program. Consultant's report. Manila. (TA 7799-UZB).

Appendix 10 43

CONTRIBUTION TO ADB RESULTS FRAMEWORK

Results Framework Indicator(s) Targets Methods / Comments Railways upgraded 140 km Design, installation and commission of equipment (power supply, signaling, telecommunication, etc.), and construction of ancillary civil works

Electrifying 140-km single track railway line between Marakand and Karshi