ASIAN DEVELOPMENT BANK PCR: UZB 30375

PROJECT COMPLETION REPORT

ON THE

RURAL ENTERPRISE DEVELOPMENT PROJECT (Loan 1504–UZB)

IN

UZBEKISTAN

October 2003

CURRENCY EQUIVALENTS

Currency Unit – sum

At Appraisal At Project Completion (30 September 1996) (21 February 2003) SUM1.00 = $0.025 $0.0010 $1.00 = SUM40 SUM963

ABBREVIATIONS

ADB – Asian Development Bank CAR – capital adequacy ratio CBU – Central Bank of Uzbekistan DEM – Deutsche mark DSCR – debt service coverage ratio EBRD – European Bank for Reconstruction and Development FIRR – financial internal rate of return FSU – Former Soviet Union GAAP – generally accepted accounting principles IAS – International Accounting Standards IFC – International Finance Corporation IOS – Interim operating strategy JSC – Joint Stock Company JV – Joint Venture KfW – Kreditanstalt für Wiederaufbau LDR – loan-to-deposit ratio LIBOR – London interbank offered rate MDC – management development center NBU – National Bank for Foreign Economic Activity of the Republic of Uzbekistan OCR – ordinary capital resources PCR – project completion review PTE – Private Limited Company ROA – return on assets RRP – report and recommendation of the President SMEs – small and medium-sized enterprises SOE – state-owned enterprise TA – technical assistance TCR – technical assistance completion report US – United States

NOTE

In this report, "$" refers to US dollars.

CONTENTS

Page

Basic Data ii I. BACKGROUND 1 A. History 1 B. Scope of Operations of NBU 1 C. NBU’s Relation with ADB and Other Lenders 1 D. Relevance of Design and Formulation 2 E. Related Technical Assistance 3 II. IMPLEMENTATION 3 A. Lending Policies 3 B. Characteristics of Subloans 4 C. Implementation and internal Operations of Subprojects 5 D. Operational Performance of NBU 7 E. NBU’s Financial Performance 9 F. Financial Statements and Ratios 9 G. Covenants 10 H. Performance of the Asian Development Bank 10 III. EVALUATION 11 A. Loan Appraisal 11 B. Implementation 12 IV. ASSESSMENT AND RECOMMENDATIONS 13 A. Relevance 13 B. Efficacy in Achievement of Purpose 13 C. Efficiency 13 D. Preliminary Assessment of Sustainability 13 E. Other Impacts 14 F. Overall Assessment 14 G. Lessons Learned 14 H. Recommendations 15

APPENDIXES 1. NBU’s Other Credit Lines 16 2. NBU Credit Policy 18 3. Characteristics of Subloans 21 4. Operational and Financial Performance of Subprojects 26 5. NBU’s Management Structure 30 6. NBU’s Loan Portfolio 31 7. NBU’s Portfolio Classification System and Loan Loss Provision 33 8. NBU’s Financial Statements and Ratios 34 9. NBU’s Compliance with Covenants 38 10. Overall Assessment of the Project 48

BASIC DATA

A. Loan Identification

1. Country Uzbekistan 2. Loan Number PAG: UZB 30375, Loan 1504-UZB 3. Loan Title Rural Enterprises Development Project 4. Borrower Republic of Uzbekistan 5. Name of development finance institutions National Bank for Foreign Economic Activity of the Republic of Uzbekistan 6. Amount of Loan USD50,000,000 7. Project Completion Report Number PCR: UZB 775

B. Loan Data

1. Appraisal – Date Started 10 Sep 1996 – Date Completed 30 Sep 1996

2. Loan Negotiations – Date Started 18 Nov 1996 – Date Completed 20 Nov 1996

3. Date of Board Approval 17 Dec 1996

4. Date of Loan Agreement 7 May 1997

5. Date of Loan Effectiveness – In Loan Agreement 13 Jun 1997 – Revised – Number of Extensions none

6. Terminal Date for Commitments – In Loan Agreement 13 Jun 2000 – Actual 13 Jun 2000 – Number of Extensions none

7. Closing Date – In Loan Agreement 13 Jun 2002 – Revised – Number of Extensions

8. Terms to the Borrower – Interest Rate Variable interest rate for lending in USD from ordinary capital resources (current 6.34%) – Maturity (number of years) 15 – Grace Period 3 (number of years) – Free Limit $3 million – Repayment Terms 24 half-yearly payments

9. Terms of Relending (if any) Same as loan

iii

10. Interest Rate for Subloans – Original ADB interest rate + NBU margin – Revised

11. Disbursements a. Dates Initial Disbursement Final Disbursement Time Interval April 2, 1998 March 13, 2002 48 months

Effective Date Original Closing Date Time Interval June 13, 1997 June 13, 2002 60 months

b. Amount $45,629,510

Category Original Last Amount Net Amount Undisbursed or Allocation Revised Canceled Amount Disbursed Balance Subloan Allocation Available “New-York – Samarkand 288,557 - - - 288,557 - Industrial Enterprise” JV Namangan Conserva JSC 1,182,000 - - - 1,182,000 - “El Erk Nur” Firm 524,680 - - - 524,680 - “Lalmikor” PTE 114,230 - - - 114,230 - “Ishtikhan Conserva” JV 2,514,699 - - - 2,514,699 - “Ziyo-Nur” PTE 843,637 - 3 - 843,634 - “Meva” JV 2,720,000 - - - 2,720,000 - “Nilufar - D” PTE 1,212,689 - - - 1,212,689 - “Ice-Djaykhun” JV 334,250 - - - 334,250 - “Deroz” PTE 443,000 - - - 443,000 - “Termez non” JSC 464,560 - - - 464,560 - “Golden Fleece” JSC 2,306,204 - - - 2,306,204 - “ABK” PTE 3,536,330 - 533,250 - 3,003,080 - “Hoshim” Firm 298,271 - - - 298,271 - “Navoi don Invest” 3,334,014 - - - 3,334,014 - “Pasta – Kamola” JV 1,245,000 - - - 1,245,000 - “Parranda – Khasib” JSC 301,545 - - - 301,545 - “Non – Pasta” JSC 1,495,000 - - - 1,495,000 - “Shukurdavlat” PTE 292,700 - - - 292,700 - “Muzimpeks-Tijorat” 5,000,000 - 2 - 4,999,998 - “Mukaddam” PTE 215,000 - - - 215,000 - “Polimex” JV 700,000 - - - 700,000 - “Green World” JV 4,000,000 - - - 4,000,000 - “Karakalpaktomat” 2,750,000 - - - 2,750,000 - “Jeinov” JSC 285,817 - - - 285,817 - “Afrasiab Meva” JSC 3,400,000 - - - 3,400,000 - “Ziyobakhsh-Uni-Trading” JV 4,990,000 - - - 4,990,000 - “Laziz” JSC 1,370,582 - - - 1,370,582 - “Garzai Uz-Af” JV 2,349,000 - 2,349,000 - - - “Oltin Meva” JSC 1,488,235 - 1,488,235 - - - Total 50,000,000 - 4,370,490 - 45,629,510 -

***ADB = Asian Development Bank, JSC = Joint Stock Company, JV = Joint Venture, NBU = National Bank of Uzbekistan, PTE = Private Limited Company, USD = US dollars. *** Source: National Bank of Uzbekistan iv

C. Implementation Data

1. Number of Subloans 28 2. Sectoral Distribution of Rural small and medium-sized enterprises Subloans

Sector Projected Actual Food production 27 27 Light Industry 1 1 Total 28 28 Source: National Bank of Uzbekistan

3. Size of Subloans $45,629,510

Range Number of Subloans Aggregate Amount (sum) Up to 1,000,000 13 5,106,244 From 1,000,001 to 2,000,000 5 6,505,271 From 2,000,001 to 3,000,000 4 10,290,903 Over 3,000,001 6 23,727,092 Total 28 45,629,510 Source: National Bank of Uzbekistan

4. Other Breakdown of Refer to Appendix 3: Characteristics of Subloans (distribution criteria Subprojects agreed upon in loan documents) (USD).

Criteria Projected Actual

5. Subloans Above Free Limit $23,727,092

Subloan Aggregate Number Amount (sum) PSE-ABK 016 3,003,080 Navoi Don Invest 019 3,334,014 Muzimpeks-Tijorat 024 4,999,998 Ziyobakhsh-Uni-Trading 029 4,990,000 Green World 030 4,000,000 SC Afrasiab-Meva 033 3,400,000 Total 6 23,727,092

Source: National Bank of Uzbekistan

6. Project Performance Report Ratings

Ratings Implementation Period Development Implementation Objectives Progress (i) From 29 Nov 1998 to 30 Dec 1998 S / S (ii) From 30 Dec 1998 to 27 Feb 1999 PS / PS (iii) From 27 Feb 1999 to 30 Mar 1999 PS / S (iv) From 30 Mar 1999 to 29 Apr 1999 PS / S v

(v) From 29 Apr 1999 to 30 Dec 2000 PS / S (vi) From 30 Dec 2000 to 30 Nov 2002 S / S PS = partly satisfactory, S = satisfactory. Source: Asian Development Bank Project Performance Reports

D. Data on Asian Development Bank Missions

Name of Mission Date No. of No. of Person- Specialization of Persons Days Members Reconnaissance 22 Jun to 9 5 85 economist, senior Jul 1996 economist, assistant general counsel, young professional, staff consultant Appraisal 10 to 30 Sep 8 136 economist, manager, 1996 senior economist, young professional, counsel, three consultants. Inception 15 to 18 Jul 1 4 senior project 1997 engineer Review 4 to15 May 1 12 financial analyst 1998 Review 24 to 30 Oct 1 7 financial analyst 1998 Review 8 to 17 Feb 2 20 financial analyst, 2000 investment officer Review 12 to 13 Jul 1 2 financial analyst 2000 Review 11 to 20 Feb 2 20 senior portfolio 2002 management specialist, financial economist Project Completion 11 to 22 Feb 2 24 senior portfolio Review 20031 management specialist, assistant project analyst

E. Related Loans

Loan No. Date of Agreement Amount SME Development Project 1799-UZB March 9, 2001 $50,000,0002

SME = small- and medium -sized enterprise.

1 This project completion report was prepared by the Project Completion Review (PCR) Mission, which comprised R. Narasimham, senior portfolio management specialist/mission leader; and Teresa Yabut, assistant project analyst/mission member. 2 Credit allocation to National Bank of Uzbekistan under this loan was $20 million.

I. BACKGROUND

A. History

1. In December 1996, the Asian Development Bank (ADB) approved from its ordinary capital resources (OCR) a $50-million loan to Uzbekistan for relending to the National Bank for Foreign Economic Activity of the Republic of Uzbekistan (NBU) for onlending to viable private- sector and small- and medium-sized enterprises (SMEs) engaged in agroindustry.

2. NBU was formed in September 1991 as a wholly state-owned commercial bank to operate as the Government’s agent on international financial markets. Both according to its charter and its banking license obtained from the Central Bank of Uzbekistan (CBU), NBU is a universal commercial bank with a license to undertake foreign exchange transactions. NBU has four financial affiliates, all of which have complementary relationships with the bank. These comprise partial ownership in two joint-venture banks in Uzbekistan ie. ABN-AMRO (Uzbekistan)1 and UzDaewoo Bank,2 an investment in a domestic leasing company, and a subsidiary bank in Russia.3 NBU’s charter mandates that the bank must be at least 60% state- owned. NBU’s management is considering plans to privatize 40% of its shares.

B. Scope of Operations of NBU

3. NBU’s main operations include (i) trade finance; (ii) corporate banking; (iii) reserves management; (iv) finance for the foreign exchange needs of export-oriented or import substituting ventures; (v) finance for projects involving technology transfer; (vi) finance for projects involving value-added agricultural processing and modernizing industrial enterprises; (vii) organization of and participation in loan syndications; (viii) provision of export credits and guarantees; and (ix) banking services for payments, settlements, and remittances in local and foreign currencies. NBU has 22,000 corporate clients, most of them in energy, metallurgy, agriculture, petrochemicals, tourism, aviation, and surface transport. NBU acts as a government agent for many projects financed by international credit lines, many of which financed the foreign currency needs of projects in export promotion or import substitution. They also financed subprojects financing capital goods and technology transfer to add value for production using domestic inputs.

4. To facilitate its international operations, NBU had correspondent banking relationships with 500 banks in 66 countries as of 21 February 2003. It had 99 branches and 18 mini-banks to facilitate domestic operations.4 NBU is a member of the Society for Worldwide Interbank Financial Telecommunications (SWIFT), and has access to Telerate and Reuters information and dealing systems.

C. NBU’s Relation with ADB and Other Lenders

5. This loan was ADB’s first to Uzbekistan, and NBU was the sole executing agency. The loan was made from ADB’s OCR for a 15-year duration, including a 3-year grace period, at

1 The other shareholders of this bank are ABN-AMRO, Bank N.V. of the Netherlands, International Financial Corporation, and the European Bank for Reconstruction and Development (EBRD). 2 The Daewoo Conglomerate of the Republic of Korea is the other shareholder of this joint venture bank. 3 This provides NBU’s clients banking services and access to Russia, particularly for trade finance. 4 These are special offices located in the premises of industrial undertakings or collective farms. They are authorized to handle payroll, clearing and deposit acceptance, and petty cash withdrawal but may not make loans. 2

ADB’s variable interest rate for United States (US) dollar loans. The Government re-lent the loan funds to NBU at an identical maturity and interest rate. NBU was also a participating bank with a credit allocation of $20 million under ADB’s SME development project5 under terms similar to the first loan. In addition, NBU was the executing agency for a component of an ADB loan to Uzbekistan for basic education and textbook development.6

6. As Uzbekistan’s leading commercial bank, NBU has participated in lines of credit from other international lenders. These include (i) the first SME loan from the European Bank for Reconstruction and Development (EBRD) to Uzbekistan in 1993 for $60 million under sovereign guarantee,7 (ii) EBRD’s second SME loan for $120 million in 1996,8 (iii) NBU’s share of 7.4 million euros in Kreditanstalt für Wiederaufbau’s (KfW) credit line (of eur15 million) approved in 1999, (iv) NBU’s share of $15 million in the first credit line ($30 million) from International Finance Corporation (IFC) approved in 1999, (v) the Organization of Petroleum Exporting Countries’ (OPEC) SME credit line of $5 million in 2000, and (vi) US Exim Bank’s SME credit line of $55 million approved in 2002 (Appendix 1 provides the terms and conditions of these loans). NBU will be a participating bank with an allocation of $30 million in EBRD’s third SME credit line, to be approved in 2003, worth $100 million. NBU has also participated as manager or lead manager in syndicated loans for financing Uzbekistan Airways’ aircraft purchases and modernizing Uzbekistan’s state-owned gold mining and refining corporation.

7. NBU’s long-term domestic lending has been financed through borrowings from the Government’s business fund9 and other nonbudget funds that the Government has entrusted to NBU’s management. All lending from such funds is under sovereign direction and guarantee, and NBU does not bear the credit risk. As required under Presidential Decree No. 25/64, dated 21 March 2000, and Resolution No. 195 of the Cabinet of Ministers, dated 19 May 2000, NBU created a special fund by transferring 25% of its gross profits on a tax-deductible basis. This fund is used to make medium-term investment and working capital loans to SMEs with an interest rate ceiling of 50% of the Central Bank of Uzbekistan’s refinancing rate.10 NBU bears the credit risk, despite the fact that this lending is directed and carries negative real interest rates. This lending is mandatory and follows Uzbekistan’s development priorities. NBU’s customers’ deposits, all of which are for maturities under 12 months, are used to finance only short-term lending to avoid a maturity mismatch.

D. Relevance of Design and Formulation

8. The Project’s rationale and design were relevant to and consistent with ADB’s interim operating strategy (IOS) for Uzbekistan11 and with the Government’s development objectives.

5 ADB. 2000. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to Uzbekistan for the Small and Medium-Sized Enterprise Development Project. Manila. 6 ADB. 1997. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to Uzbekistan for Basic Education and Textbook Development Project. Manila. 7 This loan was fully committed and disbursed among 21 subprojects in 2000. NBU advised the mission that this loan’s performance was reasonably satisfactory and that its subloan recovery rate was comparable in track record to ADB Loan 1504. 8 NBU’s credit line allocation under this loan was $60 million and without sovereign guarantee. This loan has been fully committed and has 35 subprojects, of which 10 were reported to be experiencing repayment difficulties. 9 The business fund is a nonbudget fund, created by the State Property Committee, comprising 15% of the revenues of all privatized state assets. 10 CBU’s refinancing rate from 1 July 2002 was 34.5% per annum. 11 The IOS’ overriding principle was to assist the Government in an orderly transition to a market economy. The IOS required ADB’s assistance in supporting policy reforms, capacity building, institutional strengthening, efficiency improvements, and effective investments in rehabilitation. The designated sectoral priorities identified in the IOS included financial support for SMEs in agroprocessing. 3

Uzbekistan’s climatic and soil conditions are suitable for agriculture. During the Soviet era, factories for processing agricultural outputs were located in other republics of the former Soviet Union (FSU). The breakup of the FSU left Uzbekistan without adequate facilities for processing agricultural output. Another constraint was the lack of foreign exchange funding to finance agroprocessing enterprises’ imports of capital goods. The loan financed the foreign exchange requirements of private-sector agroprocessing SMEs that could add value to agricultural resources . In doing so, the Project sought backward and forward linkages with the agricultural and horticultural sectors, thereby increasing direct and indirect employment in these sectors. The Project sought to support agroprocessing SMEs to increase production for both export and domestic sales. The Project was soundly designed and satisfactorily formulated. Its timing was particularly appropriate. World prices of cotton and gold, Uzbekistan’s two principal commodity exports, declined in 1996. The Project rightly excluded cotton from the scope of the loan. Uzbekistan needed to diversify its exports away from a single commodity. NBU—the largest commercial bank in sound financial condition (in terms of solvency, liquidity, and profitability) in 1996, with a proven track record of dealing with multilateral institutions—was an appropriate choice as the executing agency. Project design was satisfactory overall, but it could have benefited from better policy formulation (para. 36).

E. Related Technical Assistance

9. Technical assistance (TA) for institutional strengthening of NBU was processed and approved simultaneously with the loan. Its objectives were (i) to strengthen the capacity of NBU’s branch offices to appraise loan subprojects, helping clients prepare business plans and understand requirements for equity and collateral, thereby reducing subproject rejection rates; and (ii) to implement systems for subproject benefit monitoring and evaluation. The details of the TA are provided in paras. 92–93 and appendixes 7 and 8 of the Report and Recommendations of the President (RRP) and in the TA completion report (TCR),12 circulated on 1 April 2003. The TA was rated successful. Implementation was timely and within budget. Its benefits are sustainable.

II. IMPLEMENTATION

A. Lending Policies

10. NBU’s credit and risk management policies were adequate at the time of appraisal. They were strengthened during loan implementation, benefiting from (i) inputs of ADB’s TA (para. 913), and (ii) NBU’s board resolution of 200214 (Appendix 2). While NBU’s commercial lending remains prudent, it is still subservient to national development policy.15 NBU’s policies of concentrating loans on single borrowers or sectors—or groups of affiliated ones—is prudent. Its credit decision-making is moderately decentralized. NBU’s generally low loan-to-deposit ratios (LDRs) show that liquidity management is prudent. The bank seeks to avoid maturity mismatches. Generally, NBU’s single-borrower exposure limit is below 15% of tier-one capital.

12 ADB. 2003. Technical Assistance Completion Report on Institutional Strengthening of National Bank of Uzbekistan. Manila. 13The TA provided methodologies for better appraisal of SME investment projects and for better benefit monitoring and evaluation of such projects. It also helped to improve the efficiency, transparency, and uniformity of NBU’s credit policy integrating the bank’s approval system for both foreign and local currency lending for project finance. 14 The resolution consolidated elements of banking legislation with NBU’s earlier established practices. 15 The creation of a fund to finance SMEs at below market interest rates (para. 7) shows how subservient NBU’s credit policy is to state direction. 4

11. A branch credit committee may approve loans up to a maximum of sum 50 million or a credit limit established by head office, whichever is lower. NBU’s head office credit committee may approve loans up to 1% of tier-one capital. The credit committee for the whole bank may approve loans up to 15% of the bank’s tier-one capital. Loans between 15–25% of its tier-one capital need board approval, and those exceeding 25% need approval from the bank’s council. NBU’s maximum permissible exposure to any sector is limited to 30% of its tier-one capital. NBU’s maximum unsecured loans cannot exceed 5% of its tier-one capital. The absolute limits can be exceeded only by specific sovereign guarantees whose value equals or exceeds 125% of the loan amount. Use of tier-one capital as the denominator for determining credit limits is conservative. NBU’s procedures for appraising, approving, and monitoring loans are adequate and supported by checks and balances. The committee directly above the one that approved a given loan can approve its rescheduling, but loan write-offs can be authorized only by NBU’s council (para. 22) on the specific advice of the board of directors. NBU’s policies for (i) loans to staff, (ii) internal and external audit of its lending policies, and (iii) reporting of its credit operations to its board are comprehensive and transparent. These policies apply to NBU’s normal commercial lending. A breakdown between commercial and directed lending with or without sovereign guarantees is not available.

B. Characteristics of Subloans

12. NBU approved 28 subloans totaling $45.6 million. Approved subloans were widely distributed by loan size, industry, maturity, region, and subborrower ownership. Twelve subborrowers from the Tashkent and Samarkand regions (43%) accounted for $23.8 million (52%) of subloans. The remaining 16 subborrowers (57%) accounted for $21.8 million (43%) of subloans and were distributed all over the country (Appendix 3), including poor regions such as Djizzak, Karakalpakstan, Kashkardarya, Khorezem, and Surkhandarya. The subloans were well distributed according to size. Ten subloans were for amounts between $100,000 and $500,000 and represented 6.7% of the total disbursed. Another 12 subloans were for amounts between $500,000 and $3 million and accounted for 41.3% of the loan amount.

13. Of the total utilized loan amount, 6 subloans amounting to $23.7 million (52%) were above the free limit. Twenty-two subloans amounting to $21.9 million (48%) were in amounts below the free limit. Subsectorally, 6 subloans amounting to $16.6 million (or 36.3% of the loan amount) went to subprojects related to tomato paste, fruit juice, and concentrates. Two beer production units accounted for $8.3 million in subloans (18.2% of the loan amount). Another $6.0 million worth of subloans (13.1% of the loan amount) financed manufacturers of biscuits, waffles, and pasta. Other subloans financed dairy production, wool processing, meat processing, vegetable and fruit freezing, mineral water, and sunflower oil. The subsectors covered by the loan exceeded the expectations made at loan processing (paras. 51-62 of the RRP). Nineteen subloans amounting to $32.5 million (71% of the loan amount) financed new subprojects while nine subloans amounting to $13.1 million (29% of the loan amount) financed modernization of existing undertakings. This is understandable, considering how few private agroprocessing SMEs existed at project commencement.

14. Of the 28 subloans, 26, amounting to $36.6 million (80.3 %), were for durations of 2–6 years. Two subloans amounting to $9 million were for periods of 6–7 years. This is understandable since ADB’s loan financed only the foreign exchange costs of capital equipment, which needed a longer period for cost recovery. The majority of subloans (19 of the 28) went to wholly Uzbek-owned SMEs, and 9 loans went to joint ventures. The majority of joint ventures were financed through foreign direct investment or other transfer mechanisms whose 5 net funding costs were lower than NBU’s onlent funds. None of the subprojects originally listed in the pipeline at appraisal could be financed under the loan as they did not meet ADB’s criteria for subproject viability or subborrower solvency. All subloans were priced at market interest rates (para. 37).

C. Implementation and Internal Operations of Subprojects

15. The Project Completion Review (PCR) Mission visited 15 subprojects16 with subloans totaling $34.4 million, or 75.4% of the loan amount. The subprojects covered a wide cross- section of subsectors, loan sizes, geographical regions, and operational and financial performance. All subprojects were new private-sector agroprocessing facilities aimed at increasing value and rural incomes. In many instances, existing SMEs or family-owned farms (dekhans) formed new legal entities to benefit from this loan. All the subprojects needed agricultural products as inputs, wholly consistent with the loan’s objectives (para. 45 of the RRP). It is difficult to measure the macroeconomic impact of the subprojects and their contribution to increased rural income, given the size of the loan and subloans in relation to the economy.

16. Of the 28 subprojects, 20 were completed on time and 23 faced no major cost overruns. Of the total loan disbursed at $45.6 million, $1.4 million was drawn down in 1998, $8.2 million in 1999, $22.2 million in 2000, $12.4 million in 2001, and $2.4 million in 2002 (Appendix 4). The delay in drawdowns occurred because none of the subprojects listed in the RRP could be financed under the loan (para. 14), and NBU had to find new ones meeting ADB criteria.17 All procurements were financed according to ADB guidelines. All subprojects were agro-based and provided backward linkage to agriculture. The subprojects had no proven environmental benefits or drawbacks. The subprojects visited were found to be environmentally friendly with adequate facilities for treating solid, liquid, and gaseous waste.18

17. The Project has directly created 847 jobs and indirectly created another 7,167 (Appendix 4). Many subprojects have not yet reached full capacity19 and some still face teething problems, so the collective achievement by 28 subprojects of generating 8,014 jobs in 3 years’ operations is impressive. Of the 847 direct jobs created, 522 went to men and 325—or 38%—went to women. In 4 of the 15 subprojects, actual incremental direct employment exceeded appraisal estimates.20 A number of technically qualified staff employed by these 4 subprojects had been laid off from loss-making state-owned enterprises (SOEs). Four subprojects directly employed more women than men.21 Overall, the Project was successful in generating sizable direct and indirect jobs without gender discrimination within the first 3 years of operations.

16 These were: (i) Polymex, (ii) Green World, (iii) Deroz, (iv) Pasta Kamola, (v) Non Pasta, (vi) ABK, (vii) Muzimpeks Tijorat, (viii) Afrosiob Meva, (ix) Paranda Khasib, (x) Ishtikhan Conserva, (xi) Laziz, (xii) New York – Samarkhand Industrial Enterprise, (xiii) Golden Fleece, (xiv) Navoi Don, and (xv) Ziyobakshi. Of the subprojects, one (New York Samarkand Industrial Enterprise), prepaid its subloan fully in 2001. 17 The original loan condition required every subproject to have a minimum economic internal rate of return (EIRR) of 12%. Estimating EIRRs for agroprocessing projects’ in Uzbekistan was onerous, dilatory, subjective, and has inordinately delayed loan use, so ADB required subprojects to earn a minimum return on assets of 12% by the time they reached full production capacity. Additionally, ADB approved subprojects only if their financial internal rates of return (FIRRs) were satisfactory in relation to their cost of capital. 18 The subprojects used anaerobic methods to treat liquid effluents and the aerobic methods to treat gaseous effluents, in accordance with the European Union’s sanitary standards. 19 This is attributable to problems of working capital (para. 18) and delayed loan utilization since its major drawdowns began only in 1999. 20 These were: (i) ABK, (ii) Golden Fleece, (iii) Muzimpeks Tijorat, and (iv) Afrosiab Meva. 21 These were Muzimpeks Tijorat, Polymex, ABK, and Termez Non. 6

18. The financial performance of the overall project was satisfactory (Appendix 4). Of the 28 subprojects, 2322 had financial internal rates of return (FIRRs) that compared favorably with their costs of capital, and a trend of improving returns on assets (ROAs) between 2000–2002. Five subprojects have ceased production altogether. These subprojects are (i) Nilufar D.,23 (ii) Ice Djaykhun, (iii) Hoshim Firm, (iv) Karakalpaktomat, and (v) Green World. The FIRRs of these subprojects are either negative or low (Appendix 4). The 5 subprojects accounted for 5% of the loan disbursed. A principal problem faced by many subprojects was a shortage of working capital during project implementation, preventing them from reaching full productive capacity and improving their financial performance. The shortage of working capital was caused by (i) limited access to domestic currency funding; and (ii) shortage of imported consumables, spare parts, and stores —which subborrowers had previously bought locally at black market exchange rates—because of the Government’s policy of import compression.24 Their debt servicing requirements further depleted their already low levels of working capital (para. 19). Despite these problems, 23 of the 28 subprojects had satisfactory overall performance.

19. The subborrowers’ repayment track record has been satisfactory (Appendix 4). As of 31 January 2003, 15 of the 28 subprojects, with total subloan amounts of $18.5 million, were repaying their principal and interest on or ahead of schedule. Thirteen subprojects worth a total of $27.1 million had arrears totaling $5.3 million. Arrears amounted to 21.8% of amounts due, but they were only 11.6% of loans disbursed because arrears arose on loans made in 1998- 2000 with repayments due in 2000-2003. Therefore, 88.4% of the total loan amount disbursed and 78.2% of the loan amount due for collection was being serviced on schedule.25 NBU has not rescheduled any of the 13 subloans. All 13 subborrowers with arrears were selling their output domestically, for local currency, without exports. Subloans were denominated in US dollars, and repayments were badly hit by the steep depreciation of sum against dollar between 1999 and 2003.26 In many instances, debt service requirements have wiped out already scarce working capital (para. 18), denying companies the ability to reach their full production capacity. Despite such odds, 8 of the 13 subprojects with arrears amounting to $3 million are still potentially viable (judging from their FIRRs in relation to their costs of capital). The eight subprojects could be turned around with rescheduling of their loans.27 Rescheduling with longer repayment periods will ease the burden on their cash flow, help them diversify, and facilitate repayment. If SMEs diversified into areas where output demand is inelastic, they could raise their output prices in line with exchange depreciation and help mitigate exchange risk. NBU will seek recovery of arrears for the remaining 5 subprojects (para. 18)—worth $2.3 million— through court orders or out-of-court settlements by foreclosing on their assets. The collateral to be attached for these 5 subloans was valued at approximately $1.3 million as of 31 January

22 This included a subproject New York-Samarkand Industrial Enterprise, which fully prepaid its subloan in 2001. 23 Nilufar D used loan proceeds to purchase equipment to produce ice cream and generate sufficient revenue. Instead of repaying the loan to NBU, the subborrower fraudulently diverted the funds, shown in the subborrower’s financial statements, as loan repayments to finance another line for the production of beer not authorized by NBU. NBU has taken the matter to court and in December 2002, it obtained a court order to attach the client’s machinery and sell it to recover loan proceeds. 24 Subborrowers informed the PCR Mission that the Government’s pledge to the International Monetary Fund to maintain a difference of not more than 20% between the over-the-counter and black market exchange rates was suppressing the demand for foreign exchange in the black market because the Government was confiscating imported goods bought at the black market rate and sold in the domestic market. 25 The aging of loan arrears does not endanger NBU’s solvency. Of its arrears, 29% are for less than 3 years, 53.6% are for 3–4 years, and 17.7% are over 4 years. 26 At appraisal in 1996, the dollar-sum exchange rate was $1=SUM40. In December 1999, it was $1=SUM139.14. By December 2000, it was $1=SUM307.25 and in February 2003, it was $1=SUM963. 27 These eight subprojects are (i) Namangan Conserva, (ii) Ishtikhan Conserva, (iii) Meva, (iv) ABK, (v) Pasta Kamola, (vi) Non-Pasta, (vii) Ziyobaksh Uni-Trading, and (viii) Laziz. 7

2003. The net write-off will therefore be $1 million or 2.1% of the loan amount. The arrears and the expected write-offs are minor in relation to the loan amount.

20. The subborrowers without arrears had hard currency exports and/or foreign direct investment. This provided them with a foreign exchange cushion to service their debts on schedule. Of the 15 subprojects without arrears, 11 had estimated hard currency exports totaling $1.6 million between 2000 and 2002, which met another loan objective of boosting exports. This isc impressive considering the short project span. Successful subborrowers had also diversified for alternative sources of revenue. There is strong empirical evidence to suggest that the repayment track record for smaller subloans was better than for larger ones. Of the 13 subloans with arrears, 11 were for amounts exceeding $1 million. By contrast, 11 of the 15 subloans without arrears where for amounts under $1 million. The smaller subborrowers in terms of asset size and subloan amount were generally more successful than the larger ones. Smaller firms used loan funds more profitably and were more prompt in servicing debt.

D. Operational Performance of the National Bank of Uzbekistan (NBU)

1. Organization, Management, and Staffing

21. Apex Management. NBU’s apex management comprises a two-board structure with a bank council and a board of directors. The council has 7 members, including the chairperson, comprising (I) the finance minister, (ii) the foreign economic relations minister, (iii) the head of the foreign investment department for the cabinet of ministers, (iv) the central bank’s first deputy chairperson, (v) the first deputy minister of macroeconomics and statistics, and (vi) the first deputy chairperson of the State Property Committee. The council was created in 1999 and supervises NBU’s board. NBU’s executive authority is its 15-member board. NBU’s chief executive is its chairperson, who is also the chairperson of its board of directors (Appendix 5).

22. Corporate Governance. NBU’s board has constituted four executive committees, to monitor (i) asset-liability management, (ii) loan approval and examination, (iii) audit, and (iv) performance. These committees meet 2–3 times a month. The asset-liability management committee covers the bank’s long- and short-term liquidity, both at its central office and at its branch levels. Such a practice will strengthen NBU’s overall risk management system after the country’s financial deregulation. The loan examination and approval committee recommends all loan write-offs to the bank’s council, performing a significant oversight of credit policy. NBU’s audit committee is responsible for ensuring compliance with internal checks and control guidelines, and for liaison with external auditors. The performance committee oversees operational and financial performance. NBU’s structuring of its apex management and its board and council systems reflects its emphasis on shareholder values.

23. Internal Management. NBU’s chairperson is assisted by 4 deputies and 31 department heads (Appendix 5 provides NBU’s organization chart). The only major change in NBU’s organization structure was the internal restructuring of its main SME Department. The reorganization involved creating two distinct sections within the department, for (i) project appraisal and monitoring, and (ii) coordinating SME programs. The former was vested with specific responsibility for project appraisal, project financing and monitoring, and administering credit to ensure timely recovery. The latter section was responsible for (i) market research and economic intelligence on the SME sector; (ii) assistance to the former section in devising innovative methodologies for credit appraisal and administration; and (iii) monitoring of NBU’s overall SME credit program to compare with other sectors and with financing by external 8 agencies. The latter section effectively performs a staff function and the former a line function. This change was undertaken for better focus on the SME segment.

24. Personnel Administration. On 26 February 2003, NBU had 5,560 employees, 4,519 of whom were based in branch offices and 1,041 at head office. Of the 5,560 employees, 660 are support staff and 4,900 professional staff. Of these, five—the chairperson and the four deputy chairpersons—constitute the bank’s management. Each department has seven ranks below the head. The dispersion of its staff between head office and branches, as well as the balance between its executive and nonexecutive staff, appears appropriate to operational requirements. The average age of staff is 35. The minimum qualification for entry to professional-grade jobs is a university degree. NBU’s monthly starting salary for a junior ranking officer is sum41,000. Performance bonuses may be paid, of up to 50% of basic salary. NBU’s remuneration structure is adequate to its needs. Staff are evaluated by their immediate supervisors and referred to the head of department for final evaluation. A group of subordinate officers and the concerned deputy chairperson evaluate department heads. This allows subordinates an opportunity to evaluate their superiors. Staff are evaluated on performance, character, and capacity to assume higher responsibilities. Nonperforming staff usually have their employment contracts terminated. NBU’s personnel policies are progressive and adequate to operational needs.

25. NBU attaches high importance to training. It has a management development center (MDC), which trains staff in (i) banking law and practice, (ii) lending operations, (iii) new products, and (iv) the basics of foreign exchange and portfolio management. The average duration of each training program is 10 days. About 1,225 staff attended in-house training in 2002. Another 400 officers were trained in 2002 at a regional banking training center and 14 at the Banking and Finance Academy.28 Further, 85 of NBU’s high-performing officers were sent out of the country for training in 2002. In-house and external training programs were well- focused and suited NBU’s needs.

26. Lending Operations. NBU processed 28 subloans under the Project between 1998 and 2000.29 On average, NBU took 1.5 months to process a loan above the free limit, and 21 days to process a loan below the free limit. This processing time is reasonable, considering that it was NBU’s first experience working with ADB. The information NBU submitted on subprojects’ technical, commercial, financial, and economic aspects was adequate although consistently late. The average maturity of NBU’s subloans was 4.5 years. All subloans had shorter maturities than the loan. Repayments were satisfactory (paras. 19–20 and Appendix 4). NBU’s main SME department, which processed and administered subloans, was the project implementation unit (PIU) for the loan. Every subloan was approved in the head office and monitored by the PIU, even if individual subloans were made at the branches. The PIU monitored every subloan’s repayment record meticulously, in line with general banking principles. Its monitoring of other aspects of the subprojects—such as operational, financial, economic, environmental, and socioeconomic performance—has been mixed. The PIU began comprehensively monitoring subprojects, using inputs from a capacity-building TA, in July 2001. It has been difficult for the PIU to effectively monitor social and economic benefits for a broad group of subprojects when they were scattered around the country. In future, this function should be decentralized.

27. Other Ope rations. Taking advantage of its market niche, NBU has embarked consciously on increasing its fee-based income. NBU’s fee- and commission-based activities

28 ADB. 1998. Technical Assistance to Uzbekistan for Developing Commercial Banking Skills. Manila. 29 Only two subloans totaling $3.35 million were approved during the closing months of 1998. The remaining 26 subloans amounting to 42.27 million were approved in 1999 and 2000 (Appendix 4 provides the drawdown table). 9 include (i) foreign exchange trading and settlement; (ii) security transfers and custodial service transactions; (iii) clients’ payroll preparation; (iv) travelers’ checks, issue; (v) credit cards, issue, clearing and settlement; (vi) issue of letters of credit and guarantee; (vii) collecting, purchasing, negotiating and discounting foreign documentary and accommodation bills on behalf of customers; and (viii) arranging for electronic and other fund transfers (through negotiable instruments) both for NBU’s own customers and those of its clients.

E. NBU’s Financial Performance

28. NBU’s loan portfolio is still weighted heavily in favor of the industry sector (Appendix 6), which includes SMEs, agroprocessing, manufacturing, metallurgy, and petrochemicals. NBU’s agricultural lending, particularly to the cotton sector, declined considerably between 1996 and 2002. None of these subsectors have individually accounted for more than 50% of NBU’s total lending. Financing for transport and communications infrastructure also accounts for a significant portion of lending. NBU’s portfolio is balanced overall.

29. NBU’s portfolio quality is satisfactory. Its combined substandard, doubtful, and bad loans were less than 12% of its total loan portfolio between 1996–2002 (Appendix 6). The total might have been higher if NBU’s loan portfolio was classified according to international practice. NBU’s loan-loss provisions (Appendix 6) were much lower than required under CBU regulations (Appendix 7) in 1996, 1997, 1998, 1999 and 2001.30 NBU informed the PCR Mission that this discrepancy arose because it did not make provisions between 1996 and 2001 on its sovereign guaranteed lending, even if it required higher provisioning using CBU norms. The Mission followed international practice, assessing the loan-loss provision using CBU’s 1999 regulations and without deducting sovereign guaranteed debt.31

F. Financial Statements and Ratios

30. NBU’s assets grew from $3.43 billion in 1996 to $4.12 billion in 1999 at an annual compounded rate of 6.32% (Appendix 8). Its assets declined in dollar terms to $3.1 billion in 2002 at an annual compounded rate of 9%. NBU’s assets declined in dollar terms because the sum depreciated against the dollar between December 2000 and December 2002. NBU’s financial statements were cast according to International Accounting Standards (IAS) until 1997. During this period, NBU followed: (i) IAS-29: Accounting in Hyperinflationary Economies, which suggests that financial statements are denominated in dollars; and (ii) IAS-30: Financial Statements for Banks and Financial Institutions. Since 1998, NBU has followed the US Generally Accepted Accounting Principles (GAAP), International auditors audit its financial statements. NBU applied for and obtained an IC-B/C for international currency operations and an LC-1 rating for domestic currency operations from Thomson’s Financial Bankwatch in 1999. This means NBU had an excellent rating for local currency operations. Internationally, NBU has a reasonably good credit rating (B grade) despite high country risk (C grade). Its ratings are satisfactory overall.

30 The qualitative breakdown of NBU’s 2000 loan portfolio is not available, making it impossible to determine whether loan-loss provisions in 2000 were adequate. 31 Guidelines from the Basle Committee of Banking Supervision (BCBS) exempt banks that make loans against sovereign guarantees from Organization of Economic Cooperation and Development (OECD) governments from having to make loan-loss provisions. BCBS does not allow this exemption to non-OECD government guaranteed loans. The project agreement required NBU to follow international practices in loan-loss provisioning. 10

31. NBU’s is solvent, based on its capital adequacy ratio (CAR),32 and was comfortably liquid, judging from its loan-to-deposit ratio (LDR) until 2001.33 According to the Basle Committee of Banking Supervision (BCBS) formula, NBU’s CAR (Appendix 8) declined from 76% in 1999 to 34.8% in 2001 and 34% in 2002. Like with other banks in Uzbekistan, NBU regards its sovereign guaranteed loans as risk-free assets, considerably reducing the denominator of the ratio and explaining the high number. The Mission estimates that NBU’s adjusted CAR would have been 10.3% in 1997, 14.8% in 1998, 20.8% in 1999, 18.9% in 2000, 20.1% in 2001, and 19.6% in 2002 if its sovereign guaranteed loans were counted as risk- bearing assets. Even by conservative calculations, its CAR would exceed the minimum of 8% stipulated in the project agreement. NBU’s LDR ranged from 44% to 65% between 1996 and 2001, slipping to 143.2% in 2002. NBU’s profitability, measured by its ROA, declined steadily from 4.27% in 1996 to 1.88% in 1999. It then declined to 0.70% in 2000, 0.08% in 2001, and – 3.54% in 2002. NBU’s profits declined sharply in 2000 and 2001 because of large exchange losses of $25 million in 2000 and $27 million in 2001 coupled with declining interest spreads.34 NBU made its first loss in 2002 because of a large loan-loss provision. This steeply declining trend in interest spreads could erode profitability if not arrested. However, NBU’s intermediation cost ratio has remained consistently below 2%, reflecting efficiency in controlling noninterest expenses as a percentage of average total assets.

G. Covenants

32. NBU’s compliance with project covenants has been satisfactory (Appendix 9). NBU maintained its debt-equity ratio between 6.74 in 1996 and 4.91 in 2000, which was lower than the 12 times required in the project agreement. NBU also maintained its debt-service coverage ratio between 5.6 and 2.2, higher than the value of 1.25 required in the agreement. NBU did not exceed the single-borrower exposure limit of 15% of share capital, and its exposure to a single subsector did not exceed 20% of share capital. NBU consistently maintained its CAR above 8% (para. 31) and adopted GAAP. Its loan-loss provision, however, did not meet international standards (para. 29). NBU complied satisfactorily with the requirements of Section 2.04 (b), Section 2.05, and Section A of the Schedule to the Project Agreement relating to subproject selection criteria.35 NBU complied partially with Section 3.03 of the Project Agreement requiring every subproject to have adequate working capital. NBU also complied with reporting requirements set out in Section 3.06 (b) and (c).

H. Performance of the Asian Development Bank

33. ADB’s loan supervision and administration were satisfactory. ADB fielded a loan inception mission in July 1997 and five review missions between 1998 and 2002. ADB’s review missions conducted detailed analyses of selected subprojects and assessed overall performance. Such reviews helped NBU better understand ADB’s subproject selection and institutional assessment criteria. The PCR Mission was fielded in February 2003.36 The Project faced initial problems of delayed implementation for which it received a “partially satisfactory”

32 The capital adequacy ratio is the ratio of equity capital and free reserves to risk-bearing assets, as defined by the Basle Committee of Banking Supervision (BCBS). 33 The loan-to-deposit ratio is the ratio of NBU’s deposits (demand and time) to its net loans and advances (after deducting therefrom, those loan financed by nonspecific funding sources). 34 The Government’s directive in 2000 (para. 7) requiring banks to lend to SMEs at subsidized interest rates is a cause for the precipitous decline in NBU’s interest spread from $109 million in 2000 to $60 million in 2001 and $3 million in 2002. 35 NBU financed two subprojects involving beer, which is not a spirit. 36 The Project Completion Review Mission was fielded within 7 months of the loan closing date. 11 rating between 30 December 1998 and 29 April 1999. It also received a “partially satisfactory” rating for development objectives between 31 December 1998 and 31 December 2000 because goals took longer to reach than initially envisaged. ADB recognized that some project covenants made subproject selection cumbersome. ADB agreed to amend the project agreement to allow selection on more objective, quantitative grounds.37 ADB did grant priority to export-oriented subprojects. This helped expedite loan utilization, enabling an improvement in implementation progress to “satisfactory” after 24 April 1999. Amendments to the project agreement helped it receive a “satisfactory” status for development objectives from 31 December 1998 on. Notwithstanding initial problems, the loan was fully committed within its original commitment date of 13 June 2000 and no extensions were granted. ADB analyzed all subprojects from technical, environmental, managerial, commercial, financial, and socioeconomic perspectives before approving any subloan. There were no disagreements between ADB and NBU on any subproject selection or subloan acceptance criteria.38 NBU responded to all of ADB’s queries. All procurement was made according to ADB guidelines.

III. EVALUATION

A. Loan Appraisal

34. Distribution of Subloans. No specific covenants in the loan or project agreements related to the distribution of subloans by subsector or region. NBU achieved adequate subsectoral and geographical spread (para. 12). None of the subprojects listed in the pipeline and envisaged at appraisal were financed under the loan (para. 14) because they did not meet the selection criteria for commercial and financial viability, or subborrower solvency and liquidity. The change in the distribution pattern widened distribution while maintaining quality and repayment. Eighty-two percent of the subprojects were successful (para. 18). More than four- fifths of the loan amount disbursed and more than three-fourths due for collection was being serviced on schedule (para. 19). The subprojects provided an important link in the value-added chain (para. 8). The Project was in full consonance with Uzbekistan’s long-term development and growth objectives.

35. Covenants. ADB’s covenants for subproject feasibility were unsuitable for practical application and were changed early in implementation (paras. 16 and 33). ADB’s financial covenants for NBU of (i) debt-equity ratio of 12:1 or below; and (ii) debt service coverage ratio (DSCR) of 1.25 or below were irrelevant for a financial institution and more suitable to utility, manufacturing, or trading concerns. Risk-weighted CAR is more appropriate for determining a bank’s solvency. Fortunately, the covenants also required NBU to maintain a CAR of 8% or higher. A financial institution’s liquidity is better measured by its LDR, which reflects the extent to which it funds its loan portfolio out of lower-cost funds. Although NBU maintained high DSCRs, its interest margins declined, resulting in lower profitability, particularly in 2000 and 2001. The project agreement had no covenants for measuring NBU’s profitability and efficiency. However, the covenants of Loan 1799-UZB: Small- and Medium-Sized Enterprise Development Project required NBU to maintain (i) a minimum CAR of 12% in accordance with BCBS guidelines, (ii) a maximum LDR of 100%, and (iii) a minimum ROA of 1%. The PCR Mission therefore assessed NBU by these benchmarks. NBU met covenants for solvency, although not entirely for liquidity and profitability. ADB and NBU agreed to revise covenants for subproject

37 The replacement of a subproject economic internal rate of return (EIRR) of 12% with a (i) subproject financial internal rate of return (FIRR) higher than its weighted cost and capital; and (ii) return on assets (ROA) of not less than 12% was a demonstration of this idea (footnote 17). 38 The loan did not set out any geographical or sectoral distribution boundaries for subloan distribution. 12 selection and to use the financial covenants of Loan 1799-UZB to assessing NBU’s financial condition.

36. Quality of Appraisal. The Project was satisfactorily formulated as a credit line facility. It could have included a policy component to address legal and regulatory impediments to agroprocessing SMEs, particularly because the IOS mandated ADB’s assistance for policy reforms. Regulations required SMEs to surrender 50% of their export earnings at the overvalued official exchange rate, a major disincentive to exports. The Loan Agreement contained no requirement for the Government to phase out this de facto export tax.39 The loan provided foreign exchange investment credit to SMEs at market interest rates with a margin over the London interbank offered rate (LIBOR). It did not address the problem of availability of domestic currency working capital credit in a distorted financial market with administered interest rates. This resulted in time overruns for some subprojects, whose installation of loan-financed, imported machinery was delayed by the lack of local-currency working capital during implementation. The loan allowed subborrowers to access foreign exchange at the overvalued official exchange rate without building an exchange risk hedging mechanism into the project design. This made subborrowers, particularly those without exports, vulnerable to depreciation of the sum at the time of repayment (Footnote 26). These are the key issues facing SMEs in Uzbekistan. The project outcome could have been more successful if these factors had been incorporated into design and formulation. These lessons were incorporated into the design of the SME Development Project40 (i.e. Loan 1799-UZB).

B. Implementation

37. NBU’s implementation was satisfactory. Of the total $50-million loan, $45.6 million was disbursed and $4.4 million canceled. After an initial delay, subloans were committed and disbursed within their original commitment and disbursement schedules. NBU priced subloans above LIBOR. There was no subsidy on onlending from ADB loan proceeds. ADB’s amendments to project covenants were apt and timely (para. 33). While all subprojects were viable from technical and socioeconomic perspectives, 23 of 28 subprojects were commercially and financially viable. Over three-fourths of the loan amount due for collection and over 88% of the loan disbursed is being serviced on schedule. NBU is recycling subloans’ repaid installments of principal and interest to issue new loans. The subloan processing and approval system was satisfactory. All procurements were conducted according to ADB guidelines. Disbursements did not need an imprest account. The implementation of TA-2714 was successful as it facilitated institutional improvements, enabling NBU to execute the Project satisfactorily. NBU needs to improve its post-disbursement monitoring of socioeconomic benefits. (para. 26).

39 Although para. 41 of the RRP mentions the necessity of the Government abolishing this export requirement by the first quarter of 1997, there is no binding legal requirement on the Borrower doing so anywhere in the Loan Agreement. 40 After considerable policy dialogue with Government, ADB mandated that the SME loan require the Government (i) to abolish the 50% foreign exchange surrender requirement (at the official rate) for all SME exporters and (ii) allow all SMEs access to foreign exchange at the commercial exchange rate). ADB approved subloans only if (i) subprojects’ FIRRs and their DSCRs were viable at the black-market exchange rate, and (ii) SMEs had access to local-currency working capital from the designated bank. This was to ensure that subprojects would remain viable in the event of further exchange rate depreciation and would not falter for lack of working capital. 13

IV. ASSESSMENT AND RECOMMENDATIONS

A. Relevance

38. All subprojects were new, privately owned agroprocessing ventures that had been spun off from existing SMEs or private farms. All subprojects used agricultural or horticultural inputs, thereby creating backward linkages to the two sectors. The Project helped to finance agroprocessing facilities, mitigating the loss of demand for agricultural products after the breakup of the FSU.41 The Project was relevant to ADB’s development goals contained in the IOS (see Appendix 10).

B. Efficacy in Achievement of Purpose

39. The Project was implemented in a satisfactory manner and according to its original schedule. Of the $50 million loan amount, $45.6 million was utilized. The majority of subprojects are financially viable, performing satisfactorily, and maintaining repayments. The Project had identifiable social benefits, directly creating an additional 847 jobs—38% of them for women— and indirectly creating another 7,167 jobs. The Project did not generate any environmental benefits, but none of the subprojects had any impacts hostile to the environment. The subprojects used anaerobic methods to treat liquid effluents and aerobic methods to treat gaseous effluents, procedures that met European Union standards. The Project generated exports of $1.6 million in the first 3 years of operation, and is expected to meet its development goals. It is therefore rated efficacious.

C. Efficiency

40. The loan was fully committed and disbursed within its original commitment and disbursement schedules. No extension was necessary. NBU was rigorous in its credit appraisal. Of the 28 subprojects, 23 had had FIRRs that compared favorably with their weighted average cost of capital. Eighty-nine percent of the loan disbursed and 78% of the amount due for collection was being serviced on schedule. ADB was efficient and prompt in approving and confirming subloan proposals. TA consultants were fielded immediately after the agreement was signed. PIU management was efficient. All procurement followed ADB guidelines, and all subprojects had adequate counterpart funding. The Project was executed efficiently.

D. Preliminary Assessment of Sustainability

41. Satisfactory subloan recovery has enabled NBU to recycle funds to new ventures. There is increased demand for agroprocessing credit evidenced by progress under the Small and Medium Enterprise Development Project (footnote 5). The Project sparked foreign direct investment (FDI) into greenfield agroprocessing projects, judging from the number of subprojects with FDI. The TA strengthened NBU’s institutional capacity for SME finance. NBU has reorganized its SME department, whose successful operations have been demonstrated. The Project is sustainable.

41 Prior to 1991, agriculture and horticulture were a key element of Uzbekistan’s economy but processing facilities were in other Soviet republics. The breakdown of the FSU in 1991 disrupted this chain and reduced demand for output from its agriculture and horticulture sectors. 14

E. Other Impacts

42. The Project helped to finance processing facilities for agriculture and horticulture, mitigating the adverse economic impacts of the FSU’s breakup. The Project built NBU’s institutional capacity for SME project finance, and this capacity endures. The Project taught ADB important lessons on policy constraints in the SME sector. These lessons were incorporated into the design of the SME Project. Its other impacts are moderate.

F. Overall Assessment

43. Overall, the Project is successful (Appendix 10)42 because it had a significant development impact and was implemented on schedule. ADB’s loan financed the medium- to long-term foreign exchange needs of agroprocessing subprojects. Together with the TA, the loan helped NBU diversify into term lending for project finance, arresting further deterioration of production facilities, sustaining demand for agricultural inputs, and introducing new technologies for more efficient, value-added production. This met the loan’s rationale (para. 44 of the RRP) and objectives (para. 15 of this report and para. 45 of RRP). The Project also improved the efficiency of financial intermediation by banks for SMEs by offering subloans at market interest rates. The Project generated 8,014 new jobs between 1999–2002, meeting 89.6% of its employment target in its first 3 years of operations. Of the 28 subprojects, 23 were financially viable, 89.4% of the loan was disbursed, and 78.2% of the amount due for collection and more than 88% of the loan disbursed was being serviced on time.

G. Lessons Learned

44. Five important lessons emerged from this loan: (i) Policy dialogue with the Government on regulatory and other impediments is necessary while processing a sector (credit) loan. This lesson was incorporated into the design of Loan 1799 (footnote 40). (ii) Capacity building is necessary for financial institutions selected for ADB’s intermediation loans to ensure sound appraisal and supervision of subprojects, sound credit and risk management policies, and sound corporate governance and financial disclosure policies. (iii) (iii) ADB needs to set realistic, relevant, and objectively measurable financial covenants both for financial institutions and subprojects. This will help avoid delays in loan implementation while facilitating subproject viability and financial soundness of the institution. This lesson was also incorporated into the design of Loan 1799.43 (iv) Rigorous analysis, supervision, and monitoring of subloan proposals and subproject operation both by ADB and the participating financial institution are necessary to ensure efficient subloan recovery and achievement of development objectives at the subproject level. At the participating financial institution level, the post disbursement loan monitoring could be more efficient if decentralized.

42 Using Operations Evaluation Department’s (OED’s) Guidelines for the Preparation of Project Performance Audit Report (PPAR). 43 For ADB’s Loan 1799, ADB required subprojects to have (i) FIRR ³ WACC, (ii) DSCR ³ 1.25, (iii) debt equity ratio £ 75.25, and (iv) adequate local-currency working capital. These covenants are easily measurable. Most importantly, subprojects’ FIRRs and DSCRs were calculated using black-market exchange rates —and their sensitivities were tested further under exchange rate depreciation—to ensure viability even with a significant depreciation in exchange rates.

15

(v) Subloans of less than $1 million, particularly those to smaller subborrowers, resulted in better quality and repayment (para. 20).

H. Recommendations: Project Specific

45. In sector credit, ADB should simultaneously pursue policy dialogue with the government to address the policy and regulatory impediments (paras. 18, 19, 20, and 36), especially because ADB’s IOS for Uzbekistan mandated assistance with policy reform. Such policy dialogue could have helped mitigate some of the problems agro-processing SMEs faced. New credit lines in Uzbekistan should be considered only if they are unlikely to adversely affect the performance of the financial institution and if supportive macroeconomic conditions ensure subprojects with long-term financial and economic viability. The PCR Mission recommends that the project performance audit report be carried out in 2005. ADB should consider limiting the maximum subloan size to $1 million in future SME credit lines in Uzbekistan, unless compelling circumstances necessitate otherwise. This would help spread benefits and risks.

NATIONAL BANK OF UZBEKISTAN'S OTHER CREDIT LINES

Lender Loan EBRD 1 ADB 1 EBRD 2 ADB 2 KfW IFC 1 US OPEC FUND 16 EXIMBANK

YEAR OF LOAN 1993 1996 1996 2000 1999 1999 2002 2000 LOAN AMOUNT $ 60 mn $ 50 mn $ 120 mn $ 50 mn Euro 5 mn $ 25 mn $ 55 mn $ 5 mn Appendix 1

LOAN DURATION 10 years (3 15 years (3 7 years max (2 15 years (3 40 years (10 7 years (grace max. 7 years 7 years (grace years grace years grace years grace years grace years grace period: 2 years (grace period period: 2 period) period) period) period) period) max) max. 6 years) months) INTEREST CHARGED LIBOR + 1% LIBOR + 2-4% EURIBOR + LIBOR + LIBOR + LIBOR + 4% BY LENDER depending on 1.5% 3.75% (NBU) 0.2% bank LIBOR + 4% insurance (Asaka) premium = approx. 9.16%

WITH OR with with NBU without with without without without

WITH/WITHOUT Asaka Bank SOVEREIGN 100% with GURANTEE Pakhta Bank 80% with Promstroi Bank 80% with

FEES CHARGED BY Commitment Commitment Commitment Commitment Commitment Front-end Commitment LENDER charge: 0.50% charge: 0.75%, fee: 0.5% charge: fee: 0.5% fee: 0.0625% fee: 0.5% Front-end fee: Front-end fee: front-end fee: 0.75%, front-end fee: from loan Front-end fee: 1% 1% 1.5% Front-end fee: 1% amount in 1.5% 1% hard currency Management Management fee: 0.15% fee: 0.15% of loan amount in local currency

PARTICIPATING NBU $60 mn NBU $50 mn NBU $60 mn NBU $20 mn NBU Euro NBU $15 mn NBU $ 55 mn NBU $ 5 mn BANKS Asaka Bank Asaka Bank 7.4 mn Asaka Bank $ 15 mn $ 15 mn Pakhta Bank $ 10 mn Pakhta Bank $ Pakhta Bank Euro 4.1 m 15 mn $ 15 mn UzJilSber Promstroi Bank Bank Euro $15 mn 3.5 mn

Lender Loan EBRD 1 ADB 1 EBRD 2 ADB 2 KfW 1999 IFC 1 US OPEC FUND EXIMBANK

LOAN CONDITIONS relending terms relending FOR PARTICIPATING and conditions terms and BANKS identical to conditions those of identical to borrower those of borrower

LOAN CONDITIONS equity no less equity no less equity no less max. share of equity no less equity no less equity no less equity no less FOR SUB than 25% of than 25% of than 25% of government in than 25% of than 25% of than 25% of than 25% of BORROWER original project original project original project borrower´s original original project original original project cost cost cost capital: 31%, project cost cost, export- project cost cost equity no less oriented SMEs than 25% of original project cost

ONLENDING RATES market rates + market rates + 9% NBU: LIBOR + 4.9% above LIBOR + 4% + OF PARTICIPATING credit risk credit risk 3.75% + risk 3- costs of risk BANKS 4% funds? Asaka Bank: LIBOR + 4% + risk 3-4% LOAN AMOUNT $ 60 mn $ 45.6 mn NBU $ 50 mn $ 10.02 mn NBU $ 1.5 mn DISBURSED AS OF Asaka Bank $ Asaka Bank 31 December 02 30 mn $ 10 mn Paktha Bank $ 6-7 mn Promstroi Bank $ 5 mn

SUBLOAN SIZE $ 100,000 $ 50,000 (min) $ 50,000 (min) $ 50, 000 (min) $ 100,000 $ 100,000 $ 100,000 RANGE (min) $ 3 mn (max) $ 5 mn (max) $ 3 mn (max) (min) (m in), $ 5mn (min), $ 1mn up to $ 5 mn but not more $ 2 mn (max) (max) but not (max) but not (max) than 75% of NBU, $ 1.5 mn more than more than 75% project cost (max) Asaka 85% of total of total project Bank, project cost cost but not more

Appendix 1 than 75% of total project cost

SUBLOAN DURATION 10 years max 8 years max 7 years max (2 8 years max 5 years max 7 years (grace life of 7 years (grace

(3 years grace (grace period: 3 years grace (grace period: (grace period: period: 2 years equipment, period: 2 period) years max) period) 3 years max) 1.5 years max) max. 7 years years) max)

17

ADB = Asian Development Bank, EBRD = European Bank for Reconstruction and Development, EURIBOR = Euro Interbank Offered Rate (the rate at which Euro currency Interbank deposits within the eurozone are offered by one prime bank to another), IFC = International Finance Corporation, KfW = Kreditanstalt für Wiederaufbau, LIBOR = London Interbank offered rate, max = maximum, min = minimum, NBU = National Bank of Uzbekistan, OPEC = Organization of Petroleum Exporting Countries, US EXIM = Export-Import Bank of the United States. 18 Appendix 2

CREDIT POLICY

1. NBU’s credit and risk management policies were comprehensive at the time of loan appraisal. They were enhanced further with inputs from TA 2714–UZB: Institutional Strengthening of NBU in 1998, and by an NBU board resolution dated 31 January 2002. This board resolution has taken into account the requirements of bank credit legislation promulgated under various national directives1 and NBU’s earlier internal resolutions.2

2. NBU’s credit and risk management policies define the main objectives of credit activity, methodologies, and approaches, as well as providing the bank’s board and staff with clear instructions. NBU enhanced its credit departments both at head office and at its branches to improve portfolio quality, credit procedures, and an overall system of checks and balances.

3. NBU’s credit policy has distinct sectoral focuses. Sectoral priorities are (i) transport infrastructure, (ii) aircraft purchase and lease financing for Uzbekistan Airways, (iii) manufacturing industries, (iv) petrochemicals and metallurgy, (iv) tourism, (v) foreign trade, (vi) agroprocessing, and (vii) small- and medium-sized enterprises (SMEs). NBU prefers financing environmentally and ecologically friendly projects, and its credit policy has integrated some national development priorities. NBU’s credit policy is subservient to national policies, as seen by the special mandatory fund to finance SMEs (para. 7, main text; para. 5, Appendix 2).

4. ADB’s technical assistance (TA 2714–UZB) provided the necessary inputs for (i) enhancing NBU’s project finance methodologies for investment projects undertaken by SME subborrowers; and (ii) drafting methodologies for post-disbursement credit recovery and benefit monitoring and evaluation. ADB’s TA contribution helped improve uniformity, transparency, and efficiency of NBU’s operating procedures. The quality of NBU’s credit analysis in project finance improved by the use of cash flow analysis tested with sensitivity changes. The inputs of ADB’s TA also facilitated NBU’s adoption of an integrated credit approval and authorization system for both domestic and foreign currency lending. Uniform rules for appraisal and valuation of collateral were also introduced simultaneously.

5. NBU’s loans are divided into three categories: (i) short-term loans 1 year or less, (ii) medium-term loans of 1–5 years, and (iii) loans longer than 5 years. Short-term loans are usually provided for trade finance or for replenishing working capital. Trade finance is usually in the form of trust-receipt loans against letters of credit opened by NBU and are usually for periods not exceeding 180 days. Medium-term loans are usually granted for financing investment projects to SMEs, and, since 2001, for providing microcredit. Long-term loans are provided only to legal entities for financing capital assets. Most of NBU’s long-term loans have been funded by borrowing from the Government’s nonbudget funds. NBU’s medium-term investment and working capital loans to SMEs are funded out of a special fund created by the transfer of 25% of its gross profits under a presidential decree and resolution of the cabinet of ministers at lower-than-market interest rates and on which NBU bears the credit risk. NBU’s customer deposit base is used to fund short-term lending, because its deposits are for less than 12 months. NBU’s liquidity management policy is prudent, avoiding maturity mismatches. Its

1 These include: (i) Cabinet of Ministers’ (COM) Resolution No. 24 dated 15 January 1999 “On Measures Aimed at Reforming the Banking System,” (ii) Resolution No. 104 dated 24 March 2000 “On Additional Measures at Reforming the Banking System,” (iii) Resolution No. 349 dated 22 August 2001 “On Measures Aimed at Strengthening Credit Mechanisms, (iv) Statement 429 of the Central Bank of Uzbekistan dated 22 February 2000 “On Commercial Banks’ Credit Policies.” 2 “Procedures for maintaining loan documentation in the banks in the Republic of Uzbekistan” registered by NBU with the Ministry of Justice, Republic of Uzbekistan #906 dated 2 March 2000 and “Regulations on Lending to Legal Entities by the National Bank of Uzbekistan“ #124 approved on 24 April 2000. Appendix 2 19 policy of using short-term deposits to fund only short-term lending, coupled with its use of long- term resources to fund its long- and medium-term loans, accounts for the bank’s comfortable liquidity and usually low loan-to-deposit ratios.

6. NBU requires a minimum collateral level of 120% of loan amounts. In the absence of collateral, NBU can make loans against Government or third-party guarantees. For short-term trust-receipt loans, NBU requires that the title of the goods be held in trust by its borrowers’ hypothecation until the loan is repaid.

7. NBU’s policies on loan concentration (i.e. limits to a single borrower or group of affiliated borrowers) are prudent and its credit decision-making authority in this sphere is moderately decentralized. At the branch level, credit decisions are made by a committee comprising the branch’s chief executive officer, and the heads of its credit, legal, and corporate finance departments. A branch credit committee may approve loans up to a maximum of sum50 million or a credit limit established by the head office. NBU’s head office credit committee3 may approve loans up to 1% of the bank’s tier-one capital. NBU’s overall credit committee4 may approve loans up to 15% of tier-one capital. Loans between 15 and 25% of tier-one capital need board approval, and loans exceeding 25% need approval from the bank’s council.5 NBU also has ceilings on loan concentration. Its maximum exposure to any single sector is limited to 30% of its total loan portfolio. Its unsecured lending—without cash or other collaterals—cannot exceed 5% of tier-one capital. Absolute ceilings on lending may be waived only when (i) the bank receives a specific sovereign guarantee, and (ii) the value of the guarantee exceeds 125% of the credit volume.

8. NBU undertakes a rigorous credit analysis of potential borrowers. At the branch or head office level, the average time to process loan applications is about 2 weeks. For this process, the branch credit department scrutinizes (i) business plans; (ii) business licenses; (iii) draft contracts for procurement; (iv) charters; (v) past audited financial statements, if available; (vi) technical documents ; and (vii) other legal documents and collateral, if any. Collateral may be in the form of cash, third-party guarantees, bank balances, government securities, or real estate. The credit examination team evaluates the authenticity of the documents and the value of collateral. The team usually comprises credit and legal department staff at the branch level. If the loan application is for less than sum50 million or the credit limit set for the branch, the credit decision is taken at the branch. If higher, it is referred to the head office credit committee, board, or council. The head office credit approval authorities scrutinize the branch’s preliminary credit assessment. Loans is to be refinanced under credit lines from international financial agencies and in foreign exchange are referred to the head office, regardless of the amount. When a loan proposal is referred to the head office, it could take another 45 days for processing. If it goes to NBU’s board, it could take as much as another 10 days. Some credit proposals originate in head office. in which case the analysis is similar. All credit decisions by the branch credit committee require consensus. At the head office credit committee, NBU’s board or council needs approval of at least 66%. The minutes of the meeting approving every loan are kept in the bank’s central registry, with copies made available to the branch, the head bank’s office credit committee, and the respective monitoring division. In the absence of any member of the credit approval committee, a proxy is appointed to vote on his or her behalf.

3 Comprising its three Deputy Chairpersons, Deputy Director of the Project Finance Center, Deputy Director of Head Office SME Main Department, Director of Head Office Main Loan Department, Director of Head Office Retail Banking Credit Monitoring Department, and Director of Main Legal Department. 4 Comprising its three Deputy Chairpersons, Director of the Project Finance Center, Director of Head Office Main SME Department, Director of Head Office Main Department for Credit Risk Management, Director of Head Office Treasury, Director of Head Office Main Legal Department, Director of Head Office Main Loan Department and Director of Head Office Retail Banking Credit Monitoring Department. 5 This is a body senior in hierarchy to the Board of Directors, and similar in function to a Board of Supervisors in Germany (para. 18 of main text and Appendix 6). 20 Appendix 2

9. NBU’s loan monitoring process is comprehensive. Both at the branch and head office levels, the loan monitoring and recovery division is distinct from the division responsible for marketing customers’ accounts and for credit analysis. At the head office, there is a separate department: the retail banking credit monitoring department (Appendix 6). This separation provides the necessary checks and balances and has streamlined specific responsibilities for account managers and loan officers. NBU’S monitoring divisions prepare plans for following up on loan recovery. ADB’s TA’s inputs provided for a loan benefit monitoring and evaluation system, which sought to monitor holistically the socioeconomic and environmental benefits of projects financed by NBU loans. This approach, which required the bank to concentrate on matters other than loan recovery, began on 7 July 2001. Such monitoring covers (i) loan implementation, including time or cost overruns; (ii) project management; and (iii) financial performance of subborrowers. This analysis is both statistical and narrative, and is compiled every 6 months. It uses the benchmarks at the time of approval to assess actual performance.

10. When a borrower fails to pay a loan or installment, the office originating the loan investigates and recommends foreclosure or rescheduling. The credit committee that approves the loan examines the proposal to reschedule or foreclose. Any decision to reschedule, regardless of the amount, needs approval from the next highest committee. Rescheduling a loan ranging from 1% to 15% of tier-one capital needs board approval. It is immaterial whether part of a loan to be rescheduled is within these parameters (i.e. 1–15% of capital). When rescheduling involves interest and principal simultaneously, it requires approval from the board’s asset and liability management committee, regardless of the amount. Capitalization of interest is prohibited as a policy to determine the length of a loan. Rescheduling any loan—or part thereof—which exceeds 15% of tier-one capital needs the approval of the bank’s council.

11. Loans can be written off only if their principal amounts are overdue for more than 1 year. Loans are regarded as overdue for more than 1 year principal or interest either wholly or in installments arrears for over 30 days. All decisions to write off loans and charging them to loan loss provisions are the responsibility of the bank’s council on recommendation from the board. After write-off, the main credit department and the retail banking credit monitoring department still pursue recovery through a court order or an out-of-court settlement.

12. NBU’s internal credit controls are adequate. Any loan to an NBU staff member or relative, up to the rank of department head, needs approval from the board. Any loan to an officer of a higher rank, or to his/her relatives, needs approval from the bank’s council.

13. NBU’s has a satisfactory system for reporting credit activities to its board. NBU’s board receives monthly reports on (i) overdue loans and arrears in interest, including loans moved off the balance sheet; (ii) incremental foreign currency lending; (iii) portfolio quality and adequacy of loan loss provisions; (iv) actual write-offs and their charges to loan-loss provisions; and (v) loans currently in court. The board also receives quarterly reports on distribution by industry, geography, loan size, and loan type (investment, working capital, overdraft, etc.). These are compared with figures for the same quarter of the previous year.

14. In accordance with banking legislation and internal control policies, credit policy is subject to examination by internal and external auditors. The audit covers (i) compliance with internal control procedures and legislation, (ii) adequacy of collateral in value and title, (iii) appropriations of actions to mitigate credit risks, (iv) consistency with bank interest rate policies, and (v) appropriateness of provisioning with respect to potential loan losses.

15. Commercial lending policies are satisfactory. A breakdown between commercial lending and directed or sovereign guaranteed lending is not available. Appendix 3 21

SUBLOAN CHARACTERISTICS

Table A3.1: General Characteristics

Item Number % Amount ($) % A. Purpose New project 19 67.9 32,548,654 71.3 Modernization 7 25.0 6,677,776 14.7 Expansion 2 7.1 6,403,080 14.0

Total 28 100.0 45,629,510 100.0

B. Size $100,000–$500,000 10 35.7 3,037,930 6.7 $500,000–$1 million 3 10.7 2,068,314 4.5 $1 million–$2 million 5 17.9 6,505,271 14.3 $2 million–$3 million 4 14.3 10,290,903 22.5 $3 million–$4 million 3 10.7 9,737,094 21.3 $4 million–$5 million 3 10.7 13,989,998 30.7

Total 28 100.0 45,629,510 100.0

C. Maturity 1–2 years - - - - 2.1-4 years 10 35.7 3,505,350 7.7 4.1–6 years 16 57.2 33,124,162 72.6 6.1–7 years 2 7.1 8,999,998 19.7

Total 28 100.0 45,629,510 100.0

D. Region Namangan 1 3.6 1,182,000 2.6 Samarkand 5 17.9 7,875,383 17.3 Djizzak 2 7.1 638,910 1.4 Khorezm 2 7.1 2,935,000 6.4 Navoi 2 7.1 5,640,218 12.4 Tashkent 7 25.0 15,886,078 34.8 Bukhara 1 3.6 4,990,000 10.9 Karakalpakstan 2 7.1 3,084,250 6.8 Andijan 1 3.6 1,212,689 2.6 Ferghana 1 3.6 292,700 0.6 Kashkadarya 2 7.1 1,129,451 2.5 Surkhandarya 2 7.2 762,831 1.7

Total 28 100.0 45,629,510 100.0

22 Appendix 3

Item Number % Amount ($) % E. Subsector Ice cream 4 14.3 2,050,496 4.5 Tomato paste and concentrated fruit juices 6 21.4 16,566,699 36.3 Sunflower oil 1 3.6 524,680 1.1 Biscuits, waffles, and pasta 7 25.0 5,976,006 13.1 PET bottles and botting of mineral water 2 7.1 3,301,351 7.2 Wool processing 1 3.6 2,306,204 5.1 Beer 2 7.1 8,324,014 18.2 Dairy products 3 10.7 1,278,517 2.8 Chock freezing for fruits and vegetables 1 3.6 4,999,998 11.0 Sausages 1 3.6 301,545 0.7

Total 28 100.0 45,629,510 100.0

F. Ownership Wholly Uzbek 21 75.0 31,351,703 68.7 Joint venture 7 25.0 14,277,807 31.3

Total 28 100.0 45,629,510 100.0 Source: National Bank of Uzbekistan

Appendix 3 23

Table A3.2: Subloan by Purpose

Subborrower Subloan Purpose % Subloan % No. Amount 1 New York-Samarkand JV 001 New project 288,557 2 Parranda-Khasib JSC 028 New project 301,545 3 El Erk Nur Firm 007 New project 524,680 4 Lalmikor PTE 009 New project 114,230 5 Mukaddam PTE 027 New project 215,000 6 Polimex JV 022 New project 700,000 7 Ice-Djaykhun JV 013 New project 334,250 8 Hoshim Firm 017 New project 298,271 9 Laziz JSC 032 New project 1,370,582 10 Meva JV 012 New project 2,720,000 11 Navoi Don Invest 019 New project 3,334,014 12 Golden Fleece JSC 018 New project 2,306,204 13 Pasta-Kamola JV 023 New project 1,245,000 14 Ziyobakhsh-Uni-Trading JV 026 New project 4,990,000 15 Karakalpaktomat 031 New project 2,750,000 16 Nilufar-D PTE 008 New project 1,212,689 17 Ziyo Nur PTE 010 New project 843,634 18 Muzimpeks-Tijorat 024 New project 4,999,998 19 Green World JV 030 New project 4,000,000 Total 19 67.9% 32,548,654 71.3% 20 Deroz PTE 011 Modernization 443,000 21 Jeinov JSC 029 Modernization 285,817 22 Namangan Conserva JSC 002 Modernization 1,182,000 23 Ishtikhan Conserva JV 004 Modernization 2,514,699 24 Non-Pasta JSC 025 Modernization 1,495,000 25 Shukurdavlat PTE 021 Modernization 292,700 26 Termez non JSC 014 Modernizaton 464,560 Total 7 25.0% 6,677,776 14.7% 27 Afrasiab-Meva JSC 033 Expansion 3,400,000 28 ABK PTE 016 Expansion 3,003,080 Total 2 7.1% 6,403,080 14.0%

Grand Total 28 100.0% 45,629,510 100.0% Source: National Bank of Uzbekistan JV = Joint Venture, JSC = Joint Stock Company, PTE = Private Limited Company

24 Appendix 3

Table A3.3: Subloans by Maturity

Subborrower Subloan Maturity % Subloan % No. (Years) Amount 1 New York-Samarkand JV 001 2.40 288,557 2 Parranda-Khasib JSC 028 4.00 301,545 3 El Erk Nur Firm 007 4.00 524,680 4 Lalmikor PTE 009 3.00 114,230 5 Mukaddam PTE 027 3.00 215,000 6 Polimex JV 022 3.75 700,000 7 Deroz PTE 011 4.00 443,000 8 Ice-Djaykhun JV 013 4.00 334,250 9 Jeinov JSC 029 3.33 285,817 10 Hoshim Firm 017 2.33 298,271 2–4 years 10 35.7% 3,505,350 7.7% 11 Namangan Conserva JSC 002 6.00 1,182,000 12 Ishtikhan Conserva JV 004 6.00 2,514,699 13 Afrasiab-Meva JSC 033 6.00 3,400,000 14 Laziz JSC 032 5.00 1,370,582 15 Meva JV 012 5.00 2,720,000 16 Navoi Don Invest 019 6.00 3,334,014 17 Golden Fleece JSC 018 5.00 2,306,204 18 Pasta-Kamola JV 023 5.00 1,245,000 19 Non-Pasta JSC 025 5.00 1,495,000 20 ABK PTE 016 5.67 3,003,080 21 Ziyobakhsh-Uni-Trading JV 026 4.50 4,990,000 22 Karakalpaktomat 031 4.50 2,750,000 23 Nilufar-D PTE 008 5.50 1,212,689 24 Shukurdavlat PTE 021 5.20 292,700 25 Ziyo Nur PTE 010 4.17 843,634 26 Termez non JSC 014 4.75 464,560 4.1–6 years 16 57.2% 33,124,162 72.6% 27 Muzimpeks-Tijorat 024 7.00 4,999,998 28 Green World JV 030 6.50 4,000,000 6.1–7 years 2 7.1% 8,999,998 19.7% Source: National Bank of Uzbekistan

Appendix 3 25

Table A3.4: Subloan by Location

Subborrower Subloan Region % Subloan % No. Amount 1 Namangan Conserva JSC 002 Namangan 1,182,000 Total 1 3.6% 1,182,000 2.6% 2 Ishtikhan Conserva JV 004 Samarkand 2,514,699 3 Afrasiab-Meva JSC 033 Samarkand 3,400,000 4 New York-Samarkand JV 001 Samarkand 288,557 5 Parranda-Khasib JSC 028 Samarkand 301,545 6 Laziz JSC 032 Samarkand 1,370,582 Total 5 17.9% 7,875,383 17.3% 7 El Erk Nur Firm 007 Djizzak 524,680 8 Lalmikor PTE 009 Djizzak 114,230 Total 2 7.1% 638,910 1.4% 9 Meva JV 012 Khorezm 2,720,000 10 Mukaddam PTE 027 Khorezm 215,000 Total 2 7.1% 2,935,000 6.4% 11 Navoi Don Invest 019 Navoi 3,334,014 12 Golden Fleece JSC 018 Navoi 2,306,204 Total 2 7.1% 5,640,218 12.4% 13 Muzimpeks-Tijorat 024 Tashkent 4,999,998 14 Green World JV 030 Tashkent 4,000,000 15 Polimex JV 022 Tashkent 700,000 16 Deroz PTE 011 Tashkent 443,000 17 Pasta-Kamola JV 023 Tashkent 1,245,000 18 Non-Pasta JSC 025 Tashkent 1,495,000 19 ABK PTE 016 Tashkent 3,003,080 Total 7 25.0% 15,886,078 34.8% 20 Ziyobakhsh-Uni-Trading JV 026 Bukhara 4,990,000 1 3.6% 4,990,000 10.9% 21 Karakalpaktomat 031 Karakalpakstan 2,750,000 22 Ice-Djaykhun JV 013 Karakalpakstan 334,250 Total 2 7.1% 3,084,250 6.8% 23 Nilufar-D PTE 008 Andijan 1,212,689 Total 1 3.6% 1,212,689 2.6% 24 Shukurdavlat PTE 021 Ferghana 292,700 Total 1 3.6% 292,700 0.6% 25 Jeinov JSC 029 Kashkadarya 285,817 26 Ziyo Nur PTE 010 Kashkadarya 843,634 Total 2 7.1% 1,129,451 2.5% 27 Termez non JSC 014 Surkhandarya 464,560 28 Hoshim Firm 017 Surkhandarya 298,271 Total 2 7.2% 762,831 1.7%

Grand Total 28 100.0% 45,629,510 100.0%

Source: National Bank of Uzbekistan

26

Appendix 4

Table A4.2: Repayment Record of Subborrowers as of 31 January 2003

Approval Subloan Amount Due For Repayment Repayment Arrears as of 1 January 2003 Subloan name Date Amount Principal Interest Total Principal Interest Total Principal Interest Total

Namangan Conserva 3 Dec 1997 $1,182,000 $945,600 $352,552 $1,298,152 $709,200 $309,033 $1,018,233 $236,400 $43,519 $279,919 JSC “Ishtikhan conserva” 20 Jan 1999 $2,514,699 $1,005,880 $689,333 $1,695,213 $838,233 $608,513 $1,446,746 $167,647 $80,820 $248,467 JV “Meva” JV 11 Feb 1999 $2,720,000 $1,297,074 $635,014 $1,932,088 $348,458 $383,470 $731,928 $948,616 $251,544 $1,200,160 “Nilufar - D” PTE 14 Sep 1998 $1,212,689 $606,344 $291,909 $898,253 $121,268 $120,952 $242,220 $485,076 $170,957 $656,033 “Ice-Djaykhun” JV 14 Apr 1999 $334,250 $210,878 $63,916 $274,794 $199,461 $56,651 $256,113 $11,417 $7,265 $18,681 “Hoshim” Firm 17 Sep 1999 $298,271 $298,271 $43,399 $341,670 $115,618 $43,399 $159,017 $182,653 $182,653 “ABK” PTE 23 Aug 1999 $3,003,080 $1,273,004 $167,792 $1,440,796 $867,018 $167,792 $1,034,810 $405,986 $405,986 “Pasta – Kamola” JV 10 Dec 1999 $1,245,000 $461,558 $218,577 $680,135 $334,856 $218,577 $553,433 $126,702 $126,702 “Non – Pasta” JSC 10 Dec 1999 $1,495,000 $545,890 $259,983 $805,873 $475,744 $259,983 $735,727 $70,146 $70,146 “Karakalpaktomat” 27 Apr 2000 $2,750,000 $458,333 $477,548 $935,881 $210,549 $210,549 $458,333 $266,999 $725,332 “Green World” JV 13 Jan 2000 $4,000,000 $800,000 $598,701 $1,398,701 $189,578 $424,031 $613,609 $610,422 $174,670 $785,092 “Ziyobakhsh-Uni- 14 Dec 1999 $4,990,000 $580,709 $580,709 $236,572 $236,572 $344,137 $344,137 Trading” JV “Laziz” JSC 27 Jun 2000 $1,370,582 $171,322 $82,120 $253,442 $20,875 $20,875 $171,322 $61,245 $232,567 “New-York – 12 Sep 1997 $288,557 $288,557 $288,557 $288,557 $288,557 Samarkand JV “El Erk Nur” Firm 10 June 1998 $524,680 $524,680 $114,077 $638,757 $524,680 $114,077 $638,757 “Lalmikor” PTE 14 Sep 1998 $114,230 $114,230 $18,522 $132,752 $114,230 $18,522 $132,752 “Ziyo-Nur” PTE 7 Dec 1998 $843,634 $552,713 $191,463 $744,176 $552,713 $191,463 $744,176 “Deroz” PTE 28 Jan 1999 $443,000 $374,720 $83,542 $458,262 $374,720 $83,542 $458,262 “Termez non” JSC 22 Jun 1999 $464,560 $232,280 $95,488 $327,768 $232,280 $95,488 $327,768 “Golden Fleece” JSC 17 Sep 1999 $2,306,204 $2,144,701 $416,917 $2,561,618 $2,144,701 $416,917 $2,561,618 “Navoi don Invest” 11 Oct 1999 $3,334,014 $1,420,350 $700,507 $2,120,857 $1,420,350 $700,507 $2,120,857 “Parranda – Khasib” 13 Jan 2000 $301,545 $301,545 $45,437 $346,982 $301,545 $45,437 $346,982 JSC “Shukurdavlat” PTE 4 Nov 1999 $292,700 $292,700 $33,179 $325,879 $292,700 $33,179 $325,879 “Muzimpeks-Tijorat” 10 Dec 1999 $4,999,998 $504,396 $842,022 $1,346,418 $504,396 $842,022 $1,346,418 “Mukaddam” PTE 17 Dec 1999 $215,000 $129,090 $33,349 $162,439 $129,090 $33,349 $162,439

“Polimex” JV 19 Nov 1999 $700,000 $466,021 $98,713 $564,734 $466,021 $98,713 $564,734 Appendix 4 “Jeinov” JSC 13 Jan 2000 $285,817 $285,817 $35,102 $320,919 $285,817 $35,102 $320,919 “Afrasiab Meva” JSC 27 June 2000 $3,400,000 $811,183 $623,589 $1,434,772 $811,183 $623,589 $1,434,772 $45,629,510 $16,517,137 $7,793,460 $24,310,597 $12,642,417 $6,392,304 $19,034,721 $3,874,720 $1,401,156 $5,275,876 FIRR=financial internal rate of return; CPF= ;JSC=joint stock company; JV=joint venture; PTE=Private Limited Company

Source: National Bank of Uzbekistan.

27

28

Table A4.3: Summary of Drawdowns Appendix 4

Subborrower Subloan Approval Subloan Drawdowns Total No. Date Amount 1998 1999 2000 2001 2002 New York - Samarkand JV 001 12-Sep-97 288,557 288,557 288,557

Namangan Conserva JSC 002 03-Dec-97 1,182,000 1,063,800 118,200 1,182,000 Ishtikhan Conserva JV 004 20-Jan-99 2,514,699 2,514,699 2,514,699 El Erk Nur Firm 007 10-Jun-98 524,680 75,350 449,330 524,680 Nilufar - D PTE 008 14-Sep-98 1,212,689 1,152,055 60,634 1,212,689 Lalmikor PTE 009 14-Sep-98 114,230 114,230 114,230 Ziyo Nur PTE 010 07-Dec-98 843,634 589,604 254,030 843,634 Deroz PTE 011 28-Jan-99 443,000 443,000 443,000 Meva JV 012 11-Feb-99 2,720,000 2,720,000 2,720,000 Ice-Djaykhun JV 013 14-Apr-99 334,250 334,250 334,250 Termez-Non JSC 014 22-Jun-99 464,560 69,684 394,876 464,560 ABK PTE 016 23-Aug-99 3,003,080 1,150,828 1,852,252 3,003,080 Hoshim Firm 017 17-Sep-99 298,271 298,271 298,271 Golden Fleece JSC 018 17-Sep-99 2,306,204 2,306,204 2,306,204 Navoi Don Invest 019 11-Oct-99 3,334,014 3,334,014 3,334,014 Shukurdavlat PTE 021 04-Nov-99 292,700 292,700 292,700 Polimex JV 022 19-Nov-99 700,000 105,000 595,000 700,000 Pasta-Kamola JV 023 10-Dec-99 1,245,000 1,245,000 1,245,000 Muzimpeks - Tijorat 024 10-Dec-99 4,999,998 4,789,198 210,800 4,999,998 Non-Pasta JSC 025 10-Dec-99 1,495,000 1,495,000 1,495,000 Ziyobakhsh-Uni-Trading JV 026 14-Dec-99 4,990,000 748,500 4,241,500 4,990,000 Mukaddam PTE 027 17-Dec-99 215,000 215,000 215,000 Parranda-Khasib JSC 028 13-Jan-00 301,545 301,545 301,545 Jeinov JSC 029 13-Jan-00 285,817 257,235 28,582 285,817 Green World JV 030 13-Jan-00 4,000,000 1,148,445 2,851,555 4,000,000 Karakalpaktomat 031 27-Apr-00 2,750,000 2,400,000 350,000 2,750,000 Laziz JSC 032 27-Jun-00 1,370,582 1,370,582 1,370,582 Afrasiab-Meva JSC 033 27-Jun-00 3,400,000 782,000 2,618,000 3,400,000 Total 45,629,510 1,427,707 8,505,052 21,578,480 12,747,689 1,370,582 45,629,510 JSC = Joint Stock Company; JV = Joint Venture; PTE = Private Limited Company Source: National Bank of Uzbekistan and Asian Development Bank records.

Table A4.4: Jobs Created by Subborrower

Subborrower Subloan Jobs Created Gender Breakdown No. Projected Actual of Direct Jobs Direct Indirect Direct Indirect Men Women New York Samarkand JV 001 21 - 25 31 14 11 Namangan Conserva JSC 002 14 - 10 NA 5 5

Ishtikhan Conserva JV 004 52 760 50 731 38 12

El Erk Nur Firm 007 13 - 15 12 10 5 Nilufar - D PTE 008 20 - NA NA Lalmikor PTE 009 10 - 15 5 11 4 Ziyo Nur PTE 010 22 - 25 7 13 12 Deroz PTE 011 16 250 16 220 9 7 Meva JV 012 55 1,325 57 1,201 52 5 Ice Djaykhun JV 013 42 50 42 55 37 5 3 Termez-Non JSC 014 63 250 65 280 32 33 ABK PTE 016 63 - 68 4 12 30 38 Hoshim Firm 017 11 - 8 - 5 3 Golden Fleece JSC 018 22 2,000 25 1,828 15 10 Navoi Don Invest 019 32 500 35 413 25 10 Shukurdavlat PTE 021 12 - 18 5 12 6 2 Polimex JV 022 14 - 14 5 6 8 Pasta-Kamola JV 023 30 50 28 22 15 13 1 Muzimpeks - Tijorat 024 95 400 98 312 38 60 Non-Pasta JSC 025 12 300 15 200 10 5 Ziyobakhsh-Uni-Trading JV 026 80 NA NA Mukaddam PTE 027 10 100 10 68 6 4

Parranda-Khasib JSC 028 30 - 28 NA 16 12 Jeinov JSC 029 12 - 12 NA 8 4 Green World JV 030 98 250 63 104 45 18 Appendix 4

Karakalpaktomat 031 49 155 45 NA 25 20 Laziz JSC 032 12 100 12 33 9 3 Afrasiab-Meva JSC 033 40 1,500 48 1,623 36 12 Total 950 7,990 847 7,167 522 325 JSC = Joint Stock Company; JV = Joint Venture; NA = Not available; PTE = Private Limited Company

29 Source: In the 15 subborrowers visited, the PCR Mission obtained the data from the subborrowers’ human resources divisions. In others, data were obtained from NBU. All jobs listed were created after this Project began and are therefore incremental.

30 ORGANIZATIONAL CHART OF THE NATIONAL BANK OF UZBEKISTAN Appendix 5 Council of the Bank

The Board of the Bank

Chairman of the Board

The First Deputy Deputy Chairman Deputy Chairman Deputy Chairman The Main Legal Administration Chairman of the Board of the Board of the Board of the Board Department Department

Main Department Main Dept. of Project Branch Branches Main Information of Internal Audit Main Strategic Treasury Main Coordination of Finance Coordination of the Technology Researches and Department Activities of Sectors Department International Center Center Bank Secretariat of Financial of Economy Banking Department of Internal Audit Management Main Loan Main Main Department of Main Foreign Foreign The First Department Investment Credit Risk Interbank the Real Estate Department Department Currency Currency (Classified Information) Department Management Settlement & Maintenance of Capital of NBU Project Department Department Main Center Construction Department SME Main Main Department Retail Banking Security Government Methodology Department of Money and Credit Department Circulation Reserve Department Monitoring Managment Department Department The Second Main Department Electronic Department for Cooperation Library (Military with Financial Service) Institutions Department of Human Resources

Medical Office

Information Center

IT=Information Technology; NBU=National Bank of Uzbekistan; SME=small and medium enterprise. Appendix 6 31

NBU’S LOAN PORTFOLIO

Table A6.1: Portfolio Distribution (%)

Sector 1996 1997 1998 1999 2000 2001 2002 All industries1 50.53 56.83 56.30 51.90 44.73 50.10 57.40 Agriculture 10.55 – 0.06 0.06 0.24 0.30 0.60 Transport & 8.12 11.88 8.79 6.36 18.82 18.2 16.7 Communications Construction 3.85 0.67 2.61 2.41 2.79 3.89 4.0 Trade (including 0.58 17.57 4.32 3.85 2.7 1.79 4.85 external trade) Logistics – 9.82 9.61 13.46 9.69 8.15 7.57 Housing, – 0.08 0.81 0.09 0.07 0.02 0.04 Communal Services & Consumer Services Other 26.37 3.15 17.50 21.87 20.96 17.57 9.18 Total 100.00 100.00 100.00 100.00 100.00 100.00 100.00 1 Includes light industry, manufacturing, mining, food processing, and energy-related industries. Source: National Bank of Uzbekistan.

Table A6.2: Portfolio Classification by Quality (%)

Item 1996 1997 1998 1999 2001

Good 77.70 91.43 91.80 90.55 78.8 Satisfactory 10.53 4.29 6.40 7.85 16.0 Substandard 11.43 4.09 1.80 1.60 4.4 Doubtful 0.34 0.19 – – 0.8 Bad – – – – – Total 100.00 100.00 100.00 100.00 100.00 Source: National Bank of Uzbekistan.

32 Appendix 6

Table A6.3: Portfolio Classification and Loan-Loss Provisioning Requirements1 According to Central Bank of Uzbekistan’s Regulations ($’000)

1996 1997 1998 1999 2000 2001 Loan Amount 1,142 1,457 1,884 2,078 2,227 2,223 Provisions Required on: Good Loans 8.87 13.32 17.29 18.81 – 17.87 Satisfactory 12.02 3.12 6.02 8.15 – 18.14 Loans Substandard 32.63 14.89 8.47 8.21 – 24.95 Loans Doubtful Loans 1.94 1.38 – – – 9.07 Bad Loans – – – – – – Total Provision 55.46 32.71 31.78 35.17 70.03 Required Existing 12.00 23.00 20.00 24.00 41.00 68.62 Provision Requirement Shortfall/Surplus (43.46) (9.71) (11.78) (11.17) (1.43) CBU = Central Bank of Uzbekistan, LLP = loan-loss provisioning, mn = million, NBU = National Bank of Uzbekistan. 1 In accordance with CBU’s Portfolio Classification and Provisioning Rules (1999) set out in Appendix 7. 2 Audited financial statement shows LLP at $53 million. Source: Mission calculations based on CBU’s loan-loss provisioning requirements , NBU information, and NBU’s 2001 annual report. Appendix 7 33

NBU’s Portfolio Classification System and Loan-Loss Provisioning

1. The quality of credit is subdivided into five categories—good, satisfactory, substandard, doubtful, and bad—subject to the borrower’s financial standing, creditworthiness, repayment prospects, relevant and duly registered collateral, and number of outstanding days.

2. Good credit: Timely repayment is beyond doubt. The borrower is financially sound; has a high level of equity provision; high operating ratios; and short period of return on accounts receivable. In assessing reputation, the borrower’s attitude to previous liabilities is vital. Reliable collateral (movable or immovable property, guarantees, and warranties) is required, particularly liquid assets and liabilities enhancing the borrower's creditworthiness. A credit is considered secured when backed by collateral, sufficient to cover the principal and interest, which the bank can claim under the applicable law. All collateral documents should be registered in an established order. Credit under this category should not show signs that they will not be repaid. A general provision of 1% of the portfolio is adequate.

3. Satisfactory credit: Considered outstanding from time to time, 30–60 days with collateral and up to 30 days with partial collateral. The borrower’s financial standing should be stable, but there maybe some unfavorable circumstances or causes for concern. This category includes also loans with poorly prepared credit files or insufficient collateral documentation. Needs provisioning at 5–10%.

4. Substandard credit: Has pronounced signs of inadequate credit quality, hampering repayment. The initial source of repayment is insufficient to service debt, and a bank is forced to look for additional sources of repayment, such as collateral, sale of fixed assets, refinancing, or injection of fresh capital. A borrower’s current financial standing or creditworthiness does not protect it . Credits have larger-than-normal risk caused by a lack of satisfactory financial information or insufficient collateral documents. Outstanding debt is 60–180 days with collateral, 30–60 days with partial collateral, and up to 30 days if unsecured. Needs provisioning at 25%.

5. Doubtful credit: Has every weak point inherent in substandard credit, with additional characteristics such as bad collateral. Full repayment becomes highly doubtful. Losses are very likely; but their classification as losses is postponed until certain significant factors are clarified. The principal outstanding period is above 180 days with good collateral, 60–180 days with partial collateral, and 30–60 days as unsecured credit. Needs provisioning at 50%.

6. Bad credit: Repayment is impossible, and probability of recovery is low. It is inadvisable for them to be considered assets, and they have no liquidation value. Banks should stop placing them on their balance sheets. The principal outstanding amount is 180 or more days at partial collateral and registration, and 60–180 days if unsecured. Needs provisioning at 100%.

NATIONAL BANK FOR FOREIGN ECONOMIC ACTIVITY OF UZBEKISTAN FINANCIAL STATEMENTS 34 Table A8.1: Consolidated Balance Sheets ($ Million) Appendi

Item 31 Dec 1996 31 Dec 1997 31 Dec 1998 31 Dec 1999 31 Dec 2000 31 Dec 2001 31 Dec 2002

A. Assets x 8

Cash and Cash Equivalents — 567 628 820 548 550 587 Due from Other Banks — 1,068 782 818 755 640 6 Customer Loans and Advances, Net — 1,457 1,884 2,078 2,227 2,223 2,135 Premises and Equipment, Net — 178 210 227 235 233 30 Others Assets — 132 125 176 148 153 145

Total Assets 3,427 3,402 3,629 4,119 3,913 3,799 2,903

B. Liabilities and Shareholder's Equity

Amounts Owed to Government and the Central Bank of Uzbekistan 807 965 1,039 854 782 545 Amounts Owed to Customers 675 623 659 440 387 349 Due to Other Banks 596 347 497 452 392 13 Interstate Credits 768 1,075 1,222 1,450 1,543 1,504 Other Liabilities 42 48 65 55 56 83

Total Liabilities 2,984 2,888 3,058 3,482 3,251 3,160 2,494

Shareholder's Equity: Authorized and Contributed Capital 353 364 364 364 400 380 Additional Paid-in Capital 20 20 20 20 20 — Retained Earnings 141 187 253 278 219 29

Total shareholder's equity 443 514 571 637 662 639 409

Total liabilities and shareholder's equity 3,427 3,402 3,629 4,119 3,913 3,799 2,903

Source: National Bank of Uzbekistan.

NATIONAL BANK FOR FOREIGN ECONOMIC ACTIVITY OF UZBEKISTAN FINANCIAL STATEMENTS Table A8.2: Consolidated Statements of Income ($ Million)

Item 31 Dec 1996 31 Dec 1997 31 Dec 1998 31 Dec 1999 31 Dec 2000 31 Dec 2001 31 Dec 2002 Interest Income: Customer Loans and Advances, Net — 116 168 191 259 211 — Other — 95 60 67 48 29 —

Total Interest Income 186 211 228 258 307 240 151

Interest Expense: Amounts Owed to Customers — (5) (13) (25) (22) (22) — Amounts Owed to the Central Bank of Uzbekistan — (4) (25) (26) (51) (31) — Interstate Credits and Due to Other Banks — (99) (89) (94) (129) (108) —

Total Interest Expense (99) (108) (127) (145) (202) (161) (114)

Net Interest Income before Provision for Loan Losses 87 103 101 113 105 79 37

(Provision) Benefit for Loan Losses (5) (11) 3 (4) (17) (19) (34) Net Interest Income after Provision for Loan Losses 82 92 104 109 88 60 3

Noninterest Income: Fee and Commission Income — 57 53 55 52 49 25 Net (loss) Gain Arising from Foreign Currency Transactions — 1 7 16 (25) (27) 10 Other — 3 3 6 — — 3 Total Noninterest Income 66 61 63 77 27 22 38

NonInterest Expense: Payroll and Other Staff Costs — (10) (15) (16) (14) (12) (6) Occupancy and Equipment — (6) (12) (17) (17) (17) — Insurance and Taxes Other than Income Tax — (10) (15) (22) (19) (16) —

Administrative Expenses — (4) (9) (10) (5) (4) — Appendix 8 Fee and Commission Expenses — — (4) (4) (4) (9) — Other — (6) (3) (3) (7) (7) (18) Total Noninterest Expense (16) (36) (58) (72) (66) (65) (24)

Income before Income Tax Expense 132 117 109 114 49 17 17

Income Tax Expense (19) (36) (41) (41) (21) (14) (9) 35

Net Income 113 81 68 73 28 3 8 Source: National Bank of Uzbekistan

Table A8.3: Consolidated Statements of Cash Flows 36

($ Million)

Item 31 Dec 1997 31 Dec 1998 31 Dec 1999 31 Dec 2000 31 Dec 2001 Appendix 8 Operating Activities Net Income 81 68 73 28 3 Adjustments to Reconcile Net Income to Net Cash Provided by (used in) Operating Activities:

Depreciation 3 8 11 13 12 (Benefit) Provision for Loan Losses 11 (3) 4 17 19 Provision for Deferred Income Taxes 5 3 3 4 5 (Increase) Decrease in Other Assets (8) 17 (43) 18 (7) Increase in Other Liabilities 2 3 14 (20) (4) Net Cash Provided by (used in) Operating Activities 94 96 62 60 28

Investing Activities (Increase) Decrease in Amounts Due from the Central Bank of Uzbekistan (212) — — — — (Increase) Decrease in Amounts Due from Other Banks 167 286 (36) 63 115 (Increase) Decrease in Customer Loans and Advances (326) (424) (198) 156 (15) Purchase of Premises and Equipment (85) (40) (28) (21) (12) Purchase of Equity Participations (29) (10) (8) — — Proceeds from Sale of Equity Participations — — — 4 2 Net Cash used in Investing Activities (485) (188) (270) 202 90

Financing Activities Increase (Decrease) in Amounts Owed to Government and the Central Bank of Uzbekistan (429) 158 74 (185) (72) Increase (Decrease) in Amounts Owed to Customers (40) (52) 36 (219) (53) Increase (Decrease) in Amounts Due to Other Banks 207 (249) 150 (39) (60) Increase (Decrease) in Interstate Credits 159 307 147 (88) 93 Proceeds from Issue of New Shares 45 11 — — — Dividends Paid (55) (22) (7) (3) (24) Net Cash used in Financing Activities (113) 153 400 (534) (116)

Net Increase (Decrease) in Cash and Cash Equivalents (504) 61 192 (272) 2

Cash and Cash Equivalents at Beginning of Year 1,071 567 628 820 548

Cash and Cash Equivalents at End of Year 567 628 820 548 550 Supplemental information: Income Taxes Paid (31) (31) (44) (27) (4) Interest Paid (97) (128) (169) (211) (167) Noncash Dividends Paid — — — — (2) Source: National Bank of Uzbekistan

Table A8.4: Financial Ratios (%)

Item 1996 1997 1998 1999 2000 2001 2002 Loan-to-Deposit Ratio 44.03b 51.34b 63.35b 61.63b 69.9 65.4 143.2 Debt-to-Equity Ratio 6.74 5.62 5.35 5.46 4.91c 4.95 6.10 Debt Service Coverage Ratio — 5.6 3.3 3.3 2.22c 2.23 2.16 Return on Average Assets 4.27b 2.37b 1.93b 1.88b 0.70a 0.08a -3.54 Intermediation Cost Ratio 0.61 1.05 1.54 1.86 1.64 1.68 0.72 Capital Adequacy Ratio 62.09b 77.57b 68.58b 75.96b 40.4a 34.8a 34.02 Adjusted CAR (treating 33.6 10.29 14.84 20.77 18.85 20.02 19.6 sovereign guaranteed loans as full risk cases) a Source: National Bank of Uzbekistan’s Annual reports. b Source: National Bank of Uzbekistan’s Annual reports and Thomson Bankwatch Report. c Source: National Bank of Uzbekistan’s 2000 Annual Financial Statements.

Project Covenants:

1. Loan to any single borrower < or = 15% of share capital. 2. Loan to any single sector < or = 20% of share capital. 3. CAR > or = 8%. 4. DER < or = 12:1. 5. DSCR > or = 1.25. Appendix 8

37

38 Appendix 9

NBU’S COMPLIANCE WITH COVENANTS

Covenants Reference to Status Loan Documents 1. The Borrower shall furnish, or cause to be furnished, to the Loan Agreement Complied with Asian Development Bank (ADB) all such reports and Article IV, Section information as ADB shall reasonably request concerning (i) 4.02 the loan, the expenditure of the proceeds , and maintenance of the service thereof; (ii) the project; (iii) the qualified enterprises, the qualified projects , and the subloans; (iv) the administration, operations, and financial condition of the National Bank of Uzbekistan (NBU); (v) financial and economic conditions in the territory of the borrower and the international balance-of-payments position of the borrower; and (vi) any other matters relating to the purposes of the loan.

2. Except as ADB may otherwise agree, the Borrower shall Loan Agreement, Complied with relend the proceeds of the loan to NBU on the following Schedule 4, para. 1 terms and conditions:

(a) interest at the rate determined in accordance with Section 2.02 of the loan agreement; (b) approximately equal semiannual aggregate payments of principal plus interest over a period of 15 years, including a grace period of 3 years; and (c) the foreign exchange risk in respect of subloans shall be borne by the qualified enterprises.

3. The Borrower and NBU shall ensure that ADB is given a Loan Agreement, Complied with reasonable opportunity to comment on any substantial Schedule 4, para. 2 amendments that may be proposed to the charter.

4. The Borrower and NBU shall from time to time, at the Loan Agreement, Complied with request of any party, exchange views with ADB concerning Schedule 4, para. 3 the interest rates NBU will charge, taking into consideration NBU’s cost of funds, profitability, and interest rates charged by other banks and financial institutions in Uzbekistan.

5. The Borrower shall ensure that the qualified enterprises Loan Agreement, Complied with have timely access to foreign currency for repayment of Schedule 4, para. 4 subloans, either through direct export earnings, currency auctions, or the Borrower’s or NBU’s foreign currency sources.

6. The Borrower shall use its best efforts to avoid any Loan Agreement, Complied with duplication between the project and any projects to be Schedule 4, para. 5 financed by the European Bank for Reconstruction and Development (EBRD) under a proposed loan for small and medium -sized enterprises. The Borrower shall ensure that any subprojects financed by EBRD under such loan will focus primarily on cotton processing or light industries.

7. NBU shall at all times make adequate provision to protect Project Agreement, Complied with itself against any loss resulting from changes in the rate of Article III, exchange between the sum and the currency or currencies Section 3.02 in which NBU’s outstanding money obligations will have to be met.

Appendix 9 39

Covenants Reference to Loan Status Documents 8. NBU shall not make a subloan to any qualified enterprise Project Agreement, Partly complied with unless such qualified enterprise has at its disposal, or has Article III, made appropriate arrangements to obtain as and when Section 3.03 required, all local currency funds, including adequate working capital, and other resources which are required by such qualified enterprise for carrying out the qualified project in respect of which the subloan is to be made.

9. NBU shall maintain records and accounts adequate to Project Agreement, Complied with record the progress of the project and of each qualified Article III, project (including the cost thereof) and to reflect, in Section 3.04 accordance with consistently maintained sound accounting principles, the operations and financial condition of NBU.

10. (a) ADB and NBU shall cooperate fully to ensure that Project Agreement, Complied with the purpose of the loan is accomplished. Article III, Section 3.05 (b) NBU shall promptly inform ADB of any condition which interferes with, or threatens to interfere with, the progress of the project, the performance of its obligations under the project agreement or the subsidiary loan agreement, or the accomplishment of the purposes of the loan.

(c) The ADB and NBU shall from time to time, at the request of either party, exchange views through their representatives with regard to any matters relating to the project, NBU, and the loan.

11. (a) NBU shall furnish ADB with all such reports and Project Agreement, Complied with information as ADB shall reasonably request Article III, concerning (i) the loan and the expenditure of the Section 3.06 proceeds thereof; (ii) the project; (iii) the qualified enterprises, the qualified projects, and the subloans; (iv) the administration, operations and financial condition of NBU; and (v) any other matters relating to the purposes of the loan.

(b) Without limiting the generality of the foregoing, Complied with NBU shall furnish ADB with quarterly reports on the execution of the project and on the operation and management of NBU within 60 days of the end of the relevant quarter. Such reports shall be submitted in such form and in such detail as ADB shall reasonably request, and shall indicate, among other things, progress made and problems encountered during the quarter under review, steps taken or proposed to be taken to remedy these problems, and the proposed program of such activities and expected progress during the following quarter.

(c) Promptly after the closing date for withdrawals Complied with from the loan account, but in any event not later than 3 months after the said closing date or such later date as the ADB may agree for this purpose, NBU shall prepare and furnish ADB with a project completion report, in such form

40 Appendix 9

Covenants Reference to Loan Status Documents and in such detail as ADB shall reasonably request, on the utilization of the loan, the execution of qualified projects, their costs, the performance by NBU of its obligations under the project agreement, and the accomplishment of loan purposes.

12. NBU shall have its accounts and financial statements Project Agreement, Complied with (balance sheet and statement of sources and applications of Article III funds) audited annually, in accordance with appropriate Section 3.07, para. a auditing standards consistently applied, by independent auditors whose qualifications, experience, and terms of reference are acceptable to ADB, and shall, promptly after their preparation but in any event not later than 6 months after the close of the fiscal year to which they relate, furnish to the ADB (i) certified copies of such audited accounts and financial statements, and (ii) the long-form audit report of the auditors relating to supplementation information on NBU’s accounts (including the auditors’ assessment on the quality of NBU’s long-term loans and the adequacy of NBU’s provision for doubtful, distressed, and marginal loans, and the auditor’s opinion on the use of loan proceeds and compliance with the covenants of the loan agreement and the project agreement), all in the English language. NBU shall furnish ADB with such further information concerning such accounts and financial statements and the audit thereof as ADB shall from time to time reasonably request.

13. NBU shall enable ADB’s representatives to inspect any Project Agreement, Complied with qualified enterprise, qualified project, the goods financed out Article III, Section of the proceeds of the loan, and any relevant records and 3.08 documents.

14. (a) NBU shall, promptly as required, take all action Project Agreement, Complied with within its powers to maintain its corporate Article III existence, to carry on its operations, and to Section 3.09 (a) acquire, maintain, and renew all rights, properties, powers, privileges , and franchises which are necessary in the carrying out of the project or in the conduct of its business; (b) Except as ADB may otherwise agree, NBU shall Project Agreement, Complied with not sell, lease, transfer, or otherwise dispose of Article III any of its assets, except in the ordinary course of Section 3.09 (a) its business; (c) NBU shall immediately inform ADB whenever it Project Agreement, Complied with establishes or acquires any subsidiary. Article III Section 3.09 (a)

15. NBU shall cause each of its subsidiaries (if any) to observe Project Agreement Complied with and perform the obligations of NBU under this project Article III agreement to the extent to which such obligations may be Section 3.10 applicable thereto, as though such obligations were binding upon each of such subsidiaries.

Appendix 9 41

Covenants Reference to Loan Status Documents 16. Except as ADB may otherwise agree, NBU shall duly Project Agreement Complied with perform all its obligations under the subs idiary loan Article III agreement and shall not take, or concur in, any action which Section 3.11 would have the effect of assigning, amending, abrogating, or waiving any rights or obligations of the parties under the subsidiary loan agreement.

17. The amount of the loan may be withdrawn from the loan Project Agreement Complied with account to finance (i) the reasonable direct and indirect Article II foreign currency cost of goods and services and other items Section 2.01 (a) of expenditures required for qualified projects ; and (ii) the foreign currency cost of interest and other charges during construction on subloans. In no event may loan amounts be withdrawn from the loan account to finance more than 75% of the total cost of a qualified project.

18. Whenever NBU proposes to make a subloan in an amount Project Agreement Complied with exceeding the equivalent of $2,000,000 or such other Article II amount as may from time to time be agreed between ADB Section 2.02 (a) and NBU, NBU shall, before requesting a withdrawal, submit to ADB an application for approval of such subloan. Such application shall contain a description and appraisal of the qualified project, the terms and conditions of the proposed subloan, and such other information as ADB shall reasonably request. A subloan shall be deemed to exceed the equivalent of the amount specified in or agreed pursuant to this paragraph if the amount of such subloan, when added to the amount of any other subloan or subloans previously made or authorized for the same qualified project, exceeds the equivalent of the amount so specified or agreed.

19. Whenever NBU has made or proposes to make a subloan in Project Agreement Complied with an amount not exceeding the equivalent of the amount Article II specified in or agreed pursuant to paragraph (a) of this Section 2.02 (b) section, NBU shall, promptly and before requesting a withdrawal, furnish to ADB a statement, in a form satisfactory to ADB, describing the qualified project and the terms and conditions of the subloan. No withdrawal shall be made in respect of a subloan falling within the provisions of this paragraph unless ADB shall have authorized withdrawals from the loan account.

20. Notwithstanding the provisions of a paragraphs (a) and (b) Project Agreement Complied with of this section, NBU shall, before requesting a withdrawal, Article II submit to ADB for prior approval applications for the first Section 2.02 (c) four subloans and subloans for qualified projects which do not generate foreign exchange earnings, regardless of the amounts of such subloans. Such applications shall be in a form satisfactory to ADB and shall contain a description and appraisal of the qualified projects, including the terms and conditions of the proposed subloans and such other information as ADB shall reasonably request.

42 Appendix 9

Covenants Reference to Loan Status Documents

21. Except as ADB may otherwise agree, the applications and Project Agreement Complied with information required under this section shall be submitted to Article II ADB not later than a date 3 years after the effective date. Section 2.02 (d)

22. Except as the ADB may otherwise agree, no withdrawals Project Agreement Complied with shall be made from the loan account for amounts expended Article II for the cost of a qualified project more than 120 days prior to Section 2.03 receipt by ADB either of the application for approval of such qualified project pursuant to Section 2.02 (a) of the project agreement or of the statement required by Section 2.02 (b) of the project agreement.

23. (a) Each subloan shall carry interest at an appropriate Project Agreement Complied with rate, based on prevailing market rates in Article II Uzbekistan, which shall cover NBU’s cost of Section 2.04 (a) funds, administrative costs, and credit risk, and shall provide for an appropriate and reasonable margin of profit. Each subloan shall be made on terms whereby NBU shall obtain, by a written agreement with the qualified enterprise in form acceptable to ADB, rights adequate to protect the interests of the Borrower, NBU and ADB;

(b) Except as ADB may otherwise agree, the Project Agreement Complied with amortization schedule application for each Article II subloan (i) shall not extend beyond 8 years, Section 2.04 (b) including a grace period not exceeding 3 years, from the date when such subloan is approved or authorized for withdrawal from the loan account pursuant to Section 2.02 (a) or (b) of the project agreement; (ii) shall provide for approximately equal semiannual aggregate payments of principal plus interest; and (iii) shall be based on the cash flow forecasts of the qualified project;

(c) Except as ADB may otherwise agree, each Project Agreement Complied with subloan shall be subject to (i) a commitment fee Article II to be agreed upon between NBU and the Section 2.04 (c) qualified enterprise on the committed but undisbursed amounts of the subloan; and (ii) reasonable service fees for costs associated with the carrying out of the appraisal of the qualified project.

24. Without limiting the generality of the foregoing provisions of Project Agreement Section 2.04 of the project agreement, and in addition to Article II any other provisions which a prudent lender would request, Section 2.05 each subloan agreement shall include provisions to the effect that:

Appendix 9 43

Covenants Reference to Loan Status Documents (i) The qualified enterprise shall carry out and Section 2.05(i) Complied with operate the qualified project with due diligence and efficiency and in accordance with sound administrative, financial, business, and environmental practices, including maintenance of adequate accounts and records;

(ii) the proceeds of the loan shall be used only for Section 2.05 (ii) Complied with procurement in ADB member countries , in accordance with procedures acceptable to ADB, of goods produces in and supplied from, and services supplied from, such countries;

(iii) the goods and services to be financed out of the Section 2.05 (iii) Complied with proceeds of the loan shall be used exclusively in carrying out of the qualified project;

(iv) the qualified enterprises shall use the proceeds Section 2.05 (iv) Complied with of the loan to finance only (a) investment goods for new projects, and (b) the modernization and rehabilitation of existing businesses, associated initial working incremental working capital and related services; provided, that in no event may the proceeds of the loan be used to finance the cost of land and land use rights, taxes and duties, and wages;

(v) the qualified enterprise shall bear the foreign Section 2.05 (v) Complied with exchange risk;

(vi) the subloan shall be secured by collateral valued Section 2.05 (vi) Complied with at a minimum of 120% of the subloan amount;

(vii) ADB and NBU shall each have the right to Section 2.05 (vii) Complied with inspect such goods, the qualified enterprise, the qualified project, and any relevant records and documents;

(viii) the qualified enterprise shall take out, and Section 2.05 (viii) Complied with maintain with responsible insurers , insurance against such risks and in such amounts as shall be consistent with sound business practice, and without any limitation upon the foregoing, such insurance shall cover hazards incident to the acquisition, transportation, and delivery of goods financed out of the proceeds of the loan 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;

(ix) ADB and NBU shall each be entitled to obtain all Section 2.05 (ix) Complied with such information as each shall reasonable request relating to the subloan, the goods and services financed out of the proceeds of the loan, the qualified project, the qualified enterprise, and other related matters; and

44 Appendix 9

(x) NBU shall be entitled to suspend or terminate Section 2.05 (x) Complied with further access by the Qualified Enterprise to the use of the proceeds of the loan upon failure by the qualified enterprise to perform its obligations under the subloan agreement.

25. Selection and Appraisal of Qualified Projects:

(i) NBU shall select and appraise specific Project Agreement Complied with development projects for financing under the loan Schedule, paras. 1-7 in accordance with sound banking and financial principles and procedures;

(ii) NBU shall appraise all such projects in Complied with accordance with a standard appraisal report format agreed upon between NBU and ADB. Appraisal reports shall include a business plan and projected financial statements (including income statements, balance sheets and cash flow statements) and an explanation of the assumptions on which such statements are based;

(iii) The appraisal of each such project which is Complied with proposed by NBU as a qualified project shall (i) include a calculation of the financial internal rate of return (FIRR) of the project, and (ii) demonstrate that the financial viability of the qualified project does not depend on a distorted framework;

(iv) NBU shall appraise proposed qualified enterprises on the basis of the enterprise’s Complied with financial, managerial, and technical competence. NBU shall consider the enterprise’s technical, managerial, financing, marketing, and procurement requirements, as well as the enterprise’s financial viability, employment, and environmental impacts when appraising and selecting qualified enterprises ;

(v) NBU shall ensure that qualified projects comply Complied with with the requirements of all applicable environmental laws and regulations in force in Uzbekistan from time to time, including compliance with environmental quality standards and requirements for environmental impact assessment, as well as ADB’s environmental assessment requirements. NBU shall also ensure that all local planning and environmental approvals for qualified projects have been obtained. NBU shall further ensure that appropriate environmental safeguards and equipment for compliance are built into each qualified project, as necessary;

(vi) Except as ADB may otherwise agree, only Complied with nonstate small and medium -sized enterprises engaged in food processing, and the manufacture of packaging materials for processed foods , shall be eligible for financing under the loan. The term “nonstate enterprise” shall include private enterprises, collective Appendix 9 45

shall include private enterprises, collective enterprises, joint ventures with foreign partners, and joint-stock companies with the state shareholding being less than 50%. Except as ADB may otherwise agree, projects involving the production or processing of cotton, grain, spirits , or tobacco shall not be eligible for financing under the loan.

Selection Criteria for Qualified Enterprises and Qualified Projects:

(i) Except as the ADB may otherwise agree, NBU Complied with shall provide subloans only to qualified enterprises for qualified projects which meet the 26. following criteria:

(a) the qualified enterprise shall contribute a Complied with minimum of 25% of the project cost in equity Project Agreement (in cash or existing assets realistically Schedule, paras. 8-9 appraised); (b) the return on assets of the qualified project Complied with shall be at least 12% by the time it reaches full capacity; Complied with (c) the FIRR of the qualified project shall be in excess of the qualified project’s weighted average cost of capital in real terms; Complied with (d) the projected debt service coverage ratio for the qualified project shall be at least 1.5 times , based on the debt of the qualified enterprise at the time the qualified project is expected to attain normal production capacity; and Complied with (e) the qualified project shall be environmentally sound and should contribute to the borrower’s economic development by (i) creating or sustaining employment opportunities, (ii) providing new and/or better products for the markets, and/or (iii) improving the borrower’s balance of payments. Complied with (ii) NBU shall give priority to projects that generate foreign exchange earnings.

Maximum Amount of Subloans: Complied with Except as ADB may otherwise agree, NBU shall not make any subloan in an amount exceeding the equivalent of $5,000,000 or in an amount which would exceed such limit 27. when added to the outstanding principal amount of all other subloans made for the same qualified project. Project Agreement Monitoring Qualified Projects: Schedule, para. 10 Complied with NBU shall monitor the financial and economic performance, and socioeconomic and environmental benefits of Qualified Projects. NBU shall assist ADB to monitor and evaluate the 28. long-term benefits of a random sample of five qualified projects . Project Agreement Revolving Fund: Schedule, para. 11 46 Appendix 9

Complied with Subject to making the required payments of principal and interest under the subsidiary loan agreement, NBU shall use funds received from the repayment of principal of 29. subloans as revolving funds to make additional loans in accordance with its operational policies . To protect itself from the foreign exchange risks arising in connection with Project Agreement the maintenance of such revolving fund, NBU shall, to the Schedule, para. 12 extent possible endeavor to (i) synchronize relending with the recoveries of subloans; and (ii) maintain the recovered amounts of subloans in the equivalent of the relevant foreign currencies, and further relend such amounts in the equivalent of the foreign currencies in which they are maintained.

Financial Requirements for NBU: Complied with Except as ADB may otherwise agree, and subject to any applicable banking laws to the contrary, NBU shall at all times during the term of this project agreement: 30. Complied with (a) maintain its debt-to-equity ratio at a maximum of 12:1; Project Agreement Complied with (b) maintain a ratio of equity to risk-adjusted Schedule, para. 13 assets in accordance with the Bank of Internal Settlements’ definition of at least 8%; Not complied with (c) build up adequate provisions for loan losses and write-offs for bad debts in accordance with international standards; Complied with (d) maintain a minimum debt-service coverage ratio (defined as the ratio of its annual net income after taxes but before interest expenses and other charges on debt and depreciation plus principal collections under its loan portfolio, to the aggregate amount of annual amortization and interest expenses and charges on debt) of not less than 1.25 after taxes; Complied with (e) ensure that its maximum exposure to a single borrower, or to a group of related borrowers (excluding such loans and obligations that are fully guaranteed by the borrower), shall not exceed 15% of its capital reserves (excluding revaluation reserves); (f) maintain a reasonable diversified portfolio by Complied with sector, so that not more than 20% of its total portfolio is accounted for by any one sector; (g) fully adopt international accounting standards; Complied with (h) introduce financial discipline among its subborrowers, to ensure that they maintain a Complied with minimum debt-service coverage ratio of 1.5 times; and Complied with (i) maintain an adequately staffed project implementation unit that shall be responsible for the implementation of the project.

Interest rates: Complied with NBU shall review the adequacy of its interest rates from time to time at the request of ADB and exchange views, together with the Borrower, with ADB concerning the Appendix 9 47

together with the Borrower, with ADB concerning the outcome of such review. Prior to making any change in its interest rates, NBU shall inform ADB of the proposed 31. change and afford ADB a reasonable opportunity to Project Agreement comment thereon. Schedule, para. 14

Institutional changes: Complied with (a) NBU shall consult with ADB before making any changes to its operational policies that would materially affect project implementation. (b) NBU shall inform ADB of any changes in the 32. appointment of its chairman. Project Agreement Schedule, para. 15

48 Appendix 10

OVERALL ASSESSMENT OF THE PROJECT

Criterion Weight Details of Performance Rating Rating Weighted (%) Description Value Rating A. Project Outcome Assessment 1. Relevance 20% The objectives and goals of the Relevant 2 0.40 project were relevant at the time of its preparation and throughout its implementation. The project financed privately owned and small and medium -sized enterprises (SMEs) in value-added agroprocessing. While Uzbekistan, even in Soviet times, had a competitive advantage in horticulture and agriculture, all processing factories were located in other Soviet republics . The breakup of the Soviet Union resulted in the absence of demand for Uzbekistan’s produce, leading to unemployment. The project, by financing agroprocessing subprojects within Uzbekistan, created domestic demand, as well as backward and forward linkages to agriculture and horticulture. This was consistent with the Asian Development Bank’s (ADB) interim operating strategy and Uzbekistan’s development strategy. Appropriate changes were made to the project covenant to facilitate its continuing relevance.

2. Efficacy 25% The loan financed 28 subprojects Efficacious 2 0.50 that created 8,014 jobs within 3 years of operation. The loan was committed and disbursed within its original schedule. It provided processing facilities to add value to Uzbekistan’s horticultural production. Eighty-nine percent of the loan disbursed, and 78% of the loan amount due for collection, was being serviced on schedule. TA-2714, attached to the loan, assisted in enhancing NBU’s capacity for apprais ing agroindustrial processing projects promoted by SMEs. The TA facilitated efficacious loan implementation.

Appendix 10 49

Criterion Weight Details of Performance Rating Rating Weighted (%) Description Value Rating 3. Efficiency 20% The loan was fully committed and Efficient 2 .040 disbursed within its original commitment and disbursement schedules. No extension of either was necessary. NBU was rigorous in its credit appraisal of subprojects. Twenty-three of the 28 subprojects had financial internal rates of return (FIRR) that compared favorably with their weighted average cost of capital. Eighty-nine percent of the loan disbursed and 78% of am ount due for collection was being serviced on schedule. ADB was efficient and prompt in approving or rejecting subloan proposals. Technical assistance (TA) consultants were fielded immediately after the TA agreement was signed. Management at NBU’s project implementation unit was efficiently organized. All procurement was in accordance with ADB guidelines. All subprojects had adequate equity counterpart funding from their sponsor.

4. Sustainability 20% Demand for credit from Likely 2 0.40 agroprocessing industries in the country continues.

Satisfactory recovery of subloan amounts has enabled NBU to recycle funds to finance new ventures.

The TA has helped strengthen NBU’s project financing function, particularly for SMEs. To consolidate this knowledge gained, and to ensure its sustainability, NBU reorganized its main SME department.

NBU’s financial condition in terms of solvency and liquidity remains high, enabling NBU to participate successfully in Loan 1799-UZB: Small and Medium -Sized Enterprise Development Project. 5. Institutional Developments 15% The Project has revived demand Moderate 2 0.30 and Other Impacts for horticultural crops, particularly in the Fergana and Khorezem regions, reversing a decline in demand that had begun since independence. 50 Appendix 10

Criterion Weight Details of Performance Rating Rating Weighted (%) Description Value Rating The Project created domestic institutions that would use horticultural produce as raw material, thereby arresting a decline in production and creating direct and indirect employment.

The Project built up institutional enduring capacity for SME project finance in NBU.

The Project taught ADB important lessons about the needs to (i) address policy constraints to the SME sector, and (ii) set realistic covenants. These lessons were successfully incorporated into the design of the second SME Project of Loan 1799-UZB. OVERALL WEIGHTED 2.0 AVERAGE