Eligibility of State-Owned Road Enterprises for Participation in ADB-Financed Projects

Technical Assistance Consultant’s Report

Project Number: 41685-01 (Technical Assistance No. 7053) June 2008

Uzbekistan: Eligibility of State-owned Road Enterprises for Participation in ADB-financed Projects

Prepared by Nicolas Audier, Etienne Laumonier, Umid Ubaydullaev and Mirodil

Mirakhmedov

This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents.

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FINAL REPORT

June 24, 2008

Consulting Services for

Asian Development Bank Project

TA-7053

UZB – Eligibility of State-Owned Road Enterprises for Participation in ADB-Financed Projects

Nicolas Audier Etienne Laumonier Team leader SOE advisor Legal advisor

Umid Ubaydullaev Mirodil Mirakhmedov National Consultant National Consultant

Hereinafter, the “Consultants”

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TABLE OF CONTENTS

PRELIMINARY STATEMENTS ...... 7 Acknowledgements ...... 8 Glossary of Abreviations...... 9 Introduction ...... 10 1. Terms of Reference...... 10 2. Project Background and Rationale...... 11 2.1 Project background...... 11 2.2 Rationale...... 12 Scope of the Consultants’ Assignment...... 13 Methodology ...... 14 1. Kick-off Meetings...... 14 2. Preparatory work...... 14 3. Implementation of the project...... 15 SECTION 1: GATHERING AND REVIEWING ALL EXISTING UZBEKISTAN LAWS AND OTHER RELEVANT DOCUMENTATION, PARTICULARLY THOSE RELATED TO SOES, AND CONSULTING WITH ALL STAKEHOLDERS TO ACQUIRE A FULL UNDERSTANDING OF THE STATUS OF THE LEGAL FRAMEWORK FOR UZAVTOYOL ENTERPRISES...... 17 1. General review of the Uzbek legal framework applicable to SOEs...... 18 1.1 Applicable Laws and Statutes...... 18 1.1.1 Definition and typology ...... 18 1.1.2 State unitary enterprises and LLCs or JSCs having state shares in their authorized capital ...... 22 1.1.3 Rights and obligation of SOEs...... 26 1.1.4 Establishment, reorganization and dissolution...... 27 1.1.5 Exercise of State ownership...... 27 1.1.6 Organisation of management ...... 29 1.2 Provisions regarding financial management and auditing...... 35 1.3 Provisions regarding dissolution and bankruptcy...... 35 1.4 Uzavtoyol...... 37 1.4.1 Establishment ...... 37 1.4.2 Capital and assets ...... 38 1.4.3 Legal status...... 40 1.4.4 Objectives and responsibilities...... 40

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1.4.5 Rights and obligations...... 43 1.4.6 Management bodies ...... 45 1.4.7 Relationship with the State...... 49 1.4.8 Relations with its “subsidiaries” or member entities ...... 50 1.5 Uzavtoyol enterprises (G7)...... 52 1.5.1 Preliminary note...... 52 1.5.2 Establishment ...... 52 1.5.3 Assets ...... 53 1.5.4 Legal status...... 53 1.5.5 Objectives and responsibilities...... 53 1.5.6 Rights and obligations...... 54 1.5.7 Management bodies ...... 54 1.5.8 Establishment of “subsidiaries” ...... 55 2. Privatization and denationalization of to SOEs ...... 55 2.1 Basic Concepts...... 55 2.2 Relevant Stakeholders...... 57 2.3 Privatization and denationalization programs ...... 58 2.4 SOE denationalization...... 59 2.5 Privatization and denationalization process of Uzavtoyol enterprises ...... 60 SECTION 2: REVIEWING AND BECOMING FAMILIARIZED WITH ADB’S POLICIES, GUIDELINES, PROCEDURES, AND DOCUMENTS, PARTICULARLY THOSE RELATED TO THE ELIGIBILITY FOR PARTICIPATION IN ADB-FINANCED PROJECTS...... 61 1. Detailed review of ADB’s policies and guidelines...... 62 1.1 Review of ADB’s guidelines dated February 2007 (the “Guidelines”) ...... 62 1.1.1 Scope of application and governing principles ...... 62 1.1.2 Fraud and corruption...... 62 1.1.3 International competitive bidding (ICB)...... 63 1.1.4 Other forms of procurement...... 65 1.2 SOEs’ eligibility for participation in ADB-financed projects...... 65 1.3 Conflict of interest...... 67 1.4 Fraud and corruption ...... 69 2. Detailed review of other aid agencies’ policies and guidelines related to eligibility and ICB ...... 69 2.1 IDA and IBRD...... 69 2.2 EBRD...... 70

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3. Overview on applicable Uzbek Laws and statutes on tendering ...... 71 3.1 Applicable regulations...... 71 3.1.1 Development, expertise and approval of the tender documentation;...... 71 3.1.2 Persons eligible for participation in tenders;...... 72 3.1.3 Composition and requirement for the Tender Committee ...... 72 3.1.4 Evaluation of bids and decision-making process ...... 73 3.1.5 Control of tender process ...... 73 3.1.6 Liability of participants, organizers and members of the Tender Committee for violations of the bidding rules...... 73 3.2 Interaction with ADB’s guidelines...... 74 3.2.1 Establishment of an ad hoc Project Management Unit...... 74 3.2.2 Function of the PMU...... 74 3.2.3 Reporting and control...... 75 3.2.4 Management of PMU activities ...... 75 3.2.5 PMU Staff ...... 76 SECTION 3: ASSESSING THE CURRENT OPERATIONAL PRACTICES OF UZAVTOYOL ENTERPRISES AND THEIR COMPLIANCE WITH ADB ELIGIBILITY REQUIREMENTS TO PARTICIPATE IN ICB ...... 79 1. Uzavtoyol enterprises are playing a prominent role in the Uzbek road sector ...... 80 1.1 Major stakeholders in Road Construction and Maintenance...... 80 1.2 Assessment of operation of Uzavtoyol members companies ...... 81 1.3 Relations with relevant Stakeholders ...... 82 1.3.1 With the Cabinet of Ministers...... 83 1.3.2 With the Road Council...... 83 1.3.3 With the Road Fund ...... 83 1.4 Private Sector Contractors...... 85 1.5 Problems Relating to Road Maintenance ...... 86 1.6 Overview of road development strategy in Uzbekistan...... 87 1.6.1 Establishment of Uzavtodor...... 87 1.6.2 Tasks assigned to Uzavtodor...... 87 1.6.3 Establishment of the Road Fund under Uzavtodor ...... 87 1.6.4 Reorganization of Uzavtodor and establishment of Uzavtoyol ...... 88 1.6.5 Establishment of the Road Fund under the Ministry of Finance ...... 88 1.6.6 Developments Post August 2006 ...... 90 2. Management of Uzavtoyol enterprises ...... 91 2.1 Operational control of the State...... 91

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2.2 Operational management...... 92 2.2.1 Internal organisation...... 93 2.2.2 Financial evaluation of Uzavtoyol ...... 95 3. Bidding practices of Uzavtoyol enterprises ...... 98 SECTION 4: IDENTIFYING AREAS WHERE UZAVTOYOL ENTERPRISES DO NOT MEET THE ELIGIBILITY REQUIREMENTS FOR PARTICIPATION IN ADB-FINANCED PROJECTS...... 101 1. Preliminary comments...... 102 2. Assessment of Uzavtoyol enterprises’ eligibility...... 102 2.1 Operation under commercial law ...... 103 2.2 Legal autonomy ...... 104 2.3 Financial independence...... 104 2.4 Managerial autonomy ...... 105 2.5 Not a dependant agency of the borrower or the executive agency...... 107 3. Absence of conflict of interest ...... 108 SECTION 5: IDENTIFYING AND PRIORITIZING ACTIONS THAT ARE REQUIRED TO MAKE UZAVTOYOL ENTERPRISES ELIGIBLE TO PARTICIPATE IN ADB-FINANCED PROJECTS...... 110 1. Proposed set of measures and recommandations...... 111 2. Further Steps: Privatization and Divesture ...... 123 ANNEXES...... 125 Annex A: Intended work plan ...... 126 Annex B: Questionnaire to SOE representatives ...... 127 Annex C: List of interviews conducted by the international consultants with relevant stakeholders...... 136 Annex D: List of Laws and regulations governing SOEs in the road sector and other relevant regulations...... 137 Annex E: Composition of the Project Steering Committee ...... 139 Annex F: Road Fund Revenue and expenditure budget 2006...... 140 Annex G: Composition of the Road Council ...... 141 Annex H: Financial information on Uvavtoyol...... 142 Annex I: Information on tenders in 2007...... 145 Annex J: Minutes of the workshop ...... 150 Annex K: Study Tour in Indonesia ...... 151 Annex L: Comments received from the Uzbek Government...... 153 Annex M: Comments and Recommendations of National Consultants on Final Report...... 157

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PRELIMINARY STATEMENTS

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ACKNOWLEDGEMENTS

The Consultants would like to thank the Asian Development Bank (“ADB”) for entrusting to them the execution of this project and notably Mr. Olly Norojono, Project Economist, infrastructure division, Central and West Asia Department, for his helpful guidance in the implementation of the project.

The Consultants would also like to thank ADB’s Uzbekistan Resident Mission’s staff and notably Mr. Rafael Nadyrshin, and the Project Management Unit (“PMU”) team, and notably Mr. Alisher Tashmatov, for their assistance during the implementation of the project.

The Consultants would also like to thank the ADB’s Indonesian Resident Mission’s Staff and notably Mr. H.S Soewartono and Mr. Jean Marie Lacombe for their support in the organisation of a study tour in Indonesia and thank all Indonesian administration and enterprises representatives they interviewed during their mission in Indonesia.

The Consultants would like to acknowledge the cooperation given to them by the officers of the enterprises and the representatives of administrations they have interviewed.

By sharing their insights and experiences they have enabled the Consultants to gain a better appreciation of the practical operation of their enterprises and the relevant issues when implementing a sponsor-funded project.

Finally, the Consultants would like to thank their interpreter, Ms. Natasha Kalinina, who assisted them greatly during their activities in Uzbekistan.

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GLOSSARY OF ABREVIATIONS

ADB : Asian Development Bank CoM : Cabinet of Ministers EBRD : European Bank for Reconstruction and Development IBRD : International Bank for Reconstruction and Development ICB : International competitive bidding IDA : International Development Agency IFC : International Finance Company JBIC : Japanese Bank for International Cooperation JSC : Joint Stock Company LLC : Limited Liability Company MoF : Ministry of Finance PAI : Project Administration Instructions PMU : Project Management Unit REPC : Road Equipment Pool Company SBD : Standard Bidding Documents SJSC : State Joint Stock Company SOE : State Owned Enterprise TOR : Terms of Reference

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INTRODUCTION

1. TERMS OF REFERENCE

The Consultants are engaged by ADB to assess the eligibility of State-owned Road Enterprises for participation in ADB-Financed Projects.

The Consultants’ scope of work is composed of the following main tasks:

(i) Review the findings of the preliminary investigations on the eligibility of Uzavtoyol enterprises carried out under TA 4889-UZB: Preparing the Regional Infrastructure (Roads) Project;

(ii) Review similar studies for other countries undertaken by ADB and other development agencies to ascertain a similar approach; Gather and review all existing Uzbekistan laws and other relevant documentation, particularly those related to State owned enterprises (“SOE”), and consult with all stakeholders to acquire a full understanding of the status of the legal framework for Uzavtoyol enterprises;

(iii) Review and become familiarized with ADB’s policies, guidelines, procedures, and documents, particularly those related to eligibility for participation in ADB-financed projects;

(iv) Assess the current operational practices of Uzavtoyol enterprises and their compliance with ADB eligibility requirements to participate in international competitive bidding (“ICB”);

(v) Identify areas where Uzavtoyol enterprises do not meet the eligibility requirements for participation in ADB-financed projects;

(vi) Identify and prioritize actions that are required to make Uzavtoyol enterprises eligible to participate in ADB-financed projects;

(vii) Prepare draft recommendations on what measures should be taken for Uzavtoyol enterprises to meet the eligibility requirements for participation in ADB-financed projects;

(viii) Identify any difficulties in implementing the recommended measures later on and provide necessary countermeasures;

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(ix) Propose and lead a study tour program for relevant Uzbekistan Government and Uzavtoyol officials to a country where reforms on state- owned road enterprises have taken place;

(x) Consult with stakeholders including the Government to discuss proposed recommendations acceptable to the Government and ADB, and a timetable for their phased implementation; and

(xi) Prepare and submit the required reports to the Government and ADB.

2. PROJECT BACKGROUND AND RATIONALE

2.1 Project background

ADB is negotiating terms and conditions for a Loan to the Government of Uzbekistan for reconstruction and rehabilitation of 131 km of Road A380 Guzar- Bukhara-Nukus-Beyneu. The Project scope consists of two components: (a) road development component (civil works); and (b) road enhancement component, consisting of (i) advisory support for introducing a comprehensive road sector planning and management system through establishing the Road Equipment Pool Company (“REPC”) and (ii) procurement of road maintenance/reconstruction equipment to be managed by REPC.

Procurement of goods, civil works, and related services financed from the ADB loan will be in accordance with ADB procurement rules. To ensure competitive biddings 5 ICB packages will be adopted for civil works contracts among pre-qualified bidders. 5 packages of ICB will be used for procurement of goods in excess of US$1 million.

The Republican Road Fund (“Road Fund”) under the Ministry of Finance (“MoF”) will be an executive agency responsible for the biddings and implementation of the Project. The equipment to be procured under the ADB financing will be operated on cost recovery basis. A REPC will be established as an independent State owned joint stock company responsible for managing road maintenance equipment hire fleets. The Government of Uzbekistan will provide a counter sovereign guarantee against the financial risks of REPC.

It is expected that road construction enterprises of State Owned Joint Stock Company “Uzavtoyol” will bid under the Project for procurement of contracts for capital repair/reconstruction of public roads. However, these enterprises are SOEs that might not be qualified as eligible to participate in ADB-financed procurement, or that might have a conflict of interest with the Borrower or the Executive Agency.

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2.2 Rationale

As described above, the TOR for this project aim at hiring consultancy services in order to:

- Identify areas where SOEs in the Road sector do not meet eligibility requirements for participation in ADB-financed projects; and

- Propose practical measures and recommendations which should be taken for such enterprises to meet the eligibility requirements for participation in ADB- financed projects.

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SCOPE OF THE CONSULTANTS’ ASSIGNMENT

The Consultants have met Mr. Olly Norojono, Project Economist, Infrastructure division, Central and West Asia Department of the ADB on February 21, 22 and 25, 2008 during which the TOR were explained in detail.

The Consultants were asked to determine whether, pursuant to ADB’s policies, guidelines, procedures, and documents, particularly those related to the eligibility of SOEs for participation in ADB-financed projects and those related to conflicts of interest, Uzbekistan’s State-Owned Road Enterprises comply with the eligibility requirements for participation in ADB-financed projects.

The Consultants were asked to evaluate the current operation of such enterprises and their compliance with ADB eligibility requirements to participate in ICB.

In the event the above mentioned requirements were not met, the Consultants were asked to recommend feasible, viable and practical measures to allow such enterprises to meet the requirements.

The Consultants understood that their work should be focused on Uzbekistan’s State-Owned Road Enterprises under State Joint Stock Company Uzavtoyol (“Uzavtoyol”).

Following preliminary investigations on the eligibility of such enterprises for bidding for ADB-funded projects undertaken in November 2007 under TA 4889-UZB, the following enterprises, notably outlined in President’s Resolution No 511 dated November 16, 2006 have been previously identified:

(i) 7 road construction enterprises responsible for the maintenance of national-level and international public roads;

(ii) 13 regional level road maintenance organizations responsible for coordination of works on maintenance of public roads in their respective regions or provinces; and

(iii) 161 road construction and maintenance enterprises involved in maintenance of public roads in their respective districts.

The Consultants further understand that their work should be focused on the 7 above mentioned road construction enterprises responsible for the maintenance of national-level and international public roads as those enterprises are most likely to bid under ADB-financed projects for procurement of contract for capital repairs and construction of public roads.

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METHODOLOGY

1. KICK-OFF MEETINGS

From February 20 to 26, 2008 the Consultants met with Messrs. Olly Norojono, Project Economist, Infrastructure division, CWAD, John Versabtvoort, Legal Consultant, Office of the General Counsel, Walter Poick, Senior Procurement Specialist, Central Operations Services Office, Anthony J. Jude, Principal Energy Specialist, Infrastructure Division, Southeast Asia Department, Chin Chwoon Sam, Principal Portfolio Management Specialist, Head, Project administration unit, Transport Division, East Asia Department, and Jeff Taylor, Procurement Specialist, Central Operations Services Division 1, Central Operations Services Office, in the ADB Head Office in Manila. During these kick-off meetings, the Consultants have obtained:

- Clarification on the TOR and the scope of the assignment; - Confirmation of ADB’s expectations for the assignment; - Confirmation of working schedule; and - Confirmation of contact points for support during the assignment.

Following the kick-off meetings, the Consultants prepared an action plan and methodology to implement the project which is presented in Annex A.

2. PREPARATORY WORK

In preparation for the implementation of the project, the Consultants:

(i) Reviewed similar assessments undertaken by ADB and/or other development agencies for other countries, such as Vietnam and the People’s Republic of China; (ii) Reviewed and became familiarized with ADB’s policies, guidelines, procedures, and documents, particularly those related to participation in ICB and eligibility for participation in ADB-financed projects, as well as other aid agencies operating in Uzbekistan; (iii) Reviewed preliminary findings on the eligibility assessment of Uzavtoyol enterprises completed under TA 4889-UZB in November 2007; (iv) Reviewed existing technical assistance programs implemented by ADB and other agencies operating in Uzbekistan in order to ascertain current views among them.

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The Consultants, with the support of national consultants:

(i) Reviewed the legal and regulatory framework applicable to SOEs, in order to gain a better understanding of the environment in Uzbekistan; (ii) Developed a consistent questionnaire with orientation toward the TOR and the provisionally identified issues, for completion by relevant representatives of Uzavtoyol enterprises (see Annex B); and (iii) Established a comprehensive schedule of interviews and meetings with relevant representatives of SOEs and relevant stakeholders.

3. IMPLEMENTATION OF THE PROJECT

The Consultants divided their work into four components as follows:

(i) Consultations with stakeholders:

In order to gather an overall picture of SOE operations and existing reform programs in Uzbekistan, the Consultants held discussions with: - Multilateral and bilateral donors: - ADB resident Mission; - World bank and IFC resident Mission - JBIC representatives; - EBRD representatives; - Islamic Development Bank representatives; - Any other relevant agency. - Private and foreign sector representatives: - Reputable international commercial bank representatives; - Reputable international auditing company representatives; - Reputable international Law firm representatives; - Representatives of Uzbek private sector in road and transportation sectors; - Major trade associations. - Uzbek Administration - Presidential Cabinet; - Cabinet of the Government; - Ministry of Finance; - Ministry of Transportation; - Ministry of Construction; 15

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- Public entities involved in State asset management; - Public entities involved in privatization or “corporatisation” of existing SOEs; - Road Fund representatives (managers and financial officers).

(ii) Consultations with SOE executives:

Such consultations aimed at gathering information related to, and ascertaining, the operational management of the SOEs to serve as support and practical background for further analysis.

(iii) Developed suggestions and recommendations:

In the course of implementing the project, the Consultants developed suggestions and recommendations regarding potential issues related to the eligibility of Uzavtoyol enterprises for ABD-financed projects. Initial findings and recommendations were presented in the Consultants’ Interim Report.

(iv) Organisation of a workshop in Tashkent to present to stakeholders and administration’s representatives their findings and set of recommendations (Minutes of the workshops are presented in Annex J).

(v) Organisation of a Study Tour for relevant Uzbekistan Government and Uzavtoyol officials to Indonesia to present implemented reforms to allow State-owned road enterprises to participate in ADB-financed projects (Study Tour organisation is presented in Annex K);

(vi) Finalisation of the report according to commentaries received form relevant stakeholders (received commentaries are presented in Annex L).

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SECTION 1: GATHERING AND REVIEWING ALL EXISTING UZBEKISTAN LAWS AND OTHER RELEVANT DOCUMENTATION, PARTICULARLY THOSE RELATED TO SOES, AND CONSULTING WITH ALL STAKEHOLDERS TO ACQUIRE A FULL UNDERSTANDING OF THE STATUS OF THE LEGAL FRAMEWORK FOR UZAVTOYOL ENTERPRISES

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Pursuant to the third item of the TOR, this section aims at describing and assessing the general framework applicable to SOEs and more specifically Uzavtoyol enterprises. Based on a review of existing laws and other relevant documentation related to SOEs and consultations held by the Consultants with different stakeholders, an assessment of the legal framework for SOEs and more specifically for Uzavtoyol enterprises may be as follows.

Annex C indicates the list of interviews conducted during the implementation of the project as well as the list of questions raised.

1. GENERAL REVIEW OF THE UZBEK LEGAL FRAMEWORK APPLICABLE TO SOES

1.1 Applicable Laws and Statutes

The Consultants have reviewed the current existing laws and regulations governing SOEs. An exhaustive list of the reviewed documents is attached in Annex D.

It is important to note that the international consultants have not seen any official translation in English of Uzbek legislation and any references made to legal texts and regulations in the body of report are extracted from unofficial translations that they received from ADB and various stakeholders. The international consultants could not assess the accuracy of the translation provided to them.

To the best of their knowledge, the Consultants are not aware of any substantial program of reform which could substantially impact on the legal framework applicable to SOEs in Uzbekistan.

1.1.1 Definition and typology

According to data published by the State Property Management Committee competent to maintain a register of existing SOEs, as of January 1, 20061, there are:

- 16,597 State unitary enterprises and organisations; - 958 privatized enterprises having state share in their authorized capital; - 46 State enterprises or objects abroad.

1 See http://www.kgi .uz/index.php?option=com_content&task=view&id=62&Itemd=36 18

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Among the 958 privatized enterprises (335 joint stock companies and 623 limited liability companies) having State shares in their authorized capital, there are:

- 435 economic entities where the State shares shall be kept; - 324 economic entities where the State shares shall be sold; - 199 economic entities where a decision to retain or sell State shares has not been made yet.

(a) SOEs are established pursuant to a decision of a State body

SOEs appear to be entities established according to a decision of a State body2 or result from denationalization or privatisation.

For example, SJSC Uzavtoyol was established according to Decree of the President of the Republic of Uzbekistan No PF 3292 dated August 19, 2003 and Resolution of the Cabinet of Ministers of the Republic of Uzbekistan No 361 dated August 21, 2003.

As for Uzavtoyol “member entities”, i.e., the 7 road construction enterprises responsible for the maintenance of national-level and international public roads (“G7”), such entities were established according to specific resolutions of the President of the Republic of Uzbekistan, e.g., the company, Specialized Operation and Maintenance Firm of North-West Automobile Roads Having International or Local Importance was established according to Resolution of the President of the Republic of Uzbekistan No. PK 511 dated November 14, 2006.

2 Articles 70 to 72 of the Civil Code and Annex 1 to Resolution of the Cabinet of Ministers No 215 dated October 16, 2005. Such State bodies notably comprise : - The President of the Republic; - The Cabinet of Ministers; and - Other competent State bodies. 19

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Comparative time-schedule for the establishment of SOEs and private companies

Private company LLC or JSC with State Establishment steps State Unitary Enterprise (LLC or JSC) share in authorized capital 1 Rendering a decision The founders/shareholders The President, the Cabinet The process of rendering a by founders/ convene a meeting, at which of Ministers, the State decision for the shareholders they render a decision on Property Committee, or establishment of LLC or JSC establishment of a company, other authorized State with 100% State share is the its legal form (LLC, JSC, agency render on behalf of same as that for the State etc.), amount of authorized the State a decision to Unitary Enterprise. capital, number of shares establish a State Unitary In case of LLCs or JSCs and their distribution among Enterprise, in which it with less then 100% State shareholders, etc. specifies all essential shares, the LLC or JSC is dispositions related to the generally established as a establishment of the result of privatization of an enterprise SOE or corporatization of State assets [objects]. 2 Capitalization of According to Resolution of the Cabinet of Ministers No. 357 dated August 20, 2003, by authorized capital the time of applying to the registration authority, all shareholders must have their shares already contributed by at least of 30% of the authorized capital. Capitalization of the authorized fund is allowed by shareholders’ contributions in form of property or cash money. The above provisions apply to all forms of commercial legal entities. 3 Application to According to Resolution No. 357, upon rendering an establishment decision and preparing registration authority all the required documentation, the founders/ shareholders must apply to the registration authority following the same application procedure which shall apply to all forms of commercial legal entities. 4 Rendering a decision According to Article 44 of the Civil Code, a legal person shall be considered to be created on registration from the moment of the State registration thereof. According to Resolution No. 357, a decision on State registration of a legal entity [or decision on refusal of State registration thereof] shall be rendered by a registration authority within 3 working days as of the date of submitting the application for registration. The above provisions apply to all forms of commercial legal entities. 5 Appointment of key Once a decision on State registration of a legal entity is rendered by the registration managers and senior authority and relevant certificate of registration is issued, the founders/shareholders take officers decisions concerning the corporate structure, appointment of managers, business-plan, etc.

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Scheme of State registration of commercial entities according to Annex No.2 to the Resolution of Cabinet of Ministers No 357 dated August 20, 2003

FOUNDER/SHAREHOLDER OF COMPANY (1)

CHAMBER OF COMMERCE / CONSULTING FIRMS / OTHER PERSONS 4) ( RENDERING SERVICES (1)

(2) TAX AGENCIES REGISTRATION AUTHORITY: AGENCIES - MINISTRY OF JUSTICE OF THE REPUBLIC (3) OF OF UZBEKISTAN; MINISTRY (3) - MINISTRY OF JUSTICE OF THE REPUBLIC OF INTERIOR OF KARAKALPAKSTAN, REGIONAL STATISTICS DEPARTMENTS OF JUSTICE; AGENCIES - INSPECTIONS FOR REGISTRATION OF BUSINESS ENTITIES. Notes: 1. Preparation of charter documentation (through assistance of Chamber of Commerce, consulting firms, other persons, or by the founder himself). 2. Submitting documents to the Registration authority. 3. Consideration of the documents by the Registration authority and rendering a decision on registration (along with registration with the relevant agencies) or on refusal to register, as well as getting a permit from agencies of Ministry of Interior for fabrication of seal and stamps. 4. Issuing a Certification of State Registration and permit of Ministry of Interior for fabrication of seal and stamps.

The registration procedure is, by and large, similar for all companies, whether private or SOEs.

(b) SOEs enjoy legal entity status

According to the decision of the State body which decided on their establishment and their charters3 and after registration to the relevant authority, SOEs are granted legal entity status.

3 § 3 of Uzavtoyol Charter provides that “Company Uzavtoyol, as a legal entity, has the right to operate property and personal non-property rights, and use this rights; it can have obligations, and act as plaintiff and 21

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As a legal entity, the SOE may be a party to legal proceedings.

Attributes of legal personality status according to Uzbek Law

According to Article 39 of the Civil Code of Uzbekistan, a legal person is defined as an organization which : - has solitary property in ownership [Sole ownership on property contributed to them], economic jurisdiction right or operative management right over [assets contributed to them] - is liable for its obligations with such property [or assets]; - may, in its own capacity, acquire rights and liabilities and effectuate patrimonial and non patrimonial transactions; - may be a plaintiff or defendant in court.

Legal persons shall have an autonomous balance sheet or estimate.

We may distinguish two main kinds of SOE:

(i) State unitary enterprise, and (ii) Limited Liability Company (“LLC”) or Joint Stock Company (“JSC”) having State shares in their authorized capital.

1.1.2 State unitary enterprises and LLCs or JSCs having state shares in their authorized capital

(a) State unitary enterprises

Such entity is defined as a “commercial organization”4 established by law or decision of a State agency5. The constitutive document of such entity shall be its charter6. The entity is granted a “right of operative management” on the State assets consolidated to it (as opposed to ownership)7. Furthermore, according to defendant in Court”. § 1.5 of Fergana Firm provides that “Being a legal entity, the firm may have separated balance sheet and bank accounts, its seal, …” 4 Article 70 of the Civil Code 5 Article 72 § 1 of the Civil Code 6 Article 72 § 2 of the Civil Code 22

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Article 70 of the Civil Code, the assets consolidated to a unitary enterprise shall be indivisible and may not be distributed according to contribution.

Assets consolidated to a State unitary enterprise are indivisible and may not be distributed. Furthermore, the State unitary enterprise does not have full ownership of the assets consolidated to such enterprise.

“Right of operative management”

1. Definition

Article 178 of the Civil Code provides: “A State enterprise, and also institutions, with respect of property [assets] consolidated to it, shall effectuate within the limits established by Law and in accordance with the purpose of it activity, the planning tasks of the owner [the State], and designation of the assets, the rights of possession, use and disposal thereof. The owner of the assets consolidated to a State enterprise or institution shall have the right to remove the property which is surplus, not being used, or being used not for its purpose and to dispose of it at its discretion”8.

2. Disposal of assets under operative management

By virtue of Article 24 of the Law “On Property” dated October 31, 19909, as amended from time to time, by implementing the right of management of State assets an SOE may possess, use and command the given assets and, at its own discretion, may dispose of such assets in any other manner provided such disposal does not contradict the Law. However, according to Article 179 of the Civil Code, a State enterprise shall have the right to alienate or dispose of the assets consolidated to it only with the consent of the owner of the assets. Annex I to the Resolution of the Cabinet of Ministers No 215 dated October 16, 2006, elaborates this provision of the Civil Code and provides in the

7 Article 72 § 4 of the Civil Code in connection with Articles 178 and 179 of the Civil Code and Resolution of Cabinet of Ministers No.215 dated October 16, 2006 on State owned enterprises. 8 Annex I “Regulations on State-Owned Enterprises” to the Resolution of the Cabinet of Ministers No. 215 further provides that the Founder is entitled to remove any redundant, unused or used for other purposes property of state-owned enterprise and dispose of it. 9 Law on Property : Article 24. Property [assets] of a State Enterprise provides:

1. The assets which are in State ownership and are assigned to the State enterprise, belong to it with the right of complete economic management. 2. By implementing the right of complete economic management of its assets, the enterprise owns, uses and commands the given property and, at its own discretion, can conduct any actions towards it which do not contradict the Law. 23

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following cases that the executive body shall be entitled to dispose of the State- owned enterprise’s property upon consent of the owner: - Sale of fixed assets, their renting or pledge; - Contribution of the property into authorized capital of economic societies [companies]; - Purchase of shares (stocks) of economic societies [companies]; - Sale of State shares (stocks) in authorized capital of economic societies [companies]; - Other alienation of property which is in compliance with objects of the State owned enterprise.

3. Status of income originating from use of property under economic management

According to Article 181 and 182 of the Civil Code, benefits, products and incomes engendered from the use of assets under operative management and property acquired by a unitary enterprise by virtue of a contract or by other means, shall come into the enterprise’s operative management.

According to Article 72 § 5 of the Civil Code, the State shall bear subsidiary responsibility for the obligations of the State unitary enterprise if its assets are not sufficient [to cover all its liabilities].

Furthermore, according to Article 179 § 3 of the Civil Code, the distribution of revenues of a State enterprise shall be determined by the State.

Chapter 7 of Annex I of the Cabinet of Ministers’ Resolution No. 215 dated October 16, 2006 provides that income gained by a SOE [State unitary enterprise], upon payment of all applicable taxes and other levies, shall remain at the disposal of the enterprise and shall be used in accordance with the decision of the owner.

It is further provided that a SOE may contribute its net profit to an emergency reserve fund and other types of funds as per the procedure and in the amount determined by its charter and approved by the owner.

The State shall be liable for the debts of a State unitary enterprise without limit. The State owns the assets consolidated to a State unitary enterprise and may remove and dispose of such assets at its discretion.

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The State shall determine how revenues of a State unitary enterprise shall be distributed.

(b) LLCs or JSCs having state shares in their authorized capital

The Civil Code and Uzbek legislations on enterprises10 provide notably for the following forms or types of commercial legal entities:

- Limited liability companies; - Additional liability companies; - Open joint-stock companies; - Closed joint-stock companies; - Unitary enterprises11; and - State unitary enterprises12.

As such, there are no specific definitions of a LLC or JSC having State shares in its authorized capital. It is understood that such companies are established and governed by laws and regulations applicable to all LLCs and JSCs, i.e., the Civil Code, Law No 310-II on limited liability and additional liability companies adopted on December 6, 2001, Law No 223-I on joint stock companies and protection of shareholders’ rights adopted on April 26, 1996 and their implementing regulations.

“LLC with State Capital” is understood as a LLC which has 100% or some other percentage of shares belonging to the State.

“JSC with State Capital” is understood as a JSC which has some percentage of shares belonging to the State.

In practice, however, reference to “State Joint-Stock Companies” appears to be made when a company is established by decision of the President or other relevant State body in the form of joint stock company with 100% shares

10 Law No 310-II on limited liability and additional liability companies adopted on December 6, 2001 and Law No 223-I on joint stock companies and protection of shareholders’ rights adopted on April 26, 1996. 11 If an enterprise is established by a private entity, who consolidates its property to the enterprise just for management thereof, then this is a “unitary enterprise”. In this case the title of possession of the property will be based on “economic jurisdiction”. 12 If, however, the founder of such enterprise (unitary enterprise) is not a private person, but the State, then this will be a “State unitary enterprise”, and possession of the property will be based on operative management.

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belonging to the State, which, in some cases, are not subject to sale or otherwise to alienation to third parties in whole or in part13.

These are usually large companies established in various sectors of the economy, and vested with both commercial and supervisory functions, where the State owns 100% of the shares, such as SJSC “Uzavtoyol”14.

Uzavtoyol is capitalized by the State (sole shareholder), the shares can not be sold or disposed of and there are currently no plans to open its shareholding.

1.1.3 Rights and obligation of SOEs

The rights and obligations of each SOE shall be provided for in the decision of the State body governing their establishment and in their charters.

In respect of Uzavtoyol15 and its member entities, their actions shall be guided by the Law of the Republic of Uzbekistan No 117, dated October 2, 2007 on Roads and its implementing regulations16.

Furthermore, some SOEs (and notably Uzavtoyol) are vested with regulatory functions over their sector of activities and, as the case may be, in the territories where they operate.

Regarding State unitary enterprises, enjoying legal personality, such enterprises shall have the right to manage assets consolidated to them and other resources entrusted to them to, in accordance with law, achieve tasks and activities assigned to them by the State17.

As regards non regulatory aspects of their activities (if any), SOEs are subject in many aspects to the same rules of contract, tort, access to credit, tax, customs, as all other private enterprises as Uzbekistan provides for a unified legal framework applicable to both State owned and private entities.

13 According to Resolution of the Cabinet of Ministers No 361 dated August 21, 2003 and Charter of Uzavtoyol § 18 (xiii) : “the shares issued at organisation of Uzavtoyol State Joint Stock Company shall be the property of the State and shall not be subject to sale or other use”. 14 Charter of Uzavtoyol § 18 15 Charter of Uzavtoyol §§ 5, 8, 10 16 Entity strategies shall be developed in accordance with Decree of the President of the Republic of Uzbekistan No N-PP 535 dated December 20, 2006 about measures as to development of Roads in 2007-2010. 17 Article 70 of the Civil Code 26

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However, there are several discrepancies pertaining to privileges provided by the Government to SOEs notably, regarding Uzavtoyol and its member entities (G7), in respect of tax duties and levies, e.g., Annex 3 to President's Decree No.PF-499 dated October 25, 2006 notably provides that all enterprises must pay levies to the Republican Road Fund, except for Uzavtoyol member entities (G7), State Unitary Enterprises are not subject to general bankruptcy laws and regulations and, in practice, have easier access to Governmental support provided as "prejudicial rehabilitation procedure" (see below), as well as some import duties, notably, starting from January 1, 2007, departments of “Uzyolbutlash” and Uzavtoyol (and its member entities (G7 notably) are exempted for 4 years of customs duties for imported road building machinery, equipment and spare parts.

1.1.4 Establishment, reorganization and dissolution

According to Article 72 of the Civil Code and Annex I to the Regulation on State- Owned Enterprises of the Cabinet of Ministers No. 215 dated October 16, 2006, a decision for establishment, reorganization and dissolution of a State unitary enterprise or a State Joint Stock Company shall be rendered by its founder, i.e. the authorized State agency, which can be:

- The President; - The Cabinet of Ministers18; - A body of Public Governance (e.g. ministry, state committee, etc.); - A local municipality.

Decisions for the establishment, reorganization and dissolution of a LLC or a JSC having State shares in their authorized capital shall be rendered by the General assembly of shareholders.

1.1.5 Exercise of State ownership

(a) State ownership of SOEs

According to Article 20 of the Law “On Property” dated October 31, 1990, the people of Uzbekistan are owners of State property.

The implementation of property rights on behalf of the people of Uzbekistan shall be executed by:

- The Olii Majlis (National Assembly);

18 There are 14 Ministers, 9 State Committees, 8 State Agencies, 3 Controlling agencies and several State economic management structures which constitute the Cabinet of Ministers of the Republic of Uzbekistan. 27

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- The President of the Republic; and - Authorized State administrative bodies.

Accordingly, the Government has appointed a special single State agency responsible for the management of State property – the State Property Committee.

This Committee carries out supervisory and managerial functions over State assets, including SOEs, either directly or by delegating its right to other state agencies or specialised trust companies. In this capacity the State Property Committee is entitled to take decisions on reorganization, dissolution or liquidation of SOEs, privatization and/or sale of State assets to private persons.

Nevertheless, the President and the Cabinet of Ministers may decide on the liquidation or restructuring of the companies they have established19.

In respect of SOEs in the road sector (G7 notably), it is Uzavtoyol which is charged, by delegation of the State Property Committee, with the rights of management of State assets in these enterprises on behalf of the State20.

(b) Exercise of State ownership over SOEs

As mentioned above, the State decides on the establishment, restructuring or liquidation of SOEs21 established in form of State unitary enterprises or State Joint Stock Companies (see section I 1.1.4).

In respect of the road sector, the State is substantially involved in the preparation of the development plans and strategies and in the establishment of objectives and orientations for the business development of the SOEs (G7 notably) operating in the sector22.

At the same time, the State has vested Uzavtoyol with various regulatory functions over the sector (see below).

19 In respect with Uzavtoyol, decision to terminate the activity of the company shall be taken at the initiative of the Board of the company or by decision of the Government at the initiative of authorized bodies according to the law. 20 Charter of Uzavtoyol § 12.(i) 21 Article 72 of the Civil Code in connexion with Annex I to Regulation on State-Owned Enterprises of the Cabinet of Minister No.215 dated October 16, 2006 22 Articles 4 & 5 Law No 117 on roads dated October 2, 2007 and Decree of the President of the Republic of Uzbekistan No N-PP 535 dated December 20, 2006 about measures as to development of Roads on 2007-2010 years (articles 2 to 4) and its annexes I and II. 28

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In respect of assets contributed or consolidated to SOEs, as mentioned above, the State shall approve all operations of the SOEs which could impact on the property under their management23. Moreover, according to Article 179 § 3 of the Civil Code, distribution of revenues of a State [unitary] enterprise shall be determined by the State (see above).

Finally, the State is directly involved in the designation of the managers and key corporate officers who shall be responsible for the day to day management of the enterprises (see below).

The extent and methods of State ownership give the State substantial control over the activities and the operations of the SOEs which also often comprise both commercial and regulatory functions.

1.1.6 Organisation of management

(a) Organisation of management in a State Unitary Enterprise

SOEs established in the form of a State unitary enterprise usually have one single person (referred to as “director” or “general director”) as head of the company, who manages and commands all decisions relevant to the activity of the SOE.

The manager is the legal representative of the company and shall be personally accountable for the operation of the company, and may appoint deputies and other staff to assist him/her in the management of the SOE.

(b) Organisation of the management in LLCs and JSCs with State shares

(i) Board of Directors or Supervisory Council

A “Board of Directors” whose members are appointed by the owners or the shareholders to represent their interests by giving direction to management and carrying out oversight of manager performance, is not per se provided for in Uzbek laws governing JSCs and LLCs. However, the law provides for a “Supervisory Council”, common in larger joint- stock companies and limited liability companies.

This corporate body is designed to protect shareholders’ interests and to represent them equally in the executive branch of the company.

23 Article 179 of the Civil Code 29

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The following are notably within the competence of the Supervisory Council24:

- determination of the major lines of the company's activity; - calling of annual and extraordinary general meetings of shareholders; - increase of authorized funds of the company by increase of the par value of shares or by issuing additional shares; - issuing bonds and securities; - determination of market value of property; - purchase of shares, bonds and other securities; - approval of annual business-plan; - opening of representative offices and establishment of branches; - establishment of subsidiary and dependent enterprises; - entry into large transactions; - entry into transactions with affiliated and interested persons.

(ii) State Trustee25

The “State trustee” is an individual person or a professional company hired by the State (State Property Committee) to represent the State’s interests in the corporate structures of various business entities, in which the State has its assets (shares, stocks).

The regulations relevant to the appointment, dismissal, rights and obligations of “State trustees” are provided for in the above mentioned Resolution of the Cabinet of Ministers No 189 dated April 19, 2003, and Resolution registered by the Ministry of Justice No 1473 dated April 30, 2005.

(iii) Internal Audit

On September 27, 2006, the President of Uzbekistan issued a Resolution No. PP-475, by which it resolved:

- to establish starting from 1 January 2007, “internal audit services” in joint-stock companies with a balance value of assets exceeding 1 billion Uzbek sums; and - in enterprises with the State shares in charter capital over 50%, an auditing company for external audit of the enterprise

24 Articles 36 and following of Law on LLC, Articles 82 and following of Law on JSC 25 Resolution No. 189 of the Cabinet of Ministers dated April 19, 2003. 30

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shall be selected on a competitive basis (by means of competitive bidding) from a list of auditing companies determined by the State Property Committee and the Ministry of Finance.

Following the above President’s Resolution, relevant amendments were introduced into the Law “On Limited Liability and Additional Liability Companies26” and the Law “On Joint-Stock Companies and Protection of Shareholders’ Rights”27, which reflect the above requirements.

In Resolution No. 215 dated October 2006, the Cabinet of Ministers has endorsed these requirements and provided for guidance for implementation.

The main functions of this corporate body are to control the activity of the executive and other corporate bodies of the company and to assess their effectiveness.

The staff of the internal audit service is appointed by and directly accountable only to the supervisory council of the company.

(iv) Management28

A LLC or JSC could be managed by one manager or a board of managers appointed by the owners or the shareholders. In such case, the chairman of the board of managers may act as executive manager of the company.

The manager is usually appointed and dismissed by the entity having decided on the establishment of the company. The manager is the legal representative of the company and shall be personally accountable for the operation of the company.

By its Resolution No. 189 dated April 19, 2003 the Cabinet of Ministers has approved a number of Regulations aimed at raising the effectiveness of corporate management of privatized companies and notably developed a Model Contract for the Employment of the Head of the Executive Body of a JSC (Director) which elaborates on his/her rights and duties, and main functions and liabilities.

26 Articles 45 and 46 27 Articles 110 and following. 28 Regarding regulations applicable to management in a LLC see art 39 and following of Law on LLC and in a JSC see Art. 80 and following of Law on JSC. 31

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The main provisions of the Model Contract are the following:

- the contract provides for a fixed-term employment for one year. - in course of his/her employment the Director must observe the laws, company charter, decisions of the general assembly of shareholders and of the supervisory council. The Director shall be deemed to be the sole executive body (head of the “collegial executive body” or board of managers) of the company. - The Director shall bear liability for harm caused to the company by his/her guilty actions (or failures to act) in accordance with the procedure provided by the Labour Code of Uzbekistan and other legislation.

This contract may be terminated ahead of schedule by the company: - On grounds stipulated in the Labour Code of Uzbekistan; - Upon decision of the general assembly of shareholders or of the supervisory council (provided the latter is conferred such a power by the charter), including in cases of violation of shareholders’ rights; substantial worsening of the financial standing of the company; unjustified reduction of the volume of production of goods, services, and works; signs of bankruptcy or threat of bankruptcy; overdue debts before the State budget.

According to the Model Contract, the Director shall have the following duties: - Within the scope of his/her competence, he/she shall manage the daily activity of the company ensuring its effective and stable operations, except for issues within the exclusive competence of the general assembly of shareholders and the board of directors (the supervisory council); - Ensure observance of decisions of the general assembly of shareholders and the board of directors (supervisory council); - Submit to the general assembly of shareholders and the board of directors (supervisory council) at established terms the quarterly report on progress of implementation of the annual business- plan, and reports concerning his/her scope of activity; - Direct the work on drafting programs and business-plans on the company development, to ensure and control their observance; - Ensure observance of contractual obligations of the company; - Ensure obtaining profits in the amount needed for development of production sites and for social purposes; - Ensure observance of law in the activity of the company;

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- Ensure organization, due condition and reliability of book- keeping and reporting of the company accounts, timely submission of the annual report and other financial reports to appropriate agencies, and of the information about the company activity to be transmitted to shareholders, creditors and other recipients; - Ensure free access to the financial documentation of the Company upon request of the internal audit services or the auditor of the company; - Ensure full and timely presentation of statistical data to the appropriate agencies; - Ensure effective coordinated action of the production units of the company; - Refrain from disclosing confidential information, unless he/she is authorized to transmit such information to third persons. The list of information that is regarded as confidential shall be defined by the board of directors (supervisory council) of the company. - Ensure nondisclosure by the company employees of the information regarded as commercial secrets; - Arrange the meetings of the board of managers, sign the documents on behalf of the company and minutes of the meetings of the board of managers; - Take measures to provide the company with skilled staff, and to ensure best use of knowledge, qualifications, experience and skills of the company staff; - Ensure observance of labour and technological standards, observance of social guarantees and protection of employees rights; - Ensure participation of employees’ representatives in collective negotiations, to act as employer for the purpose of signing collective agreements and contracts, to perform the duties specified in the collective agreement; - To get approval of the board of directors (supervisory council) for long-term business trips and long-term vacations, inform the board of directors of the person appointed as acting manager during the absence of the Manager.

The Company shall have the following duties towards the Director: - Not to interfere in the activities assigned as the Director’s area of competence according to the law, charter of the company or by his/her employment contract; - Observe the terms and conditions of the employment contract;

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- Provide the Director with means and materials needed for effective execution of his/her duties and rights.

The Director shall be entitled to the following: - Independently decide all the matters concerning the daily activities of the company within his/her area of competence as provided by the law, the charter or this employment contract; - Act on behalf of the company without the need of having a special power of attorney, and to represent the company’s interests before other entities and agencies, open bank accounts, enter into transactions, except for transactions that are within the exclusive competence of the general assembly of shareholders or the board of directors, dispose of the property and money assets within the limits specified by the charter of the company; to sign contracts and agreements, issue powers of attorney and enter into correspondence; - Approve the structure and staff list of the company, to sign and terminate employment contracts with the company staff; - Negotiate on behalf of the company the terms and conditions of collective agreements and to sign thereof; - Issue within the scope of his/her authority, orders and instructions mandatory for execution by all employees of the company; - Give rewards to the company employees; - Require the company employees to observe internal rules of conduct, other rules and regulations of the company and of the conditions of signed employment contracts; impose disciplinary penalties upon employees who violate the rules of conduct; - Determine the volume and list of information regarded as official and commercial secrets of the company, which shall be specified in the employment contracts with the company staff. The Company shall be entitled to the following: - Carry out control over observance by the Director of the existing laws, of the company charter, of decisions of the general assembly of shareholders and of the board of directors; - Request the Director to perform his/her duties under this employment contract faithfully and completely; - Reward the Director; - Impose disciplinary penalties upon the Director.

According to this Model Contract, managers’ fiduciary duties towards the company and reporting duties to the owner are well defined.

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As this is only a model contract, its use is not mandatory for all JSCs. However, in practice many JSCs, especially those with State assets in their capital, do use this model document when hiring their managers.

1.2 Provisions regarding financial management and auditing

SOEs are required by law to have separate accounts and their own financial statements. Pursuant to the Law on LLCs dated December 6, 2001, and Law No 223- I on JSCs dated April 26, 1996, only JSCs are required to have their accounts independently audited. Similarly, companies having State shares in their authorized capital are required to perform such audit on a yearly basis.29 There is, however, no requirement to make audited accounts available to the public except for listed companies.

Uzavtoyol and its member entities (G7 notably) are required by law to have their accounts independently audited, however such entities do not publish their audited financial accounts. Further to being a mandatory requirement for eligibility for ADB-financed projects, accurate and complete financial statements and accounts play an essential role in the assessment of an enterprise. Annual publication of audited accounts could serve further as strong incentive for the management.

1.3 Provisions regarding dissolution and bankruptcy

Article 57 of the Civil Code provides that legal entities having a commercial purpose, except SOEs, along with consumer cooperatives and public funds, can be declared bankrupt if they are not able to satisfy their creditors’ claims.

The Law on Bankruptcy dated April 24, 2003, in its Article 2 provides that this Law shall not apply to “State-financed organizations”. The Commentary to the Law “On Bankruptcy” states that the Law does not apply to State unitary enterprises and State- financed institutions, which operate entirely at the expense of the State30, as well as to political parties and religious organizations regarded as public associations31.

29 Article 111 § 3 of Law on JSC: “Companies whose State-owned share in authorized funds exceeds fifty per cent, choose audit organization with a view to carry out audit on a competitive basis from the list determined by the Stare committee of the Republic of Uzbekistan for state property management and the Ministry of Finance”. 30 This view is further substantiated in Article 72 of the Civil Code which provides that the State shall bear subsidiary liability on all obligations of a State-owned enterprise when it does not have enough assets to pay out debts. 31 Article 2 §2of the Law «On Guarantees of Freedom of Entrepreneurship» adopted on March 25, 2000. 35

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LLCs and JSCs having State shares in their authorized capital are however subject to bankruptcy regulations.

Via the Special Fund for Support of Entrepreneurship and Restructuring of Enterprises under the Bankruptcy Commission of the State Antimonopoly Committee, the Government may decide to assist some insolvent enterprises.

One form of Government assistance is the so-called “prejudicial rehabilitation procedure” defined in Articles 30-34 of the Law on Bankruptcy No 474-II dated April 24, 2003, and in Annex II of the Cabinet of Ministers Resolution No 362 dated July 26, 1999.

Prejudicial rehabilitation is applied to prevent bankruptcy of an insolvent enterprise and is aimed at restoring its payment capacity. Since the prejudicial rehabilitation is an extrajudicial procedure, the economic court does not participate in this procedure, which distinguishes this procedure from formal bankruptcy proceedings carried out under the court’s control and guidance.

Annex 2 to the Resolution of the Cabinet of Ministers No. 362 dated July 26, 1999 provides that the following entities may benefit from a “prejudicial rehabilitation procedure”:

- enterprises that produce vitally important foodstuff and nonfood consumer goods, and medicines; - enterprises that ensure defense capacity and security of the State; - enterprises of basic sectors (mining, energy, metallurgy, chemical and other sectors) that play certain role in the development of the country economy; - enterprises that produce competitive, export oriented and import- substituting goods; - enterprises that ensure production of modern high-productive technologies and deployment into economy sectors of new progressive resource-saving technologies; - enterprises included by the State Antimonopoly Committee into programs of complex restructuring and financial rehabilitation plans.

It further stipulates that “main criteria in order to determine when and whether “prejudicial rehabilitation procedure” could be applied to economically insolvent enterprises, shall be the results of analysis of the financial and business activity of such entities, which demonstrate “existence of real perspective of restoring payment capacity of the debtor entity in order to help it continue its operation”. This analysis is provided by the State Antimonopoly Committee.

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Considering the above and reference to “basic sectors (mining, energy, metallurgy, chemical and other sectors) that play certain role in the development of the country economy”, SOE in the road sector (G7 notably) are likely to be eligible to “prejudicial rehabilitation procedures” and enjoy Government support.

In application of such procedure, the Government may notably grant the following types of support: - full or partial buy-out of overdue debts; - outsourcing of highly qualified specialists; - training and re-training of personnel; - Postponement of the discharge of duty on mandatory payments and loan repayments for the period of prejudicial rehabilitation.

Limited application or no application of bankruptcy and liquidation laws and statutes to SOEs established in the form of State unitary enterprises could expose commercially viable firms, including local and international firms who bid for contracts in Uzbekistan, to entities that are no longer commercially viable and by doing so hamper effective and fair competition in the market.

1.4 Uzavtoyol

1.4.1 Establishment

Uzavtoyol has been established in the form of a State Joint Stock Company according to Decree of the President of the Republic of Uzbekistan PF 3292 dated August 19, 2003 and Resolution of the Cabinet of the Minister of the Republic of Uzbekistan No. 361 dated August 21, 200332. Uzavtoyol is the successor of the State Concern for Construction and Use of Motor Roads “Uzavtodor”. The Resolution of the Cabinet of Ministers No 361, dated August 21, 2003, further elaborates on the establishment of Uzavtoyol, namely by providing for the organizational corporate structure of Uzavtoyol and the procedure of appointment of its senior officers (see below).

32 Charter of Uzavtoyol § 1 37

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1.4.2 Capital and assets33

(a) Authorized capital

According to paragraph 18 of the Charter and Resolution No. 361, the authorized capital (in the form of shares) of the Company is 66,108,000 Sum and is contributed in the form of “basic assets of the public roads” and by the property of the former State Concern “Uzavtodor”.

The total amount of the authorized capital is not in proportion with the tasks assigned to the Company.

Understanding the notion of “basic assets of the public roads”

“Basic assets of the public roads” are not clearly defined in the existing Governmental regulations and the Charter of Uzavtoyol. “Basic assets” is not a legal term per se34, but has a meaning in the field of accounting.

From an accounting point of view, basic assets [or capital assets] are defined as tangible property that is a type of asset that is not easily sold in the regular course of business operations and are generally held in ownership because they contribute to the business’s ability to generate profit. Examples include land, buildings, machinery, etc.

Our understanding of “basic assets of the public roads” is that these are tangible properties used over a long period for purposes of construction, repair, reconstruction, maintenance and use of public roads, such as road equipment, machinery, construction buildings, asphalt plants, etc. It shall not include lands and the roads attached to it as according to Article 9 of the 2007 Law on Roads "public roads are deemed to be under State ownership and under management of specially authorized body"..

33 §18 of Uzavtoyol Charter 34 Only one instance of a definition could be fund. i.e. capital assets, fixed assets – long-term material assets of a company used on a long-term basis in course of its commercial activity, e.g. plants, equipment, machinery, buildings, premises, etc. In the national legislation of Uzbekistan the term “basic assets” is defined as fixed assets, equipment ready for installment, incomplete construction objects, fixed assets rented on a long-term basis (“Regulation on Annual Revaluation of Basic Assets as of 1 January” registered by the Ministry of Justice on 4 December 2002 No.1192). 38

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Paragraph 18 (xiii) of the Charter provides that shares issued in the process of establishment of Uzavtoyol shall be State property and shall not be subject to sale or be disposed of in any other way.

(b) Assets

According to paragraph 18 sub paragraph 2 and Resolution No. 361, the assets of the company shall consist of:

(i) Its property as the successor at law of “Uzavtodor” Concern; (ii) Basic funds and working capital; (iii) Shares of the Company participants in establishing authorized capital of the Company35; (iv) Annual membership fees of the Company participants paid to the Company’s fund in kind, cash and in foreign currency; (v) Other types of inventory holdings reflected in the Company’s individual balance; (vi) Assets assigned to the Company with the right of economic management; (vii) Profits from production-economic activity (for establishing self- financed branches); (viii) Income received from the Company’s activities; (ix) Income and dividends received from issuing and selling securities; (x) Shares and other types of securities being of state property, but not allowed for sale; (xi) Authorized capital of “Uzavtoyol” State Joint Stock Company shall be formed from the basic funds of the automobile roads of general use36; (xii) Authorized capital of the entities using regional motor roads shall be formed from the basic funds given to them from the regional automobile roads of general use, as well as assets of the restructured regional state joint stock unions; (xiii) The shares issued at organization of “Uzavtoyol” State Joint Stock Company shall be the property of the state, and shall not be subject for sale or other use; (xiv) Authorized capital of “Uzavtoyol” State Joint Stock Company shall be formed from other sources not contradictory to the existing legislation.

Such assets belong to Uzavtoyol (right of ownership as opposed to right of economic management) and could be used and disposed of at Uzavtoyol’s discretion and in Uzavtoyol’s interests. Similarly, income generated from use of such assets shall belong to the company37.

35 NB An alternative translation could be "Member-fees of the Company's member-entities paid as contributions to the authorized capital of the Company". 36 NB See comments above 37 Articles 58 and 182 of the Civil Code 39

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However, the public roads remain under State ownership, which shall be managed by Uzavtoyol pursuant to Article 9 of the 2007 Law on Roads.

1.4.3 Legal status

According to President’s Decree No. UP-3292 and the Cabinet of Ministers’ Resolution No. 361, Uzavtoyol is established as a joint stock company with the State having 100% shares in its charter capital.

According to Paragraphs 3, 4 and 7 of its charter, Uzavtoyol is granted legal personality38 and may, with prior authorization of its owner, participate in other commercial organization consortiums, joint ventures or non-commercial organisations (such as sector associations).

Enjoying legal personality status, Uzavtoyol has separate balance sheets, bank accounts, stamps, seal and letterheads.

1.4.4 Objectives and responsibilities39

Decree No. UP-3292 defined the following objectives of Uzavtoyol which are further developed in the Charter of the company40 as follows:

- Carrying out unified technical, investment and external policy in the development and improvement of the motor roads network in the country; - Coordination of complex maintenance and ensuring due technical condition and throughput capacity of main roads, bridges, tunnels, first of all, of international and national level, and of the activity of the road construction organizations within the Company’s structure; - Determining the perspectives of development and improvement of motor roads network; - Providing coordinated handling of such issues as projection, construction, reconstruction, repair, maintenance and use of main roads;

38 According to Article 39 of the Civil Code of Uzbekistan, a legal person is defined as an organization which : - has solitary property in ownership [Sole ownership on property contributed to them], economic jurisdiction right or operative management right over [assets contributed to them] - is liable for its obligations with such property [or assets]; - may, in its own capacity, acquire rights and liabilities and effectuate patrimonial and non patrimonial transaction; - may be a plaintiff or defendant in court. 39 §§ 9 to 11 of the Charter 40 This objective is further developed in §§ 3 , 9, 10 and 11 of the Charter of the Company. 40

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- Control of the observance of the established quality rules and standards in performing construction and reconstruction works on main roads.

According to paragraph 10 of the Charter, the basic objectives of Uzavtoyol are defined as follows:

(i) Ensure full and complete fulfilment of the Law of Republic of Uzbekistan “On automobile roads” (i.e. motor roads); (ii) For development and improvement of all motor road structures, pursue unified technical, investment and foreign economic policy in designing, construction, operation and maintenance, regardless of subordination of road construction authorities; (iii) Coordinate activities related to rendering comprehensive services to motor roads, bridges, tunnels, first of all bridges and tunnels of international and national importance, and improve their technical conditions, and also coordinate the work on ensuring operation of contracting organizations in the structure of Company “Uzavtoyol”; (iv) Identify prospects on development and perfection of the structure of motor roads; (v) Ensure solution of comprehensive issues related to designing, construction, reconstruction, operation and maintenance, equipping of general motor roads; (vi) Monitor compliance with established rules and quality standards, while carrying out construction, repair and restoration works of general motor roads; (vii) Monitor preservation and efficient use of State property in road construction authorities; (viii) Together with concerned agencies and institutions of the Republic of Uzbekistan, take part in developing long-term concepts of road structure taking into consideration the future increase of the size of population, opportunities of the regions, strengthening defence capacities, and taking into account compliance with the rules related to environmental protection; (ix) Carry out continuous monitoring of the technical conditions of general motor roads, and ensure non-interrupted passage of vehicles; (x) Ensure the conduct of efficient road construction activities on the basis of contracts signed directly according to the State orders, and with companies, agencies and institutions, State governing bodies, managing bodies and foreign companies; (xi) Attract foreign partners to the country, and arrange and develop mutually beneficial foreign economic relations outside the country, enabling successful fulfilment of business performance of the Company “Uzavtoyol”;

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(xii) Together with company participants, create conditions for increasing profitability of production, improving production opportunities, and for improvement of the standard of living of labour communities.

According to paragraph 11 of the Charter, the responsibilities of Uzavtoyol are defined as follows:

(i) Carry out statistics of motor road structures in the Republic and evaluate their transport utilization conditions; (ii) Participate in developing national programs on social and economic development; (iii) Identify prospects of development and improvement of general automobile roads, and on this basis, determine the basic priorities of the investment policy; (iv) Ensure accounting and use of the defence complex in the automobile roads of general use, establish militarized road-bridge operation and maintenance groups in the structure of road construction authorities, ensure availability of reserves of materials and equipment for the road construction; (v) Identify priority areas of scientific-technical development, ensure development and introduction of joint scientific-technical programs; render assistance in introduction in operation of new techniques, advanced technology, efficient materials; (vi) Organize development and introduction of advanced rates and regulations; enter proposals for revision of old state road standards; (vii) Monitor conditions of road capacity on the highways; (viii) Coordinate the work of company workers in case of emergency situations (natural calamities, accidents and similar); (ix) Identify general principles of formation of prices in general use road constructions, repair and maintenance, and in production services of company employees; (x) Identify priorities in construction (reconstruction) of road structure projects having high economic and strategic importance for the country; (xi) Ensure provisional financial assistance to the company participants from the company’s centralized funds; (xii) Approve perspective and annual work plans of joint projects, accept financial statements of subordinate entities; (xiii) Conduct statistical analyses of performance of national road authorities; (xiv) Identify regulations on establishing and use of centralized funds of the Company; (xv) Distribute the company’s profits to shareholders and to the centralized funds;

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(xvi) Render assistance to the company shareholders by: provision of material- technical resources and; organizing production, labour and management; (xvii) According to the developed standards in the automobile road structure, arrange capacity building programs, training and qualification upgrading programs, including study tours abroad and invitation of experiences experts from other countries; (xviii) Solution of social programs; (xix) Arrange publishing, consultancy, engineering, facilitator and other services.

1.4.5 Rights and obligations41

The President’s Resolution No. 511 dated November 14, 2006 provides that Uzavtoyol shall be regarded as a specially authorized State body of regulation of main roads.

The main powers of Uzavtoyol as a State Agency in the road sector are defined in the newly adopted Law “On Roads”, which are:

- Working out and implementation of national programs for the development of main roads; - Determination of the perspectives of development and improvement of road networks; - Carrying out a uniform technical policy in the field of roads; - Securing the observance of norms and standards for designing main roads; - Carrying out control over quality of building, reconstruction, repair and maintenance of main roads; - Maintaining the State cadastre of main roads; - Developing proposals to the Cabinet of Ministers regarding the list of main roads of the Republic of Uzbekistan; - Preparation and retraining of personnel in the road sector; - other powers as may be provided for by the legislation.

According to § 12 of the Charter, as State authorized body responsible for managing general use automobile Roads, Uzavtoyol has the following rights:

(i) Within the given authority, manage concerned state property given to the company shareholders;

41 §§ 9 to 13 of the Charter 43

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(ii) Organize, reorganize, terminate road operation and maintenance agencies and organizations of different types, having status of regional road operation and maintenance bodies, making them responsible for regional road infrastructures and its assets (to include or exclude from balance sheet), appointing managers to these agencies; (iii) Within the given responsibilities, develop and approve internal office regulations and methodical documents; (iv) In coordination with concerned State bodies, enter proposals to the national government on restructuring and privatization programs, and perfection of acting regulations; (v) Maintaining the executive office of the company and the costs of maintaining the road authorities of the Republic of Karakalpakstan, and the regions of the country at the expense of the national Road Fund.

According to paragraph 13 of the Charter, as an economic entity, Uzavtoyol has the following rights:

(i) Act as company’s representatives in protecting its interests in relations with the State and other bodies, unions, firms and organizations; (ii) In coordination with the company’s shareholder, organize reserves and other funds, centralized financial, material-technical and other resources; (iii) From the centralized funds of the Company, organize self-financed branches, centres, firms, other servicing enterprises, open branches and representative offices in foreign countries, set up and close joint ventures with foreign partners; (iv) Carry out business activity outside the country according to the inter- state agreements, or on the basis of contracts signed with foreign partners; (v) Render contractual services according to the established order; (vi) Continuously identify forms, structures and rates of wages.

Uzavtoyol is vested with a broad array of regulatory duties which could engender potential conflicts of interest in its commercial activities and in the commercial activities of its member companies. Furthermore, the blending in a single entity of both commercial purposes and regulatory authority hampers the establishment of an effective level playing field between the various operators on the market. Finally, the performance of numerous regulatory functions, if not appropriately compensated, could impact on the financial standing of the Company (See Section III)

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1.4.6 Management bodies42

Management structure of Uzavtoyol

Cabinet of Ministers

Company Council

Audit Commission

Board of the Company (a)

Executive Office

Head of Department

(a) Collegial executive body or board of managers, the Chairman of the board shall act as executive manager.

(a) Company Council

The Resolution No. 361 provides that the highest corporate body of the Company is the Company Council whose members shall be appointed by the Cabinet of Ministers43.

Responsibilities of the Company Council comprise44: (i) Develop the concepts of improvement and perfection of structures of national motor roads; (ii) Identify basic directions of economic, scientific-technical and social development of the Republic’s road infrastructure; (iii) Review issues related to improvement acting legislation on road infrastructure and submit it to the national government; (iv) Approve the chairman of the Board of the company, deputies of the chairman of the Board, heads of departments, and also the structure of

42 §§ 21 to 30 of the Charter of the Company. 43 This provision is further substantiated in § 21 of the Charter 44 § 23 of the Charter 45

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the management of the company “Uzavtoyol” including representatives of organizations and agencies in its structure.

The Company Council shall be convened when needed but no less than two times a year. Decisions shall be taken by majority vote and each member shall have one vote45.

The duties of the Council as provided in paragraph 23 of the Charter are a combination of corporate duties and, public and regulatory functions which reflect the fact that Uzavtoyol has a dual role as a State body responsible for managing general use of motor roads and as an economic entity (as provided for in President’s Resolution of the President of the Republic of Uzbekistan No. 511 and in the company charter).

In accordance with Resolution of the President No. 424 dated July 24, 2006: the main tasks of the Council are: - Implement regular (quarterly) analysis of the dynamic indicators of the financial-economic performance indicators of the SOEs; - Ensure the implementation of necessary measures taken on perfection of corporate management, improvement of personal responsibility of executive bodies of companies and its subsidiaries, considering the principal assessment of results achieved by the management of these companies on accomplishment of tasks indicated in the approved business plans and their compliance with their positions; - In reviewing the results of the activities for the reporting year, critically review the effectiveness of the personal participation of the Council members in this process.

The actual composition of the Company Council is as follows46: 1. Hanov N.M. – Deputy Prime-Minister of the Republic of Uzbekistan, Chairman of the Council, 2. Fayzullaev R.F. - Chairman of the Uzbek Association of transport and transport communications, 3. Julibekov N.K. – Executive director of the Republican Road Fund at the Ministry of Finance of the Republic of Uzbekistan 4. Yakovlev I.G. – First deputy Chairman of the State Property Committee of the Republic of Uzbekistan 5. Kanyazov E.S. – Deputy Minister of Justice of the Republic of Uzbekistan

45 § 24 of the Charter 46 As provided for in Resolution of the President of the Republic of Uzbekistan No 424 dated July 24, 2006: 46

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6. Shovahabov Sh.Sh. – Deputy Head of Uzbek agency of automobile and river transport 7. Tulaganov Sh. A. – Deputy Minister of Economy of the Republic of Uzbekistan 8. Kuldashev A.H. – Deputy Minister of Internal Affairs of the Republic of Uzbekistan 9. Achilov M.K. – Deputy Chairman of State Committee for Architecture and Construction of the Republic of Uzbekistan 10. Irmatov Sh.M. – Chief specialist of the department of analytical information in the field of communication, transport, capital development and building industry of the Cabinet of Ministers of the Republic of Uzbekistan.

(b) Board of the Company

The Charter of the Company provides for the establishment of a “Board of the Company”, whose members comprise representatives of Uzavtoyol member entities shall have the following responsibilities47: (i) Ensures the realization of the [Company Council]’s directives; (ii) Ensures preparation in advance of all issues to be considered at Board meetings, prepares drafts of the directives to be approved at Board meetings; (iii) Establishes the scientific-technical council of the Company [Road Builders Council]; (iv) Takes decisions on other issues, which are not part of the direct responsibility of the Company.

The Board of the Company shall be convened at least once a month. Decisions shall be taken by majority vote48.

The Chairman of the Board of the Company, acting as executive manager, and his/her deputies shall be appointed by the Cabinet of Ministers upon recommendation of the Company Council49.

However, Uzavtoyol representatives informed the Consultants that such board was no longer in place and was substituted by an “executive office” chaired by an executive manager (see below in “management”) appointed by the Cabinet of Ministers upon the recommendation of the Company Council.

47 § 26 of the Charter 48 § 27 of the Charter 49 § 22 of the Charter 47

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The executive manager shall be personally responsible for the operation of the company, and shall have the following rights50:

(i) Issue orders and decisions within his/her responsibility; (ii) Represent the Company in relations with other unions, agencies, and organizations; (iii) Sign contracts on behalf of the Company, including labour contracts; (iv) Sign financial, statistical and other documents, issue letters of credits; (v) In the established order, approve charters, related to the newly established departments and agencies of the Company; (vi) Approve the structure of the “executive office”[…] (vii) Take decisions on convening the next meeting of the Board of the Company.

He/she shall be assisted by an executive office51 where each department of the company are represented.

(d) Audit Commission52

According to the Company Charter, the Company Council shall establish an audit commission from experienced auditors recruited outside Uzavtoyol or its member entities. The audit commission shall supervise the financial activities of the Company and shall report only to the Company Council regarding results of the audits. The Company’s work shall be audited at least once a year.

Internal audit, only introduced recently has not yet been implemented in Uzavtoyol.

50 § 28 of the Charter 51 § 29 of the Charter 52 § 30 of the Charter 48

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1.4.7 Relationship with the State

The State is the sole shareholder of Uzavtoyol53 and according to paragraph 8 of the Charter, Uzavtoyol shall be subordinated to the Cabinet of Minister which was competent for its establishment54. As mentioned above, the State (and notably the Cabinet of Ministers) is deeply involved in the management (by way of nomination to the Company Council55, the Chairman of the Board [i.e. executive manager]56) and in the fulfilment by the Company of its regulatory duties as the State authorized body responsible for managing general use motor roads57 and in its operations (by way of setting orientations and strategies)58.

The State appears to exercise extensive control over all facets of the Company’s operations (notably in the field of decision making, orientations, and appointments). The State is greatly involved in the preparation of business plans and Company strategy59.

53 According to President’s Decree No. UP-3292 and the Cabinet of Ministers’ Resolution No 361. 54 § 1 of the Charter 55 § 21 of the Charter 56 § 22 of the Charter 57 § 12 of the Charter 58 E.g. § 10 (x) of the Charter 59 Decree of the President of the Republic of Uzbekistan No N-PP 535 dated December 20, 2006 about measures as to development of Roads on 2007-2010 years (Articles 2 to 4) and its annexes I and II. 49

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1.4.8 Relations with its “subsidiaries” or member entities60

SJSC “Uzavtoyol”

Regional Road Specialized International and Road Repair and Construction Maintenance Enterprises National Roads Repair and Enterprises Procurement Maintenance Enterprises Department Karakalpakavtoyul (SINRRME) “Nazarnekavtoyul” “Uzdorcomplekt” Andijonavtoyul Yul Loyikha Markazi (Road Design Bukharaavtoyul “Avtomagistral” (Tashkent) Centre) Jizzakavtoyul North-western (Nukus) JSC “Samararkand Obodonchiligi” Kashkadaryaavtoyul Bukhara-Navoi (Bukhara) CSJC “Olamalik Obodonchiligi” Navoiavtoyul Southern (Kashkadarya Province) LLC “Zomoin Kukalamzorlashtirish" Training Centres Namanganavtoyul Samarkand (Samarkand) LLC "Kashkadaryo Yul Ta'minot" Samarkandavtoyul Central (Syrdarya Province) LLC "Surkhandaryo Yul Ta'minot". Bukhara Surkhandaryaavtoyul Eastern (Kokand) LLC "Angren Obodonchiligi". Namagan Syrdaryaavtoyul "Uztyumendorstroy" Trust Tashkentavtoyul Ferghanaavtoyul Khorezmavtoyul

Industrial Enterprises Specialized Drilling and Blasting Enterprises Kuyluk experimental bridge reinforced District Road Maintenance and concrete structures production plant Repair Enterprises Taskent (Tashkent Province) "Chinozyulindustry" (161 units) Angren (Tashkent Province) "Yangiyeryulindustry" Karatau (Republic of Karakalpakstan) "Bekabadyulindustry" "Bukharayulgranite" "Uzyulmashservice" Specialized Bridge Repair and SJSC – State joint stock company Almazar experimental mechanical repair JSC – joint stock sompany Maintenance Enterprises ancillary production enterprise (12 units) CJSC – closed joint stock company LLC – limited liability company

60 §§ 14 to 16 of the Charter

Page 50 of 167

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Source: Resolution of the President of the Republic of Uzbekistan, “On measures for improvement of organizational structure of the State Joint-Stock Company Uzavtoyol”, No. PP-511 of November 14, 2006

Resolution of the President of Uzbekistan No. 511 dated November 16, 2006 notably identified:

(i) 7 road construction enterprises responsible for the maintenance of national- level and international public roads (G7);

(ii) 13 regional level road maintenance organizations responsible for coordination of works on maintenance of public roads in their respective regions or provinces; and

(iii) 161 road construction and maintenance enterprises involved in maintenance of public roads in their respective districts.

According to Paragraph 2 of the Charter, Uzavtoyol is described as the “founding company” of all State owned organizations and enterprises operating in the road sector. Their “assets” are notably accounted as Uzavtoyol assets61 and Uzavtoyol is charged with the rights of management of State assets in these enterprises on behalf of the State62.

Furthermore, Uzavtoyol is given the duty of coordinating all road works63 and is required to monitor the efficient use of State property by member entities64 which could receive provisional financial assistance in specific circumstances65.

It is further noticed that as authorized body for managing the use of roads, Uzavtoyol is competent for establishing, restructuring and terminating its subsidiary companies and agencies66.

Member entities, which shall pay an “annual membership fee”, have also the right to use services provided by Uzavtoyol to conduct their operations67 and shall, in priority, execute the contracts (alone or in joint venture with another member company) and obligations assigned to them by Uzavtoyol68.

61 § 18 (iii) of the Charter 62 § 12 of the Charter 63 § 10 (iii) of the Charter 64 § 10 (vii) of the Charter 65 § 11 (xi) of the Charter 66 § 12 (ii) of the Charter and § 18 (iv) of the Charter 67 § 15 of the Charter 68 § 16 of the Charter 51

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It is worth mentioning that Uzavtoyol shall not be liable for any debt of its member companies and vice versa69.

Paragraph 1.2 of the charter of the Firm (as defined below) provides that the Firm shall be directly subordinated to Uzavtoyol (see below).

Uzavtoyol has a mandate given to it by the State to supervise the use of the assets (referred to as “State assets”) consolidated to its members entities70 and may decide on their establishment, restructuring and termination71. The relationship between Uzavtoyol and its members companies (in particular the 7 road construction enterprises responsible for the maintenance of national-level and international public roads) is not based on capital contribution or control but relies on administrative authority.

1.5 Uzavtoyol enterprises (G7)

1.5.1 Preliminary note

As provided in the TOR, the Consultants have limited their investigation to the most relevant legal entities under Uzavtoyol, i.e., only those that will potentially qualify for civil works contracts under the actual road project of ADB. Therefore, the Consultants shall limit their research to the seven road maintenance companies operating on national and international roads of the Republic of Uzbekistan which are deemed capable to bid for the Project (G7).

Considering the limited time assigned for execution of the Project, the Consultants have studied only one of the seven above mentioned companies, i.e. “Special Operation and Maintenance Firm of Northern-Western Automobile Roads Having International and National Importance” (the “Firm” hereinafter). The Consultants understand from interviews with relevant stakeholders that the seven road maintenance companies operating on national and international roads of the Republic of Uzbekistan which are deemed capable to bid for the Project, are in a similar situation as the Firm and that the assessments and recommendations below could apply similarly to all seven road maintenance companies operating on national and international roads (G7).

1.5.2 Establishment

The Firm has been established in the form of a State Unitary Company pursuant to Decree of the President of the Republic of Uzbekistan No. PK 511 dated November 14, 200672.

69 § 20 of the Charter 70 § 12 and 18 (iv) of the Charter 71 § 12 (ii) of the Charter and § 18 (iv) of the Charter 72 § 1.1 of the Charter of the Firm 52

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1.5.3 Assets73

According to § 4.1 of the charter of the Firm and Resolution No. 361, the assets of the Firm, whose value is not determined, are referred to as State assets and shall consist of the following:

(i) Capital assets and circulating assets allocated by “Uzavtoyol” State Joint Stock Company; (ii) The income, received from reducing costs of repair and maintenance of motor roads of general use, and works and services carried out because of other form of activity; (iii) Credits of banks and of other creditors, and other sources not banned according to the acting legislation; (iv) Capital funds and subsidies, allocated from the State budget.

Being a State unitary enterprise, the Firm is granted a “right of operative management” over the State assets consolidated to it (as opposed to ownership)74. According to Article 70 of the Civil Code, the property of a unitary enterprise shall be indivisible and may not be distributed according to contribution.

Disposal of “basic assets” and restructuring of assets shall only be executed with the prior authorization of Uzavtoyol75 (as Uzavtoyol is charged with the rights of management of State assets in these enterprises on behalf of the State76).

1.5.4 Legal status

According to § 1.5 of its charter, the Firm is granted legal personality and has separate balance sheets, bank accounts, stamps, seal and letterheads.

1.5.5 Objectives and responsibilities77

According to paragraphs 2.1 and 2.2 of its charter, the Firm’s main objective is to ensure continuous year-round operation of automobile roads of national and international importance78 within the territory under its supervision.

73 § 4.1 to 4.3 of the charter of the Firm 74 Article 72 § 4 of the Civil Code in connection with Articles 178 and 179 of the Civil Code approved by Resolution of Cabinet of Ministers No.215 dated October 16, 2006 on State Owned Enterprise. 75 § 4.2 and 4.3 of the Charter of the Firm 76 Charter of Uzavtoyol § 12. 77 §§ 2-1 and 2-2 of the charter of the Firm 53

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The Firm may receive orders and instructions from Uzavtoyol and the Road Fund in the executions of its tasks79.

Such routine maintenance works are contract based, however, Uzavtoyol member entities (G7) are required to enter into such contracts and perform the required work80.

Finally, the Firm is entitled to undertake commercial activities in other sectors within the limits of applicable Laws81.

1.5.6 Rights and obligations82

The Firm shall be entitled to assign and subcontract to other companies, contracts and works for operations and maintenance of works within its responsibility. The Firm shall however remain liable for any deterioration of the conditions of the roads within its responsibility.

1.5.7 Management bodies83

The Firm is managed by one single person, the director, appointed by the Board of the Company of Uzavtoyol84.

The director is the legal representative of the company and shall be personally liable for the operation of the company and may appoint deputies and other staff to assist him/her in the management of the company85.

The management structure of the Firm is extremely simple and streamlined and is directly subordinated to Uzavtoyol86; which has extensive powers of direction over the Firm’s operations.

78 Different categories of road are defined in Article 9 of the Law No 117 dated October 2, 2007 on roads. 79 § 2.2 (ix) of the charter of the Firm 80 The Law on Roads provides that public roads shall remain under State ownership and that capital repair and maintenance work shall be performed by specialized road entities established or hired by the State. The charters of Uzavtoyol member entities also provide that they are deemed as specialized entity established for purpose of carrying out capital repairs and maintenance of public roads assigned thereto. 81 §§ 2.2 (xii) and 2.2 (xvi) of the charter of the Firm 82 §§ 3.1 and 3.2 of the charter of the Firm 83 §§ 5.1 to 5.3 of the charter of the Firm 84 § 5.1 of the Charter of the Firm 85 § 5.2 of the Charter of the Firm 86 § 1.3 of the Charter of the Firm 54

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1.5.8 Establishment of “subsidiaries”87

The Firm may establish independent subsidiaries which, closely managed by the Firm, shall assist it in the execution of its duties.

2. PRIVATIZATION AND DENATIONALIZATION OF TO SOES

Beginning with the 1991 Law on Privatization, a number of laws and decrees have provided the legal framework for privatization.

2.1 Basic Concepts

According to Article 1 of the Law on Denationalization and Privatization of November 1991, denationalization shall mean transformation of State enterprises and organizations into economic partnerships and companies, other enterprises and organizations, which are not public property.

Privatization shall mean acquisition of public property, objects, or shares of State joint stock companies by physical persons and non-State legal entities.

Denationalization and privatization may be executed by (i) reorganization of SOEs, i.e., State unitary enterprises, into economic partnerships or companies88, or (ii) sale of State owned property to non-governmental legal entities and individuals89 on a competitive basis (auction) as well as other forms not contradictory to law90.

Article 4 § 2 of the Law on Denationalization and Privatization provides that the following State assets shall not be subject to denationalization or privatization as follows:

(i) Land (with the exception of cases stipulated by the legislation), its depths, inland waters, air environment, flora and fauna within the territory of the Republic of Uzbekistan; (ii) Objects of cultural heritage, including State funds, book, cinema-, photo and phono-documents, archives and funds of research establishments, museums and museum values, as well as protected natural territories;

87 § 1.4 of the charter of the firm. 88 the decision on transformation of a State enterprise into an open JSC shall be taken by the State Property Committee or its territorial agency (Article 7.4 of the Law on denationalization and privatization). 89 Article 5 of the Law on Denationalization and Privatization 90 Article 6 of the Law on Denationalization and Privatization 55

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(iii) Funds of the state budget of the Republic of Uzbekistan, exchange reserves, State funds-in-trust, the Central Bank of the Republic of Uzbekistan, as well as gold reserves of the Republic of Uzbekistan; (iv) State organizations serving monetary circulation, enterprises and organizations manufacturing securities, orders, medals and postage stamps; (v) Enterprises, establishments and military-technical property (before industrial utilization, as well as those not liable to industrial utilization) belonging to armed forces, the national security service and the Ministry of Internal Affairs of the Republic of Uzbekistan; (vi) Enterprises and objects carrying out research and development work, development, production and sale of X-ray equipment, as well as devices and equipment using ionizing radiation sources; (vii) Enterprises and objects involved in mining, production, conveyance and processing of radioactive elements, radioactive waste disposal, sale of uranium and other fissionable materials and articles made of them; (viii) Enterprises carrying out development, production, repair and sale of armament and ammunition, means of protection, military machinery and equipment, spare parts and associated items and devices, explosives, pyrotechnic articles, as well as special materials and equipment required for their manufacture; (ix) Enterprises and organizations carrying out production, repair and sale of hunting and sports rifles and ammunition, as well as cold steel (with the exception of national souvenir knives); (x) Enterprises for production of virulent poisons, narcotics and poisonous substances, as well as those carrying out activity connected with sowing, growing and processing of crops containing narcotics and poisonous substances; (xi) State reserves of the Republic of Uzbekistan. Mobilization and civil protection objects and property; (xii) Specialized enterprises and organizations carrying out construction and erection work, maintenance, operation and repair of objects (installation of equipment, systems and apparatuses) of atomic energetic and strategic objects; (xiii) Specialized enterprises involved in transportation of explosives and poisonous substances; (xiv) Highways of general use. Militarized motorcades; (xv) Sanitary and epidemiological stations, bureaus of forensic medical examination, control service over a state of environment and protection of nature; (xvi) Treatment - production workshops, enterprises for enforcement of penalties/judgements; (xvii) Special enterprises (the Republic special communication unit, military unit No. 15361, the centre of electromagnetic compatibility); (xviii) Cemeteries.

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There is no definition of “Strategic branches of the economy”, and interpretation of this concept primarily relies on the discretion of the Uzbek Government.

2.2 Relevant Stakeholders

The Cabinet of Ministers or relevant government bodies (local authorities or Khokimiyats regarding communal property)91, select entities to be privatized under the supervision of the State Property Committee, established in 1992, which was given the task to implement denationalization and privatisation programs in different economic sectors.

Some entities may only be denationalized or privatized pursuant to a decision of the President of the Republic92.

The State Property Committee of Uzbekistan

The State Property Committee of Uzbekistan was established in 1992 by President’s Decree No. UP-337 dated February 10, 1992.

According to the Regulation of the State Property Committee (approved by President’s Resolution No. PP-335 dated April 26, 2006) the State Property Committee is a State agency responsible for implementation of economic reforms, management of State property and protection of State interests in such property, denationalization and privatizations, post-privatization monitoring of enterprises, and assisting to development of market-based infrastructure.

91 Article 7 of Law on Denationalization and Privatization, furthermore, private investors may submit an application for privatization or denationalization of an enterprise. 92 Article 4.3 of Law on Denationalization and Privatization 57

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Flowchart of privatisation process

Decision of the President, the Cabinet of the Ministers or Local Authority.

State Property Committee (and its territorial agency)

Ad hoc Commission (b)

Working group on preparation of tender Tender Commission documents (a)

Valuation firm appointed by Examination of tender proposals State Property Committee

Invitation to Tender in mass media Selection of the best proposal

Investors

(a) The preparation of an enterprise for denationalization and privatization shall include a complete due diligence93. (b) Article 8 of the Law on Denationalization and Privatization.

2.3 Privatization and denationalization programs

From time to time, the President of the Republic sets key directions of the national privatization program.

Resolution of the President of the Republic of Uzbekistan dated July 20, 2007 No. PP-672 “On measures aimed at further deepening of the privatization processes and active attraction of foreign investments during the years of 2007-2010” establishes for the next 3 years94:

(i) a list of objects and sites, State owned shares which will be sold in public sales to the private sector;

93 Article 8 of the Law on Denationalization and Privatization 94Annexes of Resolution of the President of the Republic of Uzbekistan dated July 20, 2007 No. PP-672 58

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(ii) a list of leading joint stock companies in the economy and State owned stock packages which are to be sold in public sales on the basis of the decision of the State Tender Commission with exact investment obligations on modernization, technically and technologically equipping production, production of competitive and export-oriented products; and

(iii) a list of inactive and ineffective enterprises and objects including those not having completed construction, and having all necessary engineering services where unsold state assets are offered for sale at the zero redemption cost with acceptance of specific investment.

The above mentioned lists provide for each considered entity scope and extent of privatization.

2.4 SOE denationalization

State Unitary Enterprise LLC or JSC

Operate according to the decision of the Operate under the Law on LLCs or Law Organization relevant body having decided on its on JSCs.

establishment/

Conduct socio-economic objectives set For profit-making objective. Operation objectives by the State.

The State as owner may be involved in Similar to other non-State enterprises. Rights and Obligations the enterprise’s operation.

The company assets are consolidated by The State may hold 100% of the the State, which remains the sole owner authorized capital. of the company’s assets. The entity has a right to manage such assets according The entity owns and is free to use and to the goals and objectives as set in its dispose of its assets, except for major Capitalization & assets charter. transactions.

The company is not authorized to sell, rent, pledge or in any other way dispose of the company’s assets, without State permission.

The State is the highest governing body The General Assembly of Shareholders of the entity. It appoints a director, the is the highest governing body, which key managers and senior staff (deputy appoints the director (general manager). Corporate Governance director, chief accountant, senior All other managers and staff-members engineer, etc.). are hired by the director (in case of JSC). The State’s prior permission is required for any “large transactions”, and also for The General Assembly’s permission is transactions related to disposal of the required for strictly limited types of

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company’s basic assets. “large transactions”. In general, the entity is free to enter into any The Director’s competence is limited to transactions (in case of JSC). day-to-day activity of the entity. The entity may perform only those types of The director and other key managers activity, which have been defined by the have the broadest range of competence owner through its Charter. as concerns management and business of the entity. The entity may do any business it finds to be profitable.

The State shall determine how revenues The entity may dispose of its profits as it Profit of a State unitary enterprise shall be decides. distributed.

The entity may be dissolved upon The entity may be dissolved upon

decision of the State. decision of the General Assembly. Such Dissolution decision shall be supported by all

shareholders.

State-owned enterprises are either not Private companies are subject to the

subject to bankruptcy law or have a bankruptcy law and are less likely to be Bankruptcy special regime of bankruptcy with supported by the Government.

greater support from the Government.

2.5 Privatization and denationalization process of Uzavtoyol enterprises

It was understood from the interviews conducted by the Consultants that no privatization or denationalization of Uzavtoyol enterprises are currently planned by the Uzbek authorities besides the entities mentioned in Annex 1 of Resolution of the President of the Republic of Uzbekistan dated July 20, 2007 No. PP-672:

Доля Сроки реализации государства, Наименование министерств, ведомств, №№ Месторасположение подлежащая компаний и предприятий реализации 2007г. 2008г.2009г. 2010г. (%)

ГАК «Узавтойул» Ташкентская область, 95 1 АО «Олмалик ободончилиги» 25.00 х г.Алмалык

382 1 ООО «Кашкадаре йул таъминот» г.Карши 30.00 х Кашкадарьинская область, 383 2 ООО «Китобавтойул» 25.00 х Китабский р-н Самаркандская область, 384 3 ООО «Каттакургон ободончилиги» 25.00 х Каттакурганский р-н Самаркандская область, 385 4 ООО «Нарпай йул курувчи» 25.00 х Нарпайский р-н

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SECTION 2: REVIEWING AND BECOMING FAMILIARIZED WITH ADB’S POLICIES, GUIDELINES, PROCEDURES, AND DOCUMENTS, PARTICULARLY THOSE RELATED TO THE ELIGIBILITY FOR PARTICIPATION IN ADB-FINANCED PROJECTS

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Pursuant to the fourth item of the TOR, this section aims at describing and assessing ADB’s policies, guidelines and procedures, particularly those related to the eligibility for participation in ADB-financed projects.

1. DETAILED REVIEW OF ADB’S POLICIES AND GUIDELINES

Under ADB’s current procurement procedures, SOEs are eligible to bid for ADB- financed projects under the strict condition that they comply with the eligibility criteria set in ADB’s Guidelines, Project Administration Instructions and Standards bidding documents (see item 2 below) and provided that they do not appear to be in a situation of potential conflict of interest95.

1.1 Review of ADB’s guidelines dated February 2007 (the “Guidelines”)

1.1.1 Scope of application and governing principles

The financing agreement governs the legal relationship between the borrower96 and ADB and the Guidelines are made applicable to procurement of goods and works for the project as provided in the financing agreement. The Guidelines apply to all contracts for goods and works financed in whole or in part by ADB. ADB permits procurement of goods and works only supplied from and produced in eligible member countries97. In order to ensure open competition, effective and transparent procurement, ADB requires the borrower to obtain goods, works and services through International Competitive Bidding (ICB)98.

1.1.2 Fraud and corruption

The Guidelines also lay emphasis on the observance by borrowers, bidders, suppliers and contractors under all ADB-financed activity of the highest standard of ethics during the procurement process and in the execution of the project. If there are any corrupt, fraudulent, coercive or collusive practices, ADB is entitled to reject a proposal for award, cancel a portion of financing allocated to a contract or sanction a party engaged in such practice.

95 ADB considers a conflict of interest to be a situation in which a party has interests that could improperly influence that party’s performance of official duties or responsibilities, contractual obligations, or compliance with laws and regulations, and that such conflict of interest may contribute or constitute a prohibited practice under anticorruption policy ((Procurement Guidelines, February 2007, I.1.15 (c)). 96 Borrower includes recipients of ADB-financed grants and ADB-administered funds and also refers to the executing agency for the project (Procurement Guidelines, February 2007, I.1.1 footnote 3). 97 Except in the case of loans or grants from Special Funds Resources. 98 Except for some specific cases see 1.1.3 below. 62

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It is also worth mentioning that ADB is entitled to require in any contracts or bidding documents related to an ADB financed activity the inclusion of a provision obliging any party involved in such activities to allow ADB or its representative to inspect and audit accounts and records or other documents related to the performance of the contract.

Uzbek legislation on anti-corruption appears to be limited. Notably, the Criminal Code dated September 22, 1994 provides in its articles 210 to 214 for definitions of the following behavior which are considered as criminal offences: - Acceptance of bribe; - Giving bribe; - Agency in bribery, and - Suborning a civil servant.

1.1.3 International competitive bidding (ICB)

As described above, ICB is the preferred method for selecting prospective bidders for a project. The objective of such bidding method is to provide potential bidders with timely and adequate notification of a borrower’s requirements and equal opportunity to participate in the project.

(a) Preparation, invitation to bid and bidding documents The borrower shall prepare and submit to ADB a draft general procurement notice which shall notably be published by ADB. Such notice shall contain all the relevant information in order for prospective bidders to adequately assess and identify the relevant party, the amount and purpose of the loans as well as the scope and implementation of the procurement.

Invitation to bid (or prequalification in case of large or complex projects where only technically and financially capable firms shall be invited to submit bids) shall be advertised in the form of a specific procurement notice in ADB’s website and in one newspaper of national circulation in the borrowing country.

The borrowers are required to use Standard Bidding Documents issued by ADB (“SBD”) with minimum changes99. Such documents shall provide all the relevant information for bidders to adequately answer.

The bidding documents shall clearly set forth all the characteristics of the project to be carried out and specify any factors, which, in addition to price, shall be taken into consideration in evaluating bids.

99 Or internationally recognized standard condition of contract acceptable by ADB where no relevant SBD have been issued. 63

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To ensure the fairness and integrity of the bidding process, all prospective bidders shall receive the same information and shall be assured of equal opportunities to obtain any additional information on a timely basis.

(b) Bid Security Borrower has the possibility to require a bid security in an amount and form specified in the bidding documents.

(c) Pricing Bids for goods shall be invited on the basis of CIF or CIP for goods offered from abroad and EXW for locally available or manufactured or assembled goods, including those previously imported. Any services such as transportation or installation required from the bidder shall be evidenced in a separate quotation100.

Bidders for civil works shall be required to quote unit prices or lump sum prices for the performance of the works (such prices shall include all duties, taxes or levies. Bidders shall also be allowed to obtain all inputs101 from any eligible source so that they may offer the most competitive bids.

(d) Performance security Bidding documents for works shall provide for security in an amount sufficient to protect the borrower in case of breach of contract by the contractor.

Furthermore, retention money to ensure compliance by the contractor of its warranty or maintenance obligation may be required in an amount that may not exceed 10% of the payment.

(e) Process, evaluation and award The time for preparation and submission of bids shall be determined according to the specificities and the complexity of the project (generally not less than six weeks) in order to allow prospective bidders to respond adequately. The deadline and place for receipt of bids shall be clearly set forth in the invitation for biddings and biddings documents.

The borrower shall open publicly all bids at the same time, at the deadline mentioned above (or promptly thereafter).

After examination and evaluation, the bid with the lowest evaluated cost, which may not necessarily be the lowest price, which conforms to the technical

100 Except as provided for (Procurement Guidelines, February 2007, 2.27). 101 Except for unskilled labor 64

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specifications and is substantially responsive to the bidding documents shall be selected for award.

A recommendation for award shall be sent to ADB for “no objection” before publication of the results of the bidding and award by the borrower of the contract.

1.1.4 Other forms of procurement

In the case that ICB appears not to be the most economic and efficient method of procurement, other procurement methods, deemed more appropriate, could be implemented.

In descending order of preference, we may notably find: - Limited international bidding (which could be described as ICB by direct invitation without open advertisement, applicable mainly where there is only a limited number of suppliers); - National competitive bidding (public procurement used in the country of the borrower where the goods or works to be procured, by their nature or scope, are unlikely to attract foreign competition); - “Shopping”; - Direct contracting; - Force account; - Procurement from specialized agencies.

1.2 SOEs’ eligibility for participation in ADB-financed projects

According to item 1.8 of ADB’s Guidelines for procurement:

“Government-owned enterprises in the borrower’s country may participate as a bidder only if they can establish that they:

(i) are legally and financially autonomous, (ii) operate under commercial law, and (iii) are not dependent agencies of the borrower or sub-borrower.”

This is echoed in ADB’s Standard bidding documents (Instructions to Bidders – item 4.5) which stipulate that: “Government-owned enterprises in the Employer’s country shall be eligible only if they can establish that they:

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(i) are legally and financially autonomous, (ii) and operate under commercial law, and (iii) that they are not a dependent agency of the Employer.”

Similarly, according to ADB’s Project administration instructions (“PAI”) item 3.02 § 15 revised June 2006 regarding eligibility, “in order to prevent conflict of interest and encourage competition in ADB-financed procurement, government-owned enterprises in the borrower’s country are generally ineligible to bid for, or to be awarded contracts under ADB financing”. However, government-owned enterprises may be eligible to participate in ADB-financed procurement provided they meet the following criteria:

- the integrity and fairness of the bidding process is not threatened; - It operates under commercial law; - (It) is legally autonomous from the borrower or the executing agency; - It is financially independent as demonstrated by the requirement for separate audited accounts and return of capital; powers to raise capital, and obtain its revenue through the sale of goods and services; - It is managerially autonomous as evidenced by decision-making authority granted to the management, e.g., for contracting obligations and hiring and terminating the services of personnel; - It is not a dependent agency of the borrower or the agency executing the project; - It meets all bidding and contractual conditions including the prequalification and post-qualification requirements including financial and technical capabilities, experience and past performance.

When assessing the above mentioned eligibility requirement and criteria notably regarding legal autonomy, ADB may look whether the scrutinized SOE: - is a legal entity separate from the State i.e., the SOE has been incorporated under the provisions of an applicable Law or Act such as a Company Act or Enterprise Law; - has its owned audited accounts; - is managed by a separate Board of Directors/Management.

When assessing financial independence, ADB may look at whether the entity:

- is not obligated to pass its entire surplus to the State except for the applicable declared dividend; - is not receiving subsidies from the State;

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- is not receiving any budgetary support from the State.

Operation under commercial law could notably be demonstrated when the entity:

- is subject to the Bankruptcy Law; - is authorized to operate like a commercial enterprise by way of acquiring rights and liabilities, borrowing, and being liable for debts; - is making its own managerial decisions.

Managerial autonomy could be notably evidenced by effective decision-making authority granted to the management which could make decisions related to all transactions without seeking approval from a higher authority.

Dependency could be evidenced through the criteria mentioned above as well as any reporting duties of the entities to the borrower or the agency executing the project in the exercise of their activities (notably in the exercise of any administrative, public utility or regulatory mandate).

Furthermore, even if the eligibility criteria mentioned above are met, possible conflicts of interest may prevent the entities from participating.

1.3 Conflict of interest

PAI 3.02 § 14 states that: “to be eligible, a bidder must not have conflict of interest. Bidders found to be in conflict of interest will be disqualified. A bidder may be considered to have a conflict of interest with one or more parties in a bidding process, if they:

- have controlling shareholders in common; or - receive or have received any direct or indirect subsidy from any of them; or - have a relationship with each other, directly or through common parties, that put them in a position to have access to information about or influence on a bid of another bidder, or influence the decisions of the purchaser regarding the bidding process; or - submit more than one bid in the bidding process, except where alternatives offers may be permitted under the bidding documents; this does not limit the participation of subcontractors in more than one bid, or as bidders and subcontractors simultaneously; or - participated as consultant in preparing the design or technical specifications of the goods and related services or works that are subject of a bid.”

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Similarly, the SBD102 provide that: “ADB considers a conflict of interest to be a situation in which a party has interests that could improperly influence that party’s performance of official duties or responsibilities, contractual obligations, or compliance with applicable laws and regulations, and that such conflict of interest may contribute to or constitute a prohibited practice under ADB's Anticorruption Policy. In pursuance of ADB's Anticorruption Policy’s requirement that Borrowers (including beneficiaries of Bank financed” activity), as well as bidders, suppliers, and contractors under ADB Standard Bidding Document Procurement of Works User’s Guide Bank-financed contracts, observe the highest standard of ethics. ADB will take appropriate actions, which include not financing of the contract, if it determines that a conflict of interest has flawed the integrity of any procurement process. Consequently all Bidders found to have a conflict of interest shall be disqualified. A Bidder may be considered to be in a conflict of interest with one or more parties in this bidding process if, including but not limited to: (a) They have controlling shareholders in common; or (b) They receive or have received any direct or indirect subsidy from any of them; or (c) They have the same legal representative for purposes of this bid; or (d) They have a relationship with each other, directly or through common third parties, that puts them in a position to have access to information about or influence on the Bid of another Bidder, or influence the decisions of the Employer regarding this bidding process; or (e) A Bidder participates in more than one bid in this bidding process. Participation by a Bidder in more than one Bid will result in the disqualification of all Bids in which the party is involved. However, this does not limit the inclusion of the same subcontractor in more than one bid; or (f) A Bidder participated as a consultant in the preparation of the design or technical specifications of the contract that is the subject of the Bid; or (g) A Bidder was affiliated with a firm or entity that has been hired (or is proposed to be hired) by the Employer or Borrower as Engineer for the contract.”

The Guidelines103 states that “ADB considers a conflict of interest to be a situation in which a party has interests that could improperly influence that party’s performance of official duties or responsibilities, contractual obligations, or compliance with applicable laws and regulations, and that such conflict of interest may contribute to or constitute a prohibited practice under the anticorruption policy. In pursuance of the anticorruption policy’s requirement that borrowers (including beneficiaries of ADB-financed activity), as well as bidders, suppliers, and contractors under ADB-financed contracts, observe the highest standard of ethics, ADB will take appropriate actions to manage such conflicts of interest or may reject a proposal for award if it determines that a conflict of interest has flawed the integrity of any procurement process”.

102 SBD Item 4.3 103 Guidelines 1.15 (c) 68

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1.4 Fraud and corruption

ADB’s anticorruption policy requires borrowers (including beneficiaries of ADB- financed activity), as well as bidders, suppliers, and contractors under ADB-financed contracts, to observe the highest standard of ethics during procurement and execution of such contracts.

In pursuance of this policy, and as reiterated in the bank’s procurement guidelines, ADB defines a series of practices which, if they occur, could lead to the rejection of a proposal for award, the cancellation of a portion of a financing and could lead to sanctions on the party in breach.

Furthermore, with the specific agreement of ADB, a beneficiary may introduce an undertaking of a bidder to observe, in competing for and executing a contract, the country’s laws against fraud and corruption.

2. DETAILED REVIEW OF OTHER AID AGENCIES’ POLICIES AND GUIDELINES RELATED TO ELIGIBILITY AND ICB

Multilateral development banks and international financing institutions tend to harmonize their procurement procedures and documents in which the eligibility of SOEs may be one of the key issues.

2.1 IDA and IBRD

In respect of SOE eligibility, IDA and IBRD set the following principles104: “Government-owned enterprises in the Borrower’s country may participate only if they can establish that they (i) are legally and financially autonomous, (ii) operate under commercial law, and (iii) are not dependent agencies of the Borrower or Sub-Borrower105.”

104 Guidelines: Procurement under IBRD Loans and IDA Credits (May 2004, revised October 2006) IDA & IBRD (World Bank) 105 Other than Force Account units, as permitted under para. 3.8 of the IBRD and IDA guidelines: Force Account 3.8 Force account, that is, construction by the use of the Borrower’s own personnel and equipment, may be the only practical method for constructing some kinds of works. The use of force account may be justified where: (a) quantities of work involved cannot be defined in advance; (b) works are small and scattered or in remote locations for which qualified construction firms are unlikely to bid at reasonable prices; (c) work is required to be carried out without disrupting ongoing operations; (d) risks of unavoidable work interruption are better borne by the Borrower than by a Contractor; and (e) there are emergencies needing prompt attention. 69

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In the implementation of their projects in Uzbekistan, the World Bank (IBRD and IDA), as well as IFC, are currently exclusively working with private sector entities.

2.2 EBRD

The European Bank for Reconstruction and Development (“EBRD”) sets the following principles106: - “The Bank permits firms and individuals from all countries to offer goods, works and services for Bank-financed projects regardless of whether the country is a member of the Bank. Firms from developing countries as well as from the Bank’s countries of operations are encouraged to participate on equal terms and thereby assist their own country’s development process. Any conditions for participation shall be limited to those that are essential to ensure the firm’s capability to fulfil the contract in question.”107

- Eligibility to submit tenders: 3.26 A tenderer may submit or participate in any capacity whatsoever in only one tender for each contract. Submission or participation by a tenderer in more than one tender for a contract will result in the rejection of all tenders for that contract in which the party is involved. However, this does not limit the inclusion of the same subcontractor in more than one tender

3.27 No affiliate of the client, or of a procurement agent engaged by the client, shall be eligible to tender or participate in a tender in any capacity whatsoever unless it can be demonstrated that there is not a significant degree of common ownership, influence or control amongst the client or the client’s agent and the affiliate.

3.28 Where a firm, its affiliates or parent company, in addition to consulting, also has the capability to manufacture or supply goods or to construct works, that firm, its affiliates or parent company normally cannot be a supplier of goods or works on a project for which it provides consulting services, unless it can be demonstrated that there is not a significant degree of common ownership, influence or control. The only exceptions would be turnkey, single responsibility, public works concessions or similar undertakings where design, supply and construction activities are an integral part of the contract or where certain proprietary and critical items of equipment and materials are an essential part of the process design.

It is worth mentioning that EBRD according to its Strategy paper108 “will continue to support private sector investment and entrepreneurship provided that there is no direct or indirect link to the Government or Government officials”.

106 EBRD procurement policies and rules as amended in August 2000 107 Item 2.6 of the EBRD procurement guidelines 108 EBRD “Strategy for Uzbekistan” as approved by the Board of Directors on July 26, 2005 70

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“The scope for the Bank’s investments will henceforth be limited to the private sector and the Bank will not undertake any new public sector projects. Only reforms can unlock Uzbekistan’s significant economic potential and allow the Bank to operate on a full- fledged basis”.

EBRD representative confirmed that the Bank is not providing loans to a corporate entity where more than 20% of its charter capital is owned by the State.

3. OVERVIEW ON APPLICABLE UZBEK LAWS AND STATUTES ON TENDERING

3.1 Applicable regulations

The tender process is carried out in accordance with regulations approved by the Resolution of the Cabinet of Ministers No 302 “About measures on improving tender process in capital construction” dated March 7, 2003.

This regulation is based on basic principles of international competitive bidding.

3.1.1 Development, expertise and approval of the tender documentation;

The tender documentation is developed by the Employer (in this case the Republican Road Fund assisted by PMU – see below) or this work could be delegated to the outside consulting firm which will develop it based on the main conditions and criteria requested by the Employer (the technical specifications are done by the Employer).

Once the tender document is developed it is reviewed and approved by the Tender Committee members and recorded in the minutes of the meeting109.

After it is approved by the Tender Committee, the Employer shall submit it to the State Committee for Architecture and Construction for its expert opinion.

The tender can be announced only after the positive conclusion or opinion of the State Committee for Architecture and Construction.

109 The minutes shall reflect the changes proposed by the members of the Tender Committee 71

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Employer Consulting Firm

Preparation of the Tender documents (the employer may Preparation of the Tender be assisted by an outside documents (according to consulting firm) criteria and conditions set by the Employer) Tender Committee

Review and approve the Tender documents

State Committee for Architecture and construction

Review and approve the Tender documents

Tender Announcement

3.1.2 Persons eligible for participation in tenders;

Any company or entity is eligible to participate in tenders as long as they meet qualification criteria. The following main criteria apply to participation in the tender process:

- Availability of working assets (cash) in the amount of at least 20% of estimated cost of works or a bank guarantee to provide the necessary amount - Civil legal capacity and authorization to sign the contract - The size of the charter capital - Experience in carrying out similar work - The references about completion of works carried out before by its own forces - The intended percentage of work in this particular tender by its own forces

Other specific requirements could be applied to the participants by the Employer. Enterprises that have direct organizational/legal or financial dependence on each other as reflected in the form of shareholdings, financial participation, holding or other forms are prohibited from participating in the tender.

3.1.3 Composition and requirement for the Tender Committee

The Tender Committee must consist of an odd number of members. The Tender Committee usually consists of the representatives of the Employer, the Ministry of Finance and Economy, the State Antimonopoly Committee (Support for Entrepreneurship

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and Restructuring of Enterprises), the Ministry of Foreign Economic Relations, Investment and Trade, and the local governments and the serving bank of the Employer.

Depending on the subject of the tender, the Tender Committee may include the representatives of design and expertise institutes. The number of members from the Employer must not exceed a quarter of the total number of Tender Committee members. Meetings of the Tender Committee are validly constituted when three quarters of the members are present at the meeting.

3.1.4 Evaluation of bids and decision-making process

The evaluation of bids is done by the Tender Committee in accordance with the requirements and conditions described in the tender documentation. In most cases the “points system” is used for each criteria. The decision making process is done based on the majority of votes. In the event of an equal number votes the vote of Chairman is final.

3.1.5 Control of tender process

The authorized representative of the State Committee for Architecture and Construction shall be present in each Tender Committee meeting together with the organizers of the tender.

This representative does not have any influence on the decision making process. However he is there to ensure that the tender process is being properly implemented and that it complies with the requirements of the tender. The representative has the authority to stop the bid if it does not comply with the applicable requirements.

Observers may be allowed to attend the meeting of the Tender Committee.

3.1.6 Liability of participants, organizers and members of the Tender Committee for violations of the bidding rules.

All the participants, organizers and members of the Tender Committee shall be responsible for any violation of the bidding rules in accordance with the legislation and the provisions of the regulations on tender in capital construction in the territory of Uzbekistan approved by the Resolution of the Cabinet of Ministers No. 302 dated July 3, 2003.

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3.2 Interaction with ADB’s guidelines

Project flowchart

ADB

(a) Consulting Firm CoM

Notably in charge of - providing TA, and - drafting feasibility study. (f) MOF

(b)

Project Steering Committee Road Fund (d) (e)

Tender evaluation committee (c)

(d) PMU

Notanbly in charge of : - drafting bidding document; - implementing the bidding, and - make recommendations to the Tender evaluation Committee

(a) Loan agreement with the Uzbek Government (b) MOF has appointed the Road Fund as executive agency (c) The Road Fund has established PMU to manage the tendering process (d) The PMU shall make recommendations on the award (e) The Tender evaluation committee shall evaluate the bids and instruct the Road Fund to award the project to the best bidder (f) A private consulting firm has been appointed to deal with technical aspects of the project

3.2.1 Establishment of an ad hoc Project Management Unit

A specific Project Management Unit (“PMU”), a separate legal entity from the Road Fund itself, having its own bank account and staff recruited among the private sector and remunerated from ad hoc credit lines has been established.

3.2.2 Function of the PMU

The main responsibilities of the PMU on implementing the Project are:

- Planning the Project;

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- Coordination of the Project – teaming up all the participants of the Project, (Government, Executing Agency, Implementing Agency, Bank, Consultants, Suppliers and Construction Companies) into one distinctly functioning unit; - Staffing and planning of the Project – Hiring and training the appropriate staff; - Project implementation – Management of all aspects of Project activities and implementation; - Control of the management of he Project – application of control system on cost, schedules, technical quality of the work and reporting procedure as well as submitting the reports to the Bank on the activities in accordance with requirements of Loan and Project agreements and the Bank’s rules; - Management of procurement – ensure that all the requirements on inspection and testing indicated in various contracts are met; - Communication with the Project – setting up the procedure for interaction and cooperation with other organizations and parties involved in the Project as well as with the Government departments of the Borrower; - Regulating any conflicts – resolution of disputes between the participants of the Project in accordance with the agreements and contracts; - Management of changes – control on changes and functioning of the progress of the Project; - Financial management of the Project – allocation of funds, cost control, support of an effective system of accounting, preparation of financial reports for the Bank in accordance with the Loan and Project Agreement; - Compliance with the covenants of the Loan and Project Agreement; - Transferring and acceptance of the project – preparation of procedures for transferring it after its completion.

3.2.3 Reporting and control

PMU shall report to ADB in accordance with the Loan and Project Agreement.

3.2.4 Management of PMU activities

The PMU is managed by a person appointed in accordance with the list of agreed staff schedule subject to ADB and GOU concurrence.

The Head of the PMU shall: - Manage the activities of the PMU, bear personal responsibility on the accomplishment of tasks set for the PMU and represent the PMU in State, social and other agencies and organizations;

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- Prepare recommendations for the management of the Republican Road fund, for hiring and firing the staff of the PMU, promoting and punishing within the range of his rights envisaged in the charter of discipline of employees of Road Fund; - Coordinates and controls the work of international consultants working in the PMU; - The instructions of the Head of the PMU shall be compulsory for all staff of the PMU.

At the time of hiring the head of the PMU, ADB had also interviewed the candidate and gave “No objection”.

3.2.5 PMU Staff

The Project manager responsible for: - Staffing and planning of the Project; - Management of various aspects of the PIU; - Setting the procedure of interaction and cooperation with other organizations and parties participating in the Project; - Control on the changes and functioning of the Project; - Ensuring compliance with all the requirements and conditions of the Loan and Project Agreement.

The financial expert is responsible for: - Preparation of withdrawal applications from loan proceeds; - Control of expenses and accounting of allocated proceeds; - Supporting an effective system of accounting and preparation of accounts on the activities of the Bank in accordance with Project and Loan agreements; - Preparation of financial report to the Bank.

The road engineers are responsible for: - Following the schedule of the Project; - Monitoring the technical implementation of the Project; - Application of a reporting system and preparation of reports on the activities of the Bank in accordance with the Loan and Project Agreement.

Procurement specialists responsible for: - Management and monitoring of procurement (preparation of bidding documents, contract packages, contract administration and registration in relevant state agencies); - Preparation of reports on the status of procurement to the Bank;

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- Assistance in training Road Fund staff on procurement in accordance with Bank guidelines. It has to be noted that it is envisaged to hire independent, individual, international procurement consultant who will be involved in the whole tender process and implementation of the project and would assist the PMU in project implementation

The establishment of such entity could allow greater independence and ensure greater fairness in the bidding process by keeping Uzavtoyol and its member companies at arm’s length from the implementation and management of the bidding process.

Interactions with Uzavtoyol and its member companies

ADB

Consulting Firm CoM (h)

Notably in charge of - providing TA, and - drafting feasibility study. MOF Road (g) (i) Council Project Steering Uzavtoyol Committee Road Fund (j) Uzavtoyol Members Companies Tender evaluation committee (l) (k)

PMU

Notanbly in charge of : - drafting bidding document; - implementing the bidding, and - make recommendations to the Tender evaluation Committee

(g) Vice Chairman of Uzavtoyol is member of the Road Council (h) Uzavtoyol is directly subordinate to the CoM (i) The Road Council is the supreme body of the Road Fund. (j) The Road Fund gets technical support from Uzavtoyol in the implementation of its duties and provides financial support to Uzavtoyol and its regional office. (k) Uzavtoyol members companies receive financing from the Road Fund (via Uzavtoyol) to perform routine maintenance work on the roads under their supervision (contract based). (l) Uzavtoyol Chairman is a member of the project steering committee.

The composition of the Project Steering Committee110, comprising 11 members including the Chairman of Uzavtoyol is detailed in Annex E.

110 Annex 6 of Resolution of the President of the Republic No. 804 dated February 28, 2006 77

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There is no evidence of managerial, financial or capital interaction of any kind between Uzavtoyol enterprises (G7 notably) and the PMU.

However, it is worth mentioning that the PMU does not make the final decision on the award of a tender, such decision shall be made by a “Tender Evaluation Committee” designated by the Project Steering Committee. As of today, the Consultants have no information on the composition of such committee which is not established yet and the Consultants have not been able to determine why the appointment of this committee has been delayed to date.

Considering the holding structure in place, the direct subordination existing between Uzavtoyol and its members entities111, the fact that Uzavtoyol’s chairman is a member of the Project Steering Committee which will appoint the members of the Tender Evaluation Committee may constitute a conflict of interest..

111 § 1.2 of the Charter [of Uzavtoyol], see Section 1 – 1.4.8 78

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SECTION 3: ASSESSING THE CURRENT OPERATIONAL PRACTICES OF UZAVTOYOL ENTERPRISES AND THEIR COMPLIANCE WITH ADB ELIGIBILITY REQUIREMENTS TO PARTICIPATE IN ICB

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Pursuant to the fifth item of the TOR, this section aims at providing a preliminary description and assessment of the current operational practices of Uzavtoyol enterprises.

1. UZAVTOYOL ENTERPRISES ARE PLAYING A PROMINENT ROLE IN THE UZBEK ROAD SECTOR

As of today, our main source of information is the list of tender procedures launched and awarded in 2006 and 2007, in which Uzavtoyol enterprises are very present.

1.1 Major stakeholders in Road Construction and Maintenance

Public roads are considered State property and responsibilities for road construction and maintenance in Uzbekistan are defined by the updated Law on Roads, which was passed on 2 October 2007 and replaced the old version of the Law dated July 3, 1992.

At present, road policy development, planning, construction, and maintenance are coordinated by the following bodies:

(i) the Road Council, a policy formulation body which focuses on the road sector and is chaired by the deputy Prime Minister; (ii) the Road Fund, established under the Ministry of Finance in 2003, is the Government agency responsible for road investment planning, project implementation, and financial management of road construction and maintenance; and, (iii) Uzavtoyol, the State joint stock company responsible for elaboration of common use road development programmes, the operation and maintenance of major public roads.

Prior to 2003, Uzavtoyol was responsible for almost all road sector activities covering road infrastructure and road transport services, and ranging from planning, construction, maintenance, financing, and supervision. The Road Fund now fills most of these roles, particularly investment planning and the execution of projects.

The Road Fund

The Road Fund is the government agency responsible for road investment planning, project implementation, and financial management of road construction and maintenance. It tenders and supervises new road construction and rehabilitation (capital repairs) road maintenance contracts. Currently, more than 400 projects are being implemented under the Fund’s supervision. In an international contractual sense, the Fund is the Employer’s Representative where the Employer is the Government of Uzbekistan.

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For the number of projects they handle the Road Fund’s capacity in planning and execution, including contract procurement and management, is considered to be inadequate.112 They have minimal experience in engaging private sector contractors but a good level of experience in awarding contracts to Uzavtoyol enterprises. As mentioned above, it has to be noted that it is envisaged to hire independent, individual, international procurement consultants who will be involved in the whole tender process and implementation of the project and would assist the PMU and the Road Fund in the implementation of the ADB-financed project.

1.2 Assessment of operation of Uzavtoyol members companies

Uzavtoyol is a State joint stock company responsible for the operation and, periodic and routine maintenance of major public roads. The Uzavtoyol organizational structure is shown above.

There are seven road construction and maintenance enterprises that are responsible for international roads that pass through Uzbekistan. These geographically based enterprises are responsible for the repair and maintenance of national and international roads. (International roads can generally be described as those roads which connect to other countries though Uzbekistan.) Their operations cross provincial boundaries. It is these enterprises which bid for Road Fund capital works contracts. There are a number of specialist companies which concentrate on activities such as quarrying and the manufacture of concrete bridge components.

Besides this, there are thirteen administrative provincially based branches of Uzavtoyol that are responsible for local, as distinct from national, roads and usually contract the road maintenance works to one of the 161 district level smaller road repair and construction enterprises.

Within each province there are district road maintenance and repair enterprises which only work on local roads.

All companies are required to operate on a profitable basis or at least within an annual budget. Individual Uzavtoyol companies hire resources such as equipment from each other and purchase materials such as aggregate and asphalt from specialist Uzavtoyol enterprises. They rarely, if ever, enter into partnerships or joint ventures with private sector companies.

Road Fund staff highlight several advantages of working with Uzavtoyol enterprises compared with working with private contractors:

112 ADB 39669–UZB, Republic of Uzbekistan: Preparing the Regional Infrastructure (Roads) Project, Technical Assistance Report, December 2006 81

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(i) Uzavtoyol has the equipment, (ii) Uzavtoyol has the skilled personnel, (iii) Uzavtoyol enterprises are State enterprises and are therefore accountable, (iv) the focus of Uzavtoyol is on quality not profits, (v) there is cooperation and mutual assistance between individual Uzavtoyol enterprises with staff and equipment being transferred between enterprises when necessary, (vi) Uzavtoyol enterprises are deployed around the country, and competition does exist between Uzavtoyol enterprises.

Whilst the above observations may be accurate, the majority of them reflect a lack of experience within the Road Fund of working with competent private contractors and service providers. Uzavtoyol is unlikely to offer such advantages in an environment where the private road construction and maintenance sector was well developed.

1.3 Relations with relevant Stakeholders

Hierarchy of road sector regulation in Uzbekistan

Cabinet of Ministers Prime-Minister Deputy Prime-Ministers

Road Council comprising SJSC Uzavtoyol (HQ) On-site government officials of 18 ministries and Company Council authorities (hokimiyats) agencies, including Deputy Chairman and Deputies Chairman of Uzavtoyol

Road Fund under the a Main Departments of Capital Ministry of Finance 13 regional entities, 7 Construction Executive Director and national entities Deputies

Regional departments of 161 district level District –level the Road Fund enterprises construction and maintenance entities

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1.3.1 With the Cabinet of Ministers

Managers, Chairman and deputy Chairman of the Board of Directors, members of the Company council are appointed by the Cabinet of Ministers.

Moreover, Uzavtoyol, as State management body in the road sector is deeply involved in the work of the Cabinet and shall refer directly to the Deputy Prime Minister in charge of supervising the road sector.

1.3.2 With the Road Council

The deputy Chairman of Uzavtoyol is a member of the Road Council113 which is the highest body supervising the activities of the Road Fund (b).

1.3.3 With the Road Fund

The executive director of the Road Fund is also a member of the Uzavtoyol Company Council (a). According to paragraph 12 (v) of the Charter, the Road Fund shall, at is own expense, maintain executive offices of Uzavtoyol and the costs of maintaining the regional road authorities and the road authorities of the Republic of Karakalpakstan.114

Pursuant to Annex II to the Resolution of the President of the Republic No PP-499 dated October 25, 2006 on the Republican Road Fund, the Road Fund shall finance training programs for Uzavtoyol staff and executives115.

The Road Fund allocates a yearly routine maintenance budget to Uzavtoyol and its member companies for roads under their supervision (see below).

Considering the holding structure in place, the direct subordination existing between Uzavtoyol and its members entities116, the fact that the deputy Chairman of Uzavtoyol is a member of the Road Council, which is the highest body supervising the activities of the Road Fund, may constitute a conflict of interest. Similarly, the close ties between Uzavtoyol and the Road Fund described above could also lead to potential conflicts of interest.

113 The Road Council is composed of 17 members and is chaired by a Deputy Prime Minister (see annex G). 114 Also, see annex F, Balance sheet of the road fund for year 2006. 115 Resolution No PP-499 § 4 116 § 1.2 of the Charter [of Uzavtoyol], see Section 1 – 1.4.8 83

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The allocations of such budget are as follows:

Provide financing Contract and payment for maintenance works Uzavtoyol maintenance works

Consolidate requests from Evaluate financial needs for member entities related to maintenance works maintenance works. Uzavtoyol Member Entities

Provide maintenance works Road Fund

Cost for routine maintenance works is evaluated (per km depending on the location and the situation of the road) by Uzavtoyol and shall be approved by the Road Fund (§ 8 of appendix 2 to Resolution No PP-499 of the President of the Republic dated October 25 2006 further developed in subparagraph c of item 2 of the appendix to Decree UP- 3846 of the President of the Republic of Uzbekistan dated January 18, 2007).

Such works are contract based, however, Uzavtoyol and its member entities are required to enter into such contracts and perform the required work. As such firms enjoy a de facto monopoly, it is difficult to determine whether or not the contracts are granted on a commercial value basis.

In ADB TA 4659-UZB, Transport Sector Strategy that was conducted in 2006, the Consultants made the most of its recommendations on the road sector based on reforms that were initiated prior to March 2006. The results of the Strategy analysis showed that there is almost no competition on the road maintenance market and the quality control of the works performed does not fall under objective assessment by the superior agencies or local authorities.

However, recent resolutions such as the resolution of the Cabinet of Ministers of the Republic of Uzbekistan No. 266 dated November 11, 2006 “On improvement of organization and assurance of quality control in construction and operation of common use roads” approved the Classification of works on repair and maintenance of common use roads and Regulations on procedure for quality control and acceptance of works performed on construction, reconstruction, capital and medium repair of common use roads. It has to be noted that these resolutions have been adopted recently and it will take some time to have an impact.

Regarding construction works, the Road Fund finances, all the feasibility studies at the first stage and later the detailed design implemented by privately owned design institutes.

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As such, major works such as constructions, rehabilitation, which have been primarily identified and, after technical and feasibility studies are usually subject to competitive biddings and open tenders where private sector and other operators in the road sector may participate (see below).

The State controls both resource allocation and targets and strategy (notably through three year planning and annual planning)117 and largely determines the direction and pace of development of the sector and, therefore, this could be construed as detrimental to the development of the private sector.

1.4 Private Sector Contractors

There are very few private sector companies established in Uzbekistan which are capable of undertaking capital road works projects. Those that do exist do not have all the specialist equipment required for capital maintenance works, have difficulty accessing essential materials, require close supervision and are insufficient in number to provide competition in the bidding process. These are companies which undertake lower level road maintenance works, principally in urban areas.

In the last two years, the Road Fund has allocated two contracts for road reconstruction works to private contractors. Both were unsuccessful because the contractors did not have the necessary equipment, the quality of work was not up to standard and the contractors did not complete the work specified in the contracts.

Road Fund staff report that the main problems they face engaging private contractors are: (i) the contractors lack equipment, (ii) the contractors do not have enough operators, (iii) difficulties in contacting the contractors because they do not have permanent offices, (iv) the contractors have significant difficulties obtaining materials especially ‘strategic’ materials such as bitumen, and (v) the work is seasonal and contractors have difficulty mobilizing their workforce when required.

The Road Fund believes that private sector contractors should have a greater role in road works but that the environment is not yet suitable for a concerted development of the private sector. There is no strategy for the development of private contractors.

117 See notably Decree of the President of the Republic of Uzbekistan No N-PP 535 dated December 20, 2006 about measures as to development of Roads on 2007-2010 years (articles 2 to 4) and its annexes I and II. 85

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1.5 Problems Relating to Road Maintenance

The figure below shows the key problems in respect of road maintenance in Uzbekistan. The problem tree has been extracted from the problem tree contained in the ADB report Proposed Loan and Technical Assistance Grant Regional Infrastructure (Roads) Project (Uzbekistan).

Problem Tree Analysis – Road Deterioration118

Road

Backlog of Low quality of road Un-maintained road construction local/rural roads maintenance

Limited Limited government Lack of road equipment for funds for road maintenance road maintenance/ management Unqualified Weak Weak Poor road maintenance rehabilitation system contractors competition in construction design contracting supervision industry

No database system or Weak appropriate tool for institutional programming & capacity planning Weak capacity of engineers

Limited Shortcomings in Ineffective division of number of technical responsibilities: Road Fund guidelines, UTACA/Road staff support & Board/Road training Fund/Uzavtoyol/Min of Interior

118 Extracted from Annex 1 to ADB report Proposed Loan and Technical Assistance Grant Regional Infrastructure (Roads) Project (Uzbekistan)

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1.6 Overview of road development strategy in Uzbekistan

1.6.1 Establishment of Uzavtodor

A first Ministry of Roads of the Republic of Uzbekistan was set up in 1989. With a view to further improve the road sector governance of the Republic, and give more autonomy to the lower structural divisions in the context of market relations formation, the Government by virtue of Decree of the President of the Republic of Uzbekistan UP-546 dated January 26, 1993 “On establishment of Uzbek State Joint- Stock Concern on construction and operation of roads (Uzavtodor)” abolished the Ministry of Roads of the Republic of Uzbekistan and established Uzbek State Joint- Stock Concern on Construction and Operation of Roads ("Uzavtodor").

Concern “Uzavtodor” was an economic association, which united on a voluntary basis the State, State joint stock, leased, collective enterprises and organizations exercising design, construction, reconstruction and operations of roads, bridges and other road facilities, as well as enterprises and organizations of other industries and foreign legal entities, which are interested in the development of the industry.

1.6.2 Tasks assigned to Uzavtodor

As a specially authorized agency of the State administration of roads in the Republic, Concern "Uzavtodor" was assigned to tackle the following priority objectives:

(i) Drafting of road development concepts and perspective programs to ensure the most complete satisfaction of requirements of the national economy and community in transport services; (ii) Pursuing uniform scientific and technical policy in the development, operation and improvement of the road network in the Republic; (iii) Provision of comprehensive solutions to the issues in design, construction, reconstruction, repair and maintenance of common use roads; (iv) Construction of roads, bridges and other road facilities and performance of other types of contractual works on the basis of direct agreements and contracts with enterprises, institutions, organizations, local governments and local authorities; and (v) Development of mutually beneficial foreign economic relations, establishment of joint ventures and productions with foreign companies, road construction in CIS and foreign countries.

1.6.3 Establishment of the Road Fund under Uzavtodor

To ensure the financing for design, construction, reconstruction, repair and maintenance of common use roads, as well as to ensure efficient functioning of the

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road industry of the Republic, by virtue of Resolution of the Cabinet of Ministers of the Republic of Uzbekistan No. 334 dated July 5, 1993 “On establishment of the Republican Road Fund” a State financial and credit institution – the Republican Road Fund – was established under the concern "Uzavtodor", with respective regional and local road funds set up under territorial State joint stock associations and district road departments.

The resolution defined sources for establishment of the Road Fund. It has also been defined that the Road Fund resources should not be part of the State budget of the Republic and other funds, and they would not be subject to withdrawals, with the current year pending disbursements being credited and applied in subsequent years only for intended use.

1.6.4 Reorganization of Uzavtodor and establishment of Uzavtoyol

In order to improve the road construction management system, further develop a modern network of common use roads, reduce redundant management structures, enhance the productivity of resources allocated for maintenance, repair, reconstruction and construction of the common use roads, the Government by Decree of the President of the Republic of Uzbekistan UP-3292 dated August 19,2003 “On improvement of the management system for construction and operation of common use roads” the State Joint Stock Concern on Construction and Operation of Roads was reorganized into the State Joint Stock Company on Construction and Operation of Roads (SJSC "Uzavtoyol").

Resolution of Cabinet of Ministers of the Republic of Uzbekistan No. 361 dated August 21, 2003 “On issues of activity organization of State Joint Stock Company Uzavtoyol and the Republican Road Fund under the Ministry of Finance” established the organizational structure and the structure of executive back office of State Joint Stock Company "Uzavtoyol", model structures of subsidiary road construction organisations and district contracting maintenance and operating enterprises of the road industry.

Territorial subsidiary road construction organisations were set up on the basis of territorial State joint stock associations in the Republic of Karakalpakstan and provinces. The district contracting road maintenance and operating enterprises were set up under "Uzavtoyol" on the basis of district road departments, local operating, road operating, roads and bridges operating departments.

1.6.5 Establishment of the Road Fund under the Ministry of Finance

In accordance with Decree of the President of the Republic of Uzbekistan UP-3292 dated August 19, 2003, effective October 1st, 2003 the Republican, regional and local road funds within the road sector management structure were replaced by the Republican Road Fund under the Ministry of Finance.

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The function of collection and control of funds or the Republican Road Fund under the Ministry of Finance were assigned to the State Tax and Customs Committees of the Republic of Uzbekistan.

It was specified that compulsory withholdings and charges to the Republican Road Fund are set equal to a percentage of certain State taxes and charges, with the annual adjustment of the amount thereof made concurrently with approval of State budget.

To ensure effective utilization of government finances allocated for design, construction, repair and maintenance of common use roads, and to improve the structure and to enhance the efficiency of the Republican Road Fund under the Ministry of Finance the Decree of the President of the Republic of Uzbekistan PP-299 dated March 3, 2006 “On measures for strengthening control over volumes and quality of road construction works and approval of Roads construction program in 2006” assigned the functions of customer, technical and financial supervision of construction, reconstruction and repair of:

(i) Common use roads being a part of international transport corridors, intra- Republican inter-regional roads – to the Republican Road Fund under the Ministry of Finance of the Republic of Uzbekistan; (ii) Intra-regional and intra-district common use roads – to the Single Customer office under the Council of Ministers of the Republic of Karakalpakstan and regional Hokimiyats.

The decree also approved the program for reconstruction, capital and medium repair of common use roads for 2006. The Decree instructed the Road Fund to draft:

(i) Common use roads development concept and program for 2007-2010; (ii) A revised version of the Regulations on procedure for generation of revenue and expenditure of resources of the Republican Road Fund under the Ministry of Finance, Regulations on procedure for design, construction and reconstruction of roads, Regulations on the quality control and acceptance of works performed, Classification of works on repair and maintenance of common use roads; (iii) Proposals on improvement of organizational structure of SJSC "Uzavtoyol" based on deepening of the privatization processes in the industry and optimization of operating and contracting organisations; (iv) Revised Law "On Roads".

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1.6.6 Developments Post August 2006

(a) Reorganization

In order to improve the activity of operating and contracting organizations in the area of maintenance, repair, construction and reconstruction of common use roads by virtue of Resolution of the President of the Republic of Uzbekistan No. 511 dated November 14, 2006 “On measures for improvement of the organizational structure of SJSC Uzavtoyol” specialized maintenance and operating enterprises on maintenance of international and national roads were set up under SJSC “Uzavtoyol” on the basis of existing specialized contracting maintenance and operating enterprises of road sector.

Territorial subsidiary road construction organizations of SJSC "Uzavtoyol" reorganized into territorial road operating organizations. Specialized maintenance enterprises to maintain bridge facilities on the common use roads were established under territorial road operating organizations of SJSC “Uzavtoyol” on the basis of existing district specialized road and bridge maintenance contracting enterprises.

(b) Definition of a national strategy

To ensure further development of common use roads, which meet high international requirements and standards, and ensure all-year efficient international, transit and intra-republican freight and passengers road transport services, and to optimize economic relations between participants of the investment process in road construction the Resolution of the President of the Republic of Uzbekistan No. 535 dated December 12, 2006 “On measures for development of common use roads in 2007-2010”, the Concept for development of common use roads of the Republic of Uzbekistan in 2007 - 2010 and long- term perspective was approved, including the earmarked Program for construction and reconstruction of international common use roads in 2007- 2010 and the Program for reconstruction of national common use roads in 2007- 2010.

The resolution defined that:

(i) Formulation of annual Programs for repair of international and national common use roads shall be performed by the Republican Road Fund under the Ministry of Finance of the Republic of Uzbekistan in association with SJSC “Uzavtoyol” with further approval by the Cabinet of Ministers; (ii) Formulating the annual Program for repair of local common use roads shall be performed by the Council of Ministers of the Republic of Karakalpakstan and regional Hokimiyats in association with the Republican Road Fund under the Ministry of Finance of the Republic of

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Uzbekistan and SJSC “Uzavtoyol” with further approval by the Management Board of the Republican Road Fund under the Ministry of Finance of the Republic of Uzbekistan.

The Council of Ministers of the Republic of Karakalpakstan, regional Hokimiyats, Ministry of agriculture and water resources, SJSC “Uzavtoyol” were assigned to carry out an inventory of local rural roads, which previously belonged to Shirkat holdings, and to ensure transfer – acceptance thereof to the balance of the relevant district Hokimiyats.

As a result of the directives contained in recent Resolutions, particularly as regards the Resolution of the President of the Republic of Uzbekistan PP-535 dated December 20, 2006 “On measures for development of common use roads in 2007-2010”, the Ministry of Economy and the Ministry of Finance of the Republic of Uzbekistan, in association with relevant ministries and agencies, have developed a list of activities to implement the Concept for development of common use roads of the Republic of Uzbekistan in 2007-2010 and long-term perspective. This list of activities includes the following major areas:

(i) Organization of construction and reconstruction of common use roads; (ii) Development of modern road infrastructure; (iii) Rationalisation of financial resources utilisation; (iv) Improvement of legal and regulatory framework of road construction; (v) Measures for improvement of road traffic safety and reliability; (vi) Training of personnel for the road industry.

2. MANAGEMENT OF UZAVTOYOL ENTERPRISES

2.1 Operational control of the State

The Consultants understand from interviews and the documents they received and reviewed so far that the State authority has limited visibility and involvement with respect to the financial performance of the enterprises as limited financial reporting are made to the State Property Committee. The managers of Uzavtoyol member entities (G7) shall however report to Uzavtoyol.

As the State through a specific body, (i.e. the State Property Committee), appears to be ultimately responsible for performance and potential losses, an efficient reporting and management information system could be put in place in order to increase visibility for the State management body and accountability for the management.

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2.2 Operational management

It has to be noted that Uzavtoyol has unique status as a corporation because of its dual role. On the one hand it is considered as a commercially oriented corporate entity and on the other hand it is State body responsible for the operation and maintenance of the common roads in the country (see above).

However, it has to be emphasized that its administrative role is carried out by its headquarters and the actual physical work like construction and reconstruction is being carried out by the member enterprises (at national and local level).

Little separation exists between Uzavtoyol and its member companies in terms of business operation, management and ownership. The competitive impacts of the vertical integration in the road sector shall be further assessed as well as existing financial status, level of know-how, workforce, services transfers and existing compensation. It is worth mentioning that the holding company type structure may on the one hand allow for economies of scale in terms of investments and synergies and, on the other hand, it may also induce unduly complex and non transparent procedures and impede the necessary competitive rivalry between the different operators in the sector on an arm’s length basis

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2.2.1 Internal organisation

(a) Organizational structure of Uzavtoyol

Structure of the executive office of State Joint-Stock Company “Uzavtoyol”

Board of Directors

Chairman of the Board

Deputy Chairman, Chief Engineer Deputy Chairman Accounting Department

2 units.

Department for Finance and Economics Department for Assessment of Quality of Technical 8 units Lawyer Conditions of Roads 4 units 1unit.

Road Network Development Department Human Resources and Special Works

1 unit 4 units.

The General Department

3 units.

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(b) Organization structure of Uzavtoyol member company (national level)119 Organizational chart of one of the seven “national” enterprises

Director

Chief Engineer Deputy Director Department for Economics and Accounting 3 units Department for Maintenance and Operation and Development of Department for Technical Maintenance and Highways Development of Industrial Infrastructure

10 units. 3 units HRD and Special Works 2 units

Chief Mechanic’s Department 3 units Lawyer

1 unit

Maximum number of administrative personnel –should not exceed 25 units

119 Extracted from Annexes to the Resolution of the President of the Republic of Uzbekistan No. PP-511 of 14 November 2006

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2.2.2 Financial evaluation of Uzavtoyol

Uzavtoyol was evaluated based on the company’s consolidated financial statements for fiscal years (FY) 2004, 2005 and 2006120 obtained upon request by the Consultants for the implementation of the project. The consolidated Balance Sheet and Income Statement for FY 2004, 2005 and 2006 are given in Annex H. Salient features of the structure and contents of the financial statement are as follows.

(i) The financial statements of Uzavtoyol are prepared in compliance with the National Accounting Standards and in the form specified by the Ministry of Finance (MOF) of the Republic of Uzbekistan. (ii) Financial reporting is done in both Russian and Uzbek languages. (iii) All the enterprises under Uzavtoyol are required to report independently to the local taxation and statistics bodies. Their reports are collected and consolidated by the financial department of Uzavtoyol annually. (iv) As per income statements, Uzavtoyol has reported positive net profit for all considered years. Net profit growth in 2006 to the previous year has amounted to 41%. (v) Balance sheets for the reported years show that Uzavtoyol invests significant amounts in projects including mostly road maintenance, equipment and buildings. (vi) Although the companies operating under Uzavtoyol’s coordination are making use of some kinds of short term investments, it still keeps large amounts of cash in local and foreign currencies. So called non- performing cash was around US$4~8.5 million in reported years. This may be due to a rather weak but slowly developing financial sector in the country, which cannot attract the idle cash of the companies and individuals, and, on the other hand, indicates that measures should be taken by Uzavtoyol to manage its own cash more efficiently.

The financial condition of Uzavtoyol has been assessed for its liquidity position, long term solvency and operating efficiency. All the three attributes have been assessed in terms of three sets of ratios.

- Liquidity ratios - Capital structure/ leverage ratio - Profitability ratios

120 Every financial reporting year starts from 1 January and closes in 31 December.

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(a) Liquidity Ratios

Liquidity ratios indicate the ability of Uzavtoyol to meet its short term obligations and reflect its short term financial strength/solvency. Three parameters, which have been used to assess liquidity of Uzavtoyol are given below and summarized in table 1.

Table 1: Liquidity Parameters Parameters FY 2004 FY 2005 FY 2006 Net Working Capital 54 470 M UZS 32 821 M UZS 41 343 M UZS (NWC) (USD50.6 million) (USD27.8 million) (USD34.3 million) Current Ratio (CR) 1.9 1.8 1.8 Quick Ratio (QR) 10% 17% 20% Source: Uzavtoyol and ADB consultants

NWC represents the excess of current assets over current liabilities. CR indicates the money available with the organization for each unit of current liability/ obligation. The higher the value of current ratio, the greater is company’s ability to meet current obligations and greater safety of funds for short term creditors. QR indicates the company’s ability to convert its current assets quickly into cash in order to meet its current liabilities. The inferences drawn from table 2.1 for Uzavtoyol are described below.

The NWC for the reported years show that the Company has adequate working capital to meet the claims of creditors and to meet the daily needs of the business.

The higher values of CR indicates higher short term solvency of Uzavtoyol. It shows that the organization has current assets, which are almost the twice of its short-term obligations.

The values of QR indicate the short term solvency of Uzavtoyol. It shows that the organization has cash/ bank balance, which was 10% of its short-term obligations for the in 2004 and gradually increased to 20% in FY 2006.

(b) Capital Structure/ Leverage Ratios

Capital structure/ leverage ratios describe the long term financial strength or long term solvency of the organization measured in terms of its ability to pay the interest and the principle amount of the loan regularly. In this respect, the following ratios have been summarized in table 2 for reported years to evaluate the long term solvency of Uzavtoyol.

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Table 2: Long Term Solvency Parameters Parameters FY 2004 FY 2005 FY 2006 Debt to Equity Ratio (D/E) 10:90 6:94 6:94 Equity to Asset Ratio (EAR) 0.91 0.94 0.94 Source: Uzavtoyol and ADB PPTA consultants

D/E relationship reflects the relative claims of creditors and shareholders against the assets of the organization. EAR reflects the owner’s/proprietor’s funds with respect to total assets. The inferences drawn from table 2 for Uzavtoyol are described below.

D/E ratio is very low indicating sufficient safety margin for creditors. The servicing of debt is less burdensome for the Company and it can raise additional funds.

A high percentage of EAR (over 90%) indicates that proportion of total assets of Uzavtoyol financed by its owners is very high, again reflecting high margin of safety available to creditors.

Leverage ratios surely indicate the safety of the Company, however, on the other hand, it clearly indicates that low gearing is preventing the entity to grow even faster by taking larger investments financed with loans.

Uzavtoyol has not been using leverage efficiently.

Profitability ratios measure the operating efficiency of the organization. It indicates financial strength of the company to its owners and management. The operating efficiency of Uzavtoyol has been assessed in terms of the following profitability ratios with respect to sales and investment and summarized in table 3 below:

Table 3 Operating Efficiency Parameters Parameters FY 2003 FY 2004 FY 2005 Return on Sales (ROS) 3.3% 2.1% 2.5% Operating Profit Ratio (OPR) 5.3% 3.9% 4.7% Return on Assets (ROA) 0.4% 0.4% 0.4% Return on Equity (ROE) 0.5% 0.4% 0.4% Return on Capital Employed (ROCE) 9.8% 17.4% 20.1% Source: Uzavtoyol and ADB PPTA consultants

ROS is the profit margin of the company. OPR, which is a measure of profit margin, reflects the ability to operate the business to recover reasonable compensation to the owners for providing their capital at risk. ROA is measured in terms of the relationship between net profit and assets. ROCE also indicates return on investment and is measured in terms net profits after taxes

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with respect to total capital employed. The inferences drawn from table 3 for Uzavtoyol are described below.

ROS and OPR are positive for all reported years.

Ratios showing the return on investment, i.e. ROA, ROE and ROCE are positive but rather low, in the view of the fact that currently commercial lending rates in the country vary between 16-20% (refinancing rate of the Central Bank is 14%).

It can be concluded that Uzavtoyol has adequate short term financial solvency from its current operations. Though low D/E ratio and high EAR indicates good long term solvency, it also reflects that debt is not being exploited as a source of capital and for trading on equity by the Company. This can be attributed to the economy of Uzbekistan where the capital markets are not well developed and the cost of capital is rather high. Positive but rather low profit margins and operating profit ratios shows that the bulk of revenue is used to meet the operating and financial expense of the organization. Return on investment is positive, but when compared to private sector yield is not very attractive.

3. BIDDING PRACTICES OF UZAVTOYOL ENTERPRISES

The Road Fund is responsible for all tenders that are carried out annually for construction, reconstruction and capital repairs of common use roads of international and state importance, and conclude agreements with winners of the competitive bids.

Uzavtoyol road enterprises participate in various road construction and rehabilitation tenders, arranged and financed by the Road Fund and by other agencies, local municipalities and large corporations such as National Company “Uzbekistan Railways”, “Uzbekistan Airways”, etc.

The entities are allowed to borrow bank loans for the activity related to road construction and to enter into other constructions and business activity, provided this does not hamper or impede their general task of watching over the conditions of and maintaining the roads.

Only 7 “national enterprises” and the 161 “local” enterprises, as separate legal entities, are eligible and qualified to participate in the biddings from Uzavtoyol along

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with private and other companies in the tender that is carried out annually and these enterprises decide at their own risk to bid or not on particular projects.

The head office of Uzavtoyol and its 12 provincial enterprises do not bid as they are administrative legal entities and they do not have equipment and other facilities to be qualified.

Only in exceptional cases can Uzavtoyol be assigned directly by the Government to carry out a strategic project where any single enterprise cannot perform it alone, and Uzavtoyol will serve as coordinating body among its enterprises to carry out this task.

The principles of the tender require transparency and aim at ensuring competitiveness of the bid.

In previous years, Uzavtoyol enterprises were always dominant among the winners with participation of few private contractors. There was significant competition among these enterprises (in particular at among “regional entities” as they had to submit their proposals separately in conjunction with tender rules. However, competition between “national entities” remained very limited. Indeed, in 2007, in the 7 tenders where a “national entity” prepared a bid which were reported to the consultants, no other national entity entered in the competition (see Annex I).

Information about the tender results for reconstruction and capital repair works of international and national roads that are realized under the Road Fund financing for the year 2006.

(mln. soum) Including SJSC "Uzavtoyul" The other state Types of the Total Number of Contract Non state companies enterprises enterprises work number bidders value quantity value quantity value quantity value Construction and 22 65 60329.1 21 59349.1 1 980.0 reconstruction Capital repair 34 96 20639.9 30 18193.6 1 1551.3 3 895.0 Total 56 161 80969.0 51 77542.7 2 2531.3 3 895.0

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Information about the tender results for reconstruction and capital repair works of international and national roads that are realized under the Road Fund financing for the year 2007.

(mln. soum) Including SJSC "Uzavtoyul" The other state Types of the Total Number of Contract Non state companies work number bidders value enterprises enterprises quantity value quantity value quantity value Construction and 19 47 86635.4 14 64181.0 3 18117.2 2 4337.2 reconstruction

Capital repair 32 87 39511.3 26 35654.8 6 3856.5

Total 51 134 126146.7 40 99835.8 3 18117.2 8 8193.7

However, starting from 2008 the situation is changing and the initial tender results showed that there are about 10 private companies which were among tender winners representing 90% of the winners. This implies that the tender procedure is becoming more and more competitive, and this should influence Uzavtoyol entities to be more competitive and operate as commercially oriented enterprises.

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SECTION 4: IDENTIFYING AREAS WHERE UZAVTOYOL ENTERPRISES DO NOT MEET THE ELIGIBILITY REQUIREMENTS FOR PARTICIPATION IN ADB-FINANCED PROJECTS

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In their assessment pursuant to sixth item of the TOR, the international consultants have identified the following areas where the Uzavtoyol member entities (G7) may not meet the eligibility requirements for participating in ADB-financed projects. Additional comments from the national consultants are attached in Annex M.

1. PRELIMINARY COMMENTS

The road sector is a capital intensive sector where entry is de facto limited by the need for large initial investment in the form of tools and machinery to perform earth and road works.

Traditionally, the road projects were financed only out of the budgetary grants and were controlled or supervised by the Government. The road sector has so far attracted limited private sector participation.

However, the establishment of the Road Fund introduced a higher degree of decentralization and improved resource allocation and public procurement procedures. Furthermore, the establishment of the REPC responsible for providing to market operators for hire equipments, tools and machinery necessary to perform road works will remove one of the largest barriers to entry for private sector operators.

2. ASSESSMENT OF UZAVTOYOL ENTERPRISES’ ELIGIBILITY

Uzavtoyol member entities (G7) shall be eligible if they establish that (i) they operate under commercial Law, (ii) they are legally autonomous from the borrower, (iii) financially independent, (iv) they are managerially autonomous and (v) they are not a dependant agency of the borrower.

The four key attributes of a standard corporation may be defined as follows121:

1. Separate entity: the corporation is a legal entity distinct from its owners with a clear definition of and accounting for its own assets and liabilities. 2. Limited liability for owners: Owners’ risks of financial lost are limited to their contribution to the corporation’s capital. 3. Centralized role for corporate management and a board of directors: the day to day affairs of the corporation are conducted by one or more persons (“managers”), who are hired by the owners. A board of directors, elected by the owners, represents the owners’ interests by giving direction to the management and carrying out oversight of the managers’ performance. 4. Transferability of the ownership shares: The Shareholders’ ownership interests are transferable, and a transfer by an owner does not, in itself, change the rights and obligations of the corporation in respect of its own assets and liabilities.

121 See Broadman H. ed. (1996) Policy options for reform of Chinese State-owned enterprises, The World Bank, Washington, D.C.

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2.1 Operation under commercial law

As mentioned in section 2, operation under commercial law may be notably demonstrated when the entity, which must comply with commercial laws and regulations: - Is subject to the bankruptcy law; - Is authorized to operate like a commercial enterprise by the way of acquiring rights and liabilities, borrowing, being liable for debts; - Is making its own managerial decisions.

Uzavtoyol member enterprises (G7) are not fully subject to market discipline, enjoy soft-budget constraints – and have limited incentives to improve their performance:

(i) Limited application or no application of bankruptcy and liquidation law and statutes to Uzavtoyol member companies (see section 1) could expose commercially viable firms, including local and international firms who bid for contract in Uzbekistan, to entities that are no longer commercially viable and may therefore hamper effective and fair competition in the market.

In that context, enabling or facilitating the bankruptcy or liquidation process to existing SOEs shall notably foster competitive behavior on the market, and ensure a level playing field for all market players.

(ii) Uzavtoyol member entities (G7), as State unitary enterprises, appear to only manage the assets consolidated to them by the State which remains the owner and as such may remove and dispose of such assets at its discretion and shall also determine how revenues of such entities are distributed.

Furthermore, the State is in fine responsible for the liabilities of the enterprises.

(iii) If, in many aspect of their activities, Uzavtoyol member entities are subject to the same rules of contract, tort or access to credit, such entities enjoy privileges granted by the Government in respect of tax duties and import duties.

In that context, it may be concluded that Uzavtoyol member entities do not appear to operate under Commercial Law.

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2.2 Legal autonomy

An SOE may be considered as legally-autonomous when it:

- is a legal entity separate from the State i.e., the SOE has been incorporated under the provisions of an applicable Law or Act such as a Company Act or Enterprise Law; - has its owned audited accounts; - is managed by a separate Board of Directors/Management.

As provided by in the decision of the State body governing their establishment and according to their charters, Uzavtoyol member entities are separate legal entities with full legal capacity.

Furthermore, Uzavtoyol member entities maintain their own balance sheet and accounts. As mentioned above (section 1), Uzavtoyol member enterprises have separate audited accounts by law. However, such entities do not publish their audited financial accounts.

Established as State unitary enterprises, Uzavtoyol member entities are managed by one single person appointed by the “Board of the Company” of Uzavtoyol.

Uzavtoyol member entities are self-standing legal entities distinct from its owners. However, there is no clear definition and distinction of the companies’ own assets and liabilities, on one hand, and the owner’s (i.e. The State represented by Uzavtoyol) assets and liabilities on the other hand.

In that context, it may be concluded that Uzavtoyol member entities are legally autonomous.

2.3 Financial independence

Financial independence may be notably demonstrated by the requirement for separate audited accounts and return of capital; powers to raise capital, the fact that the entity is obtaining its revenue through the sale of goods and services, and is generating sufficient cash flow to self-finance or is being able to borrow from banks to implement its investments, could be further demonstrated notably if the entity:

- is not obligated to pass its entire surplus to the State except for the applicable declared dividend;

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- is not receiving subsidies from the State; - is not receiving any budgetary support from the State.

An enterprise may be deemed autonomous when it is able to obtain revenues, compete and be profitable in an open competitive market.

Uzavtoyol member entities are described as “self-financed entities”. Assessment of operation shows that such entities obtain a substantial part of their revenues from commercial operations. Noteworthy, use of revenues and profit engendered by such activities are, by law, determined by the State

As mentioned above, such entities, established as State unitary enterprises, do not own the assets consolidated to them by the State.

Revenues generated from such contracts represent on average 16% of the revenues from the 7 “national entities”. Moreover such contracts generate minimum profit or no profit. In practice, most of these contracts are subcontracted to the 161 “local entities”.

In that context, it may be concluded that Uzavtoyol member entities are not financially independent

2.4 Managerial autonomy

Effectively operating a corporation, being a SOE or a private enterprise, and sound corporate governance inevitably require a clear separation of the enterprise’s ownership from its management.

The extent of the owners’ decision making power usually includes:

- Election to the board of directors (or any similar body, if any),

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- Naming of key corporate officers, - Approval or rejection of changes in the corporate charters, - Merges and acquisitions, - Increase and decrease in capital, - Major debts borrowings, - Disposal of major assets, - Determination and deployment of retained earning and dividends, - Setting of managerial pay.

The owners (shareholders) shall select or appoint managers to conduct the day-to-day management of the firm, and in the process, accept to relinquish to the manager some of their powers. To that extent, precise arrangements on how owners or shareholders, board of directors and managers interact with one another, how various decisions are made and who is accountable for them shall be put in place.

Such managers shall be appointed on merits rather than connection with the owners or shareholders.

At the same time, the owners or shareholders may appoint a specific corporate body, which, representing their interests by giving direction to the management, shall supervise or oversight managers’ performance in the fulfillment of their tasks.

Operations, investments and activities pursued by Uzavtoyol member entities comprise both public utility and commercial objectives set by the State. Most activities are implemented according to a “National Road Strategy”122 established by the Government of Uzbekistan for a five-year period and further detailed on a yearly basis. Uzavtoyol has a mandate given to it by the State to supervise the use of the assets (referred to as “State assets”) consolidated to its members entities123 and may decide on their establishment, restructuring and termination124. The relationship between Uzavtoyol and its members companies is not based on capital contribution or control but relies on administrative authority and referred to as “direct subordination”.125 The management structure of Uzavtoyol member entities is extremely simple and streamlined and is directly subordinated to Uzavtoyol126; which has extensive powers of direction over operations.

122 Resolution of the President of the Republic of Uzbekistan No 535 dated December 12, 2006 “On measures for development of common use roads in 2007-2010”, 123 § 12 and 18 (iv) of the Charter 124 § 12 (ii) of the Charter and § 18 (iv) of the Charter 125 § 12 of the Charter 126 § 1.3 of the Charter of the Firm

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Managers of Uzavtoyol member entities, appointed by the board of the company of Uzavtoyol, have a limited margin for manoeuvre and autonomy in conducting the operations of the companies under their management.

In that context, it may be concluded that Uzavtoyol member entities are not managerially autonomous.

2.5 Not a dependant agency of the borrower or the executive agency

Dependency could notably be further evidenced by:

- Workforce deputation from or to the borrower or the agency executing the project (i.e. the Road Fund):

- Significant direct power over the management and operations of the entity granted to the borrower or the agency executing the project:

127 According to Article 179 of the Civil Code, a State unitary enterprise shall only have the right to alienate or dispose of the assets consolidated to it only with the consent of the owner of the assets (i.e. the State).

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The above evidences the dependence of Uzavtoyol and its member entities on the Road Fund.

3. ABSENCE OF CONFLICT OF INTEREST

As mentioned in section 2, PAI 3.02 § 14 states that: “to be eligible, a bidder must not have conflict of interest. Bidders found to be in conflict of interest will be disqualified. A bidder may be considered to have a conflict of interest with one or more parties in a bidding process, if they:

- have controlling shareholders in common:

Uzavtoyol member entities have one controlling “shareholder” in common i.e. Uzavtoyol representing the State and having close proximity in the operations of the entities. In that context, provided that other criteria were met, only one of the entities under Uzavtoyol’s umbrella could bid for the project.

The Road Fund, being a public body notably reports to the Road Council and the Cabinet of Ministers. Uzavtoyol entities report to Uzavtoyol and ultimately to the State Property Committee under the Cabinet of Ministers.

- receive or have received any direct or indirect subsidy from any of them:

The Road Fund allocates a yearly routine maintenance budget to Uzavtoyol and its member companies for maintaining roads under their supervision. Such budgetary allocation could be considered as a subsidy.

- have a relationship with each other, directly or through common parties, that put them in a position to have access to information about or influence on a bid of another bidder, or influence the decisions of the purchaser regarding the bidding process:

When bidding for the project and considering the “holding structure” in place, Uzavtoyol entities may easily exchange information regarding their respective bids.

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Considering the holding structure in place, the direct subordination existing between Uzavtoyol and its members entities128, the fact that the deputy Chairman of Uzavtoyol is a member of the Road Council, which is the highest body supervising the activities of the Road Fund, may constitute a conflict of interest. Similarly, the close ties between Uzavtoyol and the Road Fund described above could also lead to potential conflicts of interest.

Similarly, the fact that Uzavtoyol’s chairman is a member of the Project Steering Committee which will appoint the members of the Tender Evaluation Committee may constitute a conflict of interest.

- submit more than one bid in the bidding process, except where alternatives offers may be permitted under the bidding documents; this does not limit the participation of subcontractors in more than one bid, or as bidders and subcontractors simultaneously; or - participated as consultant in preparing the design or technical specifications of the goods and related services or works that are subject of a bid.

As mentioned above, design and technical specifications for the project were prepared by an independent consulting company (despite existing capacity within Uzavtoyol).

The above evidences potential conflicts of interests in the event that one or several Uzavtoyol member entities are bidding for a project.

128 § 1.2 of the Charter [of Uzavtoyol], see Section 1 – 1.4.8

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SECTION 5: IDENTIFYING AND PRIORITIZING ACTIONS THAT ARE REQUIRED TO MAKE UZAVTOYOL ENTERPRISES ELIGIBLE TO PARTICIPATE IN ADB-FINANCED PROJECTS

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In their assessment pursuant to item 7 of the TOR, the Consultants have identified the following actions that are required to make Uzavtoyol enterprises eligible to participate in ADB-financed projects.

A critical component for SOEs in the road sector to meet the requirements for eligibility for ADB-financed projects is notably the strengthening of corporate governance to allow clear separation between the functions of ownership and management and the increase of incentives to facilitate better discipline and increase manager accountability and corporate performance.

The Consultants are providing in the Matrix below their final set of recommendations and measures to be taken for Uzavtoyol enterprises to meet the eligibility requirements for participating in ADB-financed projects.

Proposed measures could be implemented within the existing legal framework.

1. PROPOSED SET OF MEASURES AND RECOMMANDATIONS

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Current Situation Proposed actions Outcomes - Uzavtoyol members entities are Denationalization Conversion into LLC (see Table Below established as State unitary for comparison between State Unitary The Law on Denationalization and enterprises Enterprises and LLC in respect of ADB Privatization governs the conversion of eligibility criteria). State unitary enterprises into other - Such entities are not currently - According to existing regulations, corporate forms. Such conversion is subject to bankruptcy law; LLC are subject to bankruptcy law referred to as “denationalization”129. - Such entities only manage the - The denationalized entities shall be assets consolidated to them by the The Cabinet of Ministers of the Republic the owner of the assets by way of State which remains the owner of of Uzbekistan, or the state administration contribution; such assets; bodies authorized by it, shall be - The State shall be the owner of the empowered to adopt the decision on share or participation in the denationalization and privatization130. denationalized entities; - The State determines how revenues - Profits shall be distributed among Such measure could be implemented of the entities shall be distributed within the existing legal framework (see the owner(s); - The State is in fine responsible for section 1 item 2). - The liability of the State as owner Operation under commercial Law the liabilities of the entities or shareholder shall be limited to its The implementation of the procedure contribution to the legal capital (described in Section 1 item 2.4) lies with denationalized entities; the State Property Committee. Notably, some entities under the Uzavtoyol umbrella are already established as LLCs and are currently considered for privatization (See section 1 item 2.5) - Uzavtoyol member entities are Repealing existing regulations granting - The denationalized entities shall subject to the same rules of Uzavtoyol member entities with conduct business in a way that is contract, tort or access to credit, privileges in respects of tax and import comparable to businesses not such entities enjoy privileges duties. owned by the State and operate granted by the Government in through market channels; respect of tax and import duties.

129 Article 1 of the Law on Denationalization and Privatization of November 1991, Denationalization shall mean transformation of State enterprises and organizations into economic partnerships and companies, other enterprises and organizations, which are not public property. Denationalization may notably be executed by reorganization of State Owned enterprises, i.e., State Unitary enterprises, into economic partnerships or companies. 130 Article 7of the Law on Denationalization and Privatization Page 112 of 167

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Comparing State Unitary Enterprise and LLC State Unitary Enterprise LLC Organization Operate according to the decision of the relevant body having decided Operate under the Law on LLCs as other non State on its establishment/ enterprises. Operation objectives Conduct socio-economic objectives set by the State. For profit-making objective. Rights and Obligations The State as owner may be involved in the enterprise’s operation. Similar to other non-State enterprises. The company assets are consolidated by the State, which remains the The State may hold 100% of the authorized capital. sole owner of the company’s assets. The entity has a right to manage The entity owns and is free to use and dispose of its Capitalization & assets such assets according to the goals and objectives as set in its charter. assets, except for major transactions. The company is not authorized to sell, rent, pledge or in any other way dispose of the company’s assets, without State permission. The State is the highest governing body of the entity. It appoints a The General Assembly of Shareholders is the highest director, the key managers and senior staff (deputy director, chief governing body, which appoints the director (general accountant, senior engineer, etc.). manager). The State’s prior permission is required for any “large transactions”, All other managers and staff-members are hired by the and also for transactions related to disposal of the company’s basic director (in case of JSC). assets. The charter of the company may stipulate the The Director’s competence is limited to day-to-day activity of the establishment of the supervisory board of the company. Corporate Governance entity. The entity may perform only those types of activity, which have The General Assembly’s permission is required for

been defined by the owner through its Charter. strictly limited types of “large transactions”. In general, the entity is free to enter into any transactions (in case of JSC). The director and other key managers have the broadest range of competence as concerns management and business of the entity. The entity may do any business it finds to be profitable. The State shall determine how revenues of a State unitary enterprise The entity may dispose of its profits as it decides. Profit shall be distributed. The entity may be dissolved upon decision of the State. The entity may be dissolved upon decision of the Dissolution General Assembly. Such decision shall be supported by all shareholders. State-owned enterprises are either not subject to bankruptcy law or have Private companies are subject to the bankruptcy law and Bankruptcy a special regime of bankruptcy with greater support from the are less likely to be supported by the Government. Government.

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Current Situation Proposed actions Outcomes - Uzavtoyol member entities are legal - Similarly, denationalized entities entities separated from the State; shall be considered as separate legal entities - There is no clear definition and – Denationalization will involve the distinction of the companies’ own Denationalization alteration of the reporting, legal and assets and liabilities, on one hand, management mechanisms of and the owner’s (i.e. The State enterprises and will allow the represented by Uzavtoyol) assets denationalized entity to operate at and liabilities on the other hand; arms length from the State; - Uzavtoyol member entities - Implementation of Resolution of the - External audit by an independent Legal Autonomy maintain their own balance sheet President No. PP-475 dated auditor selected on a competitive and accounts. They have separate September 27, 2006 providing for basis; audited accounts by law. However, external audit by independent - Publication of audited financial such entities do not publish their auditors selected on a competitive accounts. audited financial accounts. basis in Enterprises with State shares over 50% of the Charter Capital. – Instruction from the supervising authority to publish audited financial accounts131.

131 Such possibility as been confirmed to the consultants.

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Current Situation Proposed actions Outcomes - Uzavtoyol member entities obtain a - The denationalized entities, substantial part of their revenues established in form of LLC shall act from commercial operations. as bona fide commercial companies under the jurisdiction of company Denationalization law - Use of revenues and profit - Profits in the denationalized entities engendered by such activities are, shall be distributed among the by law, determined by the State owner(s); Financial Independence - Uzavtoyol member entities receive All works, including routine maintenance - Routine maintenance works are yearly funds from the Road Fund shall be awarded after a fully fledged executed on arm’s length basis and for routine maintenance works of tender procedure open to all operators according to existing tender roads under their supervision (see and negotiated on arm’s length basis as regulation; above). If performance of such currently implemented for construction works is based on a contract, and upgrade works. Uzavtoyol member entities are required to enter in such contracts and perform the required works.

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Current Situation Proposed actions Outcomes - Denationalization will permit the - Managers of Uzavtoyol member establishment of clearer lines of entities, appointed by the board of responsibility, and the introduction the company of Uzavtoyol, have a of sound principles of corporate limited margin for maneuver and governance (see Chart below). autonomy in conducting the operations of the companies under - The owners of the denationalized Denationalization their management. entities shall appoint a specific

- The management structure of corporate body, which, representing Uzavtoyol member entities is their interests by giving direction to extremely simple and streamlined the management, and supervise and and is directly subordinated to oversight managers’ performance in Uzavtoyol ; which has extensive the fulfillment of their tasks powers of direction over operations. (Supervision Committee);

- Denationalization could ease the appointment of independent Systemization of use of “Model contract professional recruited outside the - The manager of Uzavtoyol member Managerial Autonomy for manager” provided in umbrella of the administration; entities are currently appointed by Resolution of the Cabinet of - Increased accountability for the board of the company of Ministers No. 189 dated April 19, managers and increased managers Uzavtoyol. 2003 margin for maneuver and autonomy in conducting the operations of the companies under their management. - Uzavtoyol has a mandate given to it Streamlining State property - Allow clear separation between by the State to supervise the use of management by revoking Uzavtoyol’s ownership and sectoral regulatory the assets (referred to as “State supervision mandate on member entities. oversight; assets”) consolidated to its Unbundling of pursuit of members entities and may decide Supervision shall be allocated to a commercial objectives by on their establishment, restructuring centralized entity, i.e the State Property denationalized entities whose shares and termination . The relationship Committee, which according to the and participations are owned by the between Uzavtoyol and its Regulation of the State Property State Property Committee) and members companies is not based on Committee (approved by President’s regulatory functions performed by capital contribution or control but Resolution No. PP-335 dated April 26, Uzavtoyol; relies on administrative authority 2006) is a State agency responsible for - Removal of Uzavtoyol oversight and referred to as “direct implementation of economic reforms, shall nurture competitive rivalry subordination”. management of State property and between the different entities under

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protection of State interests in such Uzavtoyol by increasing their property, denationalization and commercial international margin for privatizations, post-privatization maneuver. monitoring of enterprises, and assisting to development of market-based infrastructure.

The State Property Committee should develop and issue a set of rules and principles that defines the overall objectives of State ownership and the State’s role in the corporate governance of SOEs in the form of a Charter.

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Existing Management Structure in the 7 national member entities

Uzavtoyol Uzavtoyol Member Cabinet of Ministers entitiy Manager

The Firm is managed by one single person, the director, Company Council appointed by the Board of the Company of Uzavtoyol .

The director is the legal representative of the company Executive Office and shall be personally liable for the operation of the company and may appoint deputies and other staff to assist him/her in the Head of Department management of the company

Responsibilities of the Company Council comprise132: (i) Develop the concepts of improvement and perfection of structures of national motor roads; (ii) Identify basic directions of economic, scientific-technical and social development of the Republic’s road infrastructure; (iii) Review issues related to improvement acting legislation on road infrastructure and submit it to the national government; (iv) Approve the chairman of the Board of the company, deputies of the chairman of the Board, heads of departments, and also the structure of the management of the company “Uzavtoyol” including representatives of organizations and agencies in its structure.

132 § 23 of the Charter

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Management Structure after Conversion

General meeting of participants of the company is regarded as a higher management body of the General meeting of participants company.

Exclusive authorities of the general meeting of participants of the company are as follows: - determination of the basic lines of activity of the company, as well as taking of decision on Supervision Committee participation in other associations of commercial organizations; - change of an amount of the authorized fund (authorized capital) of the company; The charter of the company stipulates the establishment of the supervisory - introduction of amendments and supplements to constituent documents; board of the company. - establishment of executive agencies of the company and anticipated termination of their authorities; This corporate body is designed to protect shareholders’ interests and to - election and anticipated termination of authorities of auditing committee (auditor) of the company; represent them equally in the executive branch of the company. - election and prescheduled termination of authorities of the supervisory board if its establishment The following are notably within the competence of the Supervisory specified by the charter of the company; Council : - approval of annual reports and annual balance sheets; - determination of the major lines of the company's activity; - taking of a decision on distribution of net profit of the company between participants of the - calling of annual and extraordinary general meetings of shareholders; company; - increase of authorized funds of the company by increase of the par value - approval (adoption) of documents governing activity of the company's bodies; of shares or by issuing additional shares; - taking of a decision on execution of audit; determination of audit organization and maximum - issuing bonds and securities; amount of payment for its services; - determination of market value of property; - taking of a decision on the establishment of other legal entities, representative offices and affiliates; - purchase of shares, bonds and other securities; - taking of a decision on reorganization or winding-up of the company; - approval of annual business-plan; - appointment of liquidator and approval of liquidation balance sheets; - opening of representative offices and establishment of branches; - settlement of other questions stipulated by the Law. - establishment of subsidiary and dependent enterprises; - entry into large transactions; Such cases cannot be can not be transferred or settled by the supervisory board of the company and - entry into transactions with affiliated and interested persons. executive agency of the company, with the exception of cases stipulated by the present Law. State Trustees as provided in Resolution No. 189 of the Cabinet of Ministers dated April 19, 2003 (individual or professional company hired by the State to represent its interests) could be appointed to act as i

Management Management of current activity of the company is carried out by the sole executive agency or collective executive agency of the company.

Executive agency of the company is accountable to the general meeting of participants of the company and the supervisory board of the company (if its establishment is stipulated by the charter of the company).

The manager shall enter into the “Model contract for manager” provided in Resolution of the Cabinet of Ministers No. 189 dated April 19, 2003

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Current Situation Proposed actions Outcomes As mentioned above, dependency could be evidenced through the criteria mentioned above as well as any reporting duties of the entities to the borrower or the agency executing the project in the exercise of their activities (notably in the exercise of any administrative, public utility or regulatory mandate). All works, including routine maintenance shall be awarded after a fully fledged tender procedure open to all operators - The Road Fund allocates a yearly and negotiated on arm’s length basis as routine maintenance budget to currently implemented for construction Uzavtoyol and its member and upgrade works133. Not a dependent agency companies for maintaining roads - Routine maintenance works are

under their supervision. Such works executed on arm’s length basis and Alternatively, Routine maintenance are contract based, however, according to existing tender works could be directly performed by Uzavtoyol and its members entities regulation. Uzavtoyol entities at local level (161 are required to enter into such local entities). It is understood that these contracts and perform the required routine maintenance works are currently work assigned to Uzavtoyol national member entities and further subcontracted to local entities.

133 According to the comments received from the Uzbek Government “The next step of road sector reforms in the Republic can be staged (within 3 to 7 years) introduction of a selection system through tenders of the road enterprises to perform common roads maintenance. This measure shall increase the application efficiency of funds allocated for current maintenance of the roads, as well as improve the quality of roads”. A shorter timeframe could be considered.

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Current Situation Proposed actions Outcomes - Uzavtoyol entities have one controlling “shareholder” in common i.e. Uzavtoyol representing the State and having close proximity in the operations of Conflict of interest the entities. In that context, provided that other criteria were met, only one of the entities under Uzavtoyol’s umbrella could bid for - Allow clear separation between the project. ownership and sectoral regulatory - Considering the holding structure in oversight; place, the direct subordination - Unbundling of pursuit of existing between Uzavtoyol and its commercial objectives by members entities , the fact that the denationalized entities whose shares deputy Chairman of Uzavtoyol is a and participations are owned by the member of the Road Council, Streamlining State property State Property Committee and which is the highest body management by revoking Uzavtoyol’s regulatory functions performed by supervising the activities of the supervision mandate on member entities. Uzavtoyol; Road Fund, may constitute a - Newly appointed supervisors shall conflict of interest. Similarly, the Supervision shall be allocated to a be independent from Uzavtoyol and close ties between Uzavtoyol and centralized entity, i.e the State Property the Road Fund to prevent conflict the Road Fund described above Committee. of interest; could also lead to potential conflicts - Removal of Uzavtoyol oversight of interest. shall nurture competitive rivalry - Similarly, the fact that Uzavtoyol’s between the different entities under chairman is a member of the Project Uzavtoyol by increasing their Steering Committee which will commercial international margin for appoint the members of the Tender maneuver. Evaluation Committee may constitute a conflict of interest - When bidding for the project and considering the “holding structure” in place, Uzavtoyol entities may easily exchange information regarding their respective bids.

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- The Road Fund allocates a yearly All works, including routine maintenance routine maintenance budget to shall be awarded after a fully fledged - Routine maintenance works are Uzavtoyol and its member tender procedure open to all operators executed on arm’s length basis and companies for maintaining roads and negotiated on arm’s length basis as according to existing tender under their supervision. Such currently implemented for construction regulation; budgetary allocation could be and upgrade works. considered as a subsidy.

ADB

Consulting Firm CoM (h)

Notably in charge of - providing TA, and - drafting feasibility study. MOF Road (g) Proposed actions aim at (i) Council severing “direct subordination” links between Project Steering Uzavtoyol Uzavtoyol and its members Committee Road entities. Fund (j) Uzavtoyol Members Companies Tender evaluation (l) committee (k)

PMU

Notanbly in charge of : - drafting bidding document; - implementing the bidding, and - make recommendations to the Tender evaluation Committee

(m) Vice Chairman of Uzavtoyol is member of the Road Council (n) Uzavtoyol is directly subordinate to the CoM (o) The Road Council is the supreme body of the Road Fund. (p) The Road Fund gets technical support from Uzavtoyol in the implementation of its duties and provides financial support to Uzavtoyol and its regional office. (q) Uzavtoyol members companies receive financing from the Road Fund (via Uzavtoyol) to perform routine maintenance work on the roads under their supervision (contract based). (r) Uzavtoyol Chairman is a member of the project steering committee.

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2. FURTHER STEPS: PRIVATIZATION AND DIVESTURE

Further privatization or divesture could be considered as there is little justification for State involvement in such area, as private and competitive market forces could produce greater efficiency under the eventual regulatory oversight of the State.

State shareholding or participation in member enterprises could be divested fully or reduced to a minimum. Specific criteria on which enterprises should, or should not, have State shareholding or participation could be further developed.

Divesture and sale of share or participation to the private sector (national or foreign) could be implemented by way of increase of legal capital in order to improve the financial standing of the company. At the same time a “Golden Share” mechanism as provided in article 24 of Law on JSC could be put in place.

Golden Share134

"Golden share" is a special right of participation of the State in the management of certain joint-stock companies that is introduced on the grounds of the governmental Resolution of the Republic of Uzbekistan upon privatization of SOEs or sale into private ownership of state holding of shares of joint stock companies of strategic importance. It ensures the protection of the economic interests of the country. A "Golden share" has no value; it is not liable to alienation or transfer in pledge and is not taken into account when determining an amount of an authorized fund and charge of dividends. A "Golden share” can be introduced to joint-stock companies which either have no State share or the latter does not exceed twenty five percent of the authorized fund. The Cabinet of Ministers of the Republic of Uzbekistan established a procedure for use of the "golden share" by the state. A "Golden share" is implemented by the appointment of a representative of the State to the supervisory council of a joint stock company (hereinafter referred to as the representative of the State). The representative of the State participates, without fail, in general meetings of shareholders and meetings of the supervisory council with the right of veto over the resolutions concerning questions stipulated in Paragraphs two through four, seven, eight, eighteen, nineteen of the first Part of Article 65, as well as in Paragraphs seven, twenty two through twenty four of the first Part of Article 82 of Law on JSC.

134 See § 2 of Resolution of the President of the Republic of Uzbekistan No PP-672 dated July 20, 2007 requesting application of “golden share” mechanism in respect of the enterprises of the cotton-processing and fat-and-oil industry, "Tashkent tractors' making plant" JSC. Page 123 of 167

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Alternatively (if finding private entities interested in investing in privatized entities revealed difficult), participation could be offered to workers and managers in the form of a Management Buy Out (MBO).

Considering the financial standing and competitiveness of the entities in the medium to long term, a final step could be a listing on the Tashkent Stock Exchange and full divestiture.

The Consultants are providing in the Matrix below a timeframe for implementation of proposed set of recommendations and measures to be taken for Uzavtoyol enterprises to meet the eligibility requirements for participating in ADB-financed projects:

Implementation Action Entity responsible Short Medium Long term term term 1. Denationalization - Conversion and denationalization President of the Republic / X State Property Committee - Use of Model contract for State Property Committee X manager - Use of IAS and publication of Member entities X audited account - Privatization and divesture President of the Republic / X State Property Committee - Listing on Stock exchange X 2. Streamline State asset management - Transfer of participation President of the Republic / X State Property Committee 3. Removal of administrative support - Allocation of routine maintenance Road Fund X works trough tendering - Repealing existing regulations Cabinet of Ministers granting Uzavtoyol member X entities with privileges in respects of tax and import duties

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ANNEXES

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ANNEX A: Intended work plan

February March 20 21 22 23 24 25 26 27 28 29 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 1 2 3 4 5 6 7 8 9 10 11 12 13 14

Manila - ADB Hanoi Tashkent Hanoi

(i) Review the finding of the prelimanary investigation; (i) Gather and review all relevant documentation; (i) Gather and review all relevant documentation; (i) Assess the current practice of scrutinized enterprises and their compliance with ADB guidelines and policies notably through interviews with relevant stakeholders, on-site visits, and local research; (i) Prepare draft recommandations; Etienne Laumonier (ii) review similar studies for other countries undertaken by ADB and other development agencies; (ii) Liase with local consultants for additional information; and (ii) Liase with local consultants for additional information; and (ii) addtional on-site researches on specific issues identified by the team leader; (ii) Draft Final report; and and (iii) In coordination with local consultant, prepare questionnaire and comprehensive schedule of (iii) In coordination with local consultant, prepare and schedule field trip to Tashkent (iii) Prepare recommandations on what measure could be taken for scrutinized enterprises to meet eligibility requirements; and Consultant, SOE Expert (iii) Prepare dissemination seminar and consultations. (iii) review and familiarize with ADB's policies and guidelines related to the eligilibilty of SOE. interviews with relevant SOE representatives and relevant Stakeholders. (continued). (iv) Draft Interim report.

Manila - ADB Hanoi Tashkent Hanoi Hanoi

(i) Gather and review all relevant documentation; (i) Gather and review all relevant documentation; (i) Assess the current practice of crutinized enterprises and their compliance with ADB guidelines and policies notably through interviews with relevant stakeholders, on-site visits, and local research; (i) Prepare draft recommandations; Nicolas Audier (i) Review the finding of the prelimanary investigation; (ii) Liase with local consultants for additional information; and (ii) Liase with local consultants for additional information; and (ii) Prepare recommandations on what measure could be taken for scrutinized enterprises to meet eligibility requirements; and (ii) Draft Final report; and (ii) review similar studies for other countries undertaken (iii) In coordination with local consultant, prepare and schedule field trip to Tashkent Team Legal, Legal Advisor (iii) In coordination with local consultant, prepare and schedule field trip to Tashkent. (iii) Draft Interim report. (iii) Prepare dissemination seminar and consultations. by ADB and other development agencies; (continued). (iii) review and familiarize with ADB's policies and guidelines related to the eligilibilty of SOE.

Intermittent work Intermittent work

Local Consultants

Consultants' outputs Interim ReportInterim working schedule in Tashkent (in (in in Tashkent schedule working coordinationwith local consultants) Initial Questions to LocalConsultants Additional questions (if any), Definition of of Definition any), (if questions Additional

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ANNEX B: Questionnaire to SOE representatives Annex B.1:

Questions send to the Uzavtoyol “national” enterprises

1. Requested documents:

- Decree or resolution establishing the enterprises; - The charter of the Company - Organizational chart of the company - Any resolution or minutes made by State authority regarding the organisation and the management of the company.

2. Questions raised and topics of discussions

o Does the enterprise have a separate legal identity and is it subject to the same registration requirements as private enterprises?

We understand that the enterprise is not established according to Law on Corporation or Enterprise Act; but are established pursuant to a Resolution of the Cabinet of Ministers.

- According to Law and Charter, is the enterprise considered as a separate legal entity?

o How was the enterprise established and capitalized? Who is the shareholder?

- How is the Shareholder represented in the company (is there a board of directors?) - Which entity represent the State as Shareholder? - What is the extend of the shareholder liability according to charter and Law? - Please describe the involvement of the State as shareholder in the day to day business of the company - Please describe the involvement of the State as Shareholder in the definition of the strategy of the company. - Please could you elaborate on the notions of “economic management” and “operative management”. - In which way can the enterprise dispose of the assets “under its management”? to which extend is the shareholder or State representative involved?

o Is the enterprise subject to the same corporate/commercial laws as any other private enterprise, for example regarding its incorporation, capitalization, corporate governance, dissolution, etc.? Please show relevant differences in a matrix.

- Can you define the scope of activity of the enterprise (according to Law and Charters)? - Does Law or Charter provides for regulatory function for the enterprise?

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o Is the enterprise subject to the same laws of property, contract, torts, access to credit, etc. as private enterprises? Please show differences in a matrix.

- In practice; does the enterprise has a preferential access to credit and financing, notably from State Owned commercial Banks?

o Which body/bodies or agency/agencies have the power to appoint and dismiss the management of The enterprise?

- Please describe the corporate structure of the company (Board, manager, CEO, CFO and respective attributions). - Please describe the appointment and the dismissal process of directors (if any), managers and key corporate officers. - What are the usual recruitment criteria and background of appointed directors, managers and key corporate official? - Is there a decision or a resolution appointing the management for a definite term?

o Is The enterprise’s management subject to the same fiduciary duties and liabilities as managers of private enterprises?

- Is there a MIS in place? What are the reporting duty of the management to the shareholders? How is it implemented?

o Are its employees subject to the same employment laws as employees of private enterprises?

- Please compare actual work force with private enterprises operating in the same sector of activities in term of recruitment, wages, lay off, pension and dismissal.

o Are any of the management or employees of The enterprise seconded from or to the Government?

o Are any of the pension or other benefits of the management or employees linked to the Government?

o Can the enterprise be a party to legal proceedings (either as plaintiff or as defendant) like any other private enterprise and can its assets by seized like those of any other private enterprise?

o Can the enterprise be declared insolvent/bankrupt under Uzbekistan’s bankruptcy laws like any other private enterprise?

o How are the enterprise’s operations financed? How are The enterprise’s income and expenditures accounted for?

- How are road maintenance contracts awarded? What is the portion of such works on the overall operations of the company?

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o Is the enterprise required by law to draw up and publish audited annual financial statements like any other private enterprise? Please provide copies of such statements for the last 3 years.

o What are the cash flows of the enterprise, both in terms of distributions from The enterprise (whether as dividends service charge, repayment of loans, otherwise) made by The enterprise and inflows into The enterprise (other than account receivables in the ordinary course of business). Which body/agency is entitled to profits generated by The enterprise?

- How are the dividend paid? (is there minutes of board of manager regarding such payment?)

o Are these financial statements subject to the same auditing requirements as any other private enterprise? Please provide copies of audit reports.

o Does the enterprise have the power to raise capital or borrow money? Does it enjoy any privileges (amounts, interest rates, borrowing from state owned banks, etc) in accessing capital as compared to private enterprises?

o Does the enterprise obtain its revenue (mainly) through the sale of goods and services? Are there any other sources of income?

o Is the enterprise long term and medium term strategy and objectives established according to road master plan and yearly sectoral strategic paper issued yearly by the Government?

o What decision-making authority does management have in the conduct of its operations? For example, does it have the freedom to enter into contracts, purchase equipment, hire and terminate the services of personnel?

o What decisions of management are subject to prior approval from other entities/agencies?

o To which body/bodies and agency/agencies does the management of The enterprise report?

o Which Authority appoints the Executive Management and which other Executive Appointments are made by such Authority? How is the Executive Management of the Enterprise appointed?

o How many present staff are former or current employees of the EA/Borrower?

o Please indicate to which extent the Government has the authority to direct or intervene in the day-to-day management of The enterprise, for example where it regards:

The enterprise’s operational organization and business decisions; the development and/or approval of business plans and strategies;

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the entry into contracts and arrangements with third parties for collaboration, financing, joint ventures, mergers & acquisitions; the transfer, lease/rent, lien or mortgage, of important equipment and workshops.

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Annex B.2:

Questions send to Uzavtoyol

o Does Uzavtoyol have a separate legal identity and is it subject to the same registration requirements as private enterprises?

- We understand that the enterprise is not established according to Law on Corporation or Enterprise Act; but are established pursuant to Presidential Decree [@]

- According to Law and Charter, is the enterprise considered as a separate legal entity?

o How was Uzavtoyol established and capitalized? Who is the shareholder?

o Is Uzavtoyol subject to the same corporate/commercial laws as any other private enterprise, for example regarding its incorporation, capitalization, corporate governance, dissolution, etc.? Please show relevant differences in a matrix.

- Can you define the scope of activity of the enterprise (according to Law and Charters)? - Does Law or Charter provides for regulatory function for the enterprise?

o Is Uzavtoyol subject to the same laws of property, contract, torts, access to credit, etc. as private enterprises? Please show differences in a matrix.

- In practice; does the enterprise has a preferential access to credit and financing, notably from State Owned commercial Banks?

o Which body/bodies or agency/agencies have the power to appoint and dismiss the management of Uzavtoyol?

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- What are the usual recruitment criteria and background of appointed directors, managers and key corporate official?

o Is Uzavtoyol’s management subject to the same fiduciary duties and liabilities as managers of private enterprises?

- Is there a MIS in place? What are the reporting duty of the management to the shareholders? How is it implemented?

o Are its employees subject to the same employment laws as employees of private enterprises?

- Please compare actual work force with private enterprises operating in the same sector of activities in term of recruitment, wages, lay off, pension and dismissal.

o Are any of the management or employees of Uzavtoyol seconded from or to the Government?

o Are any of the pension or other benefits of the management or employees linked to the Government?

o Can Uzavtoyol be a party to legal proceedings (either as plaintiff or as defendant) like any other private enterprise and can its assets by seized like those of any other private enterprise?

o Can Uzavtoyol be declared insolvent/bankrupt under Uzbekistan’s bankruptcy laws like any other private enterprise?

o How are Uzavtoyol’s operations financed? How are Uzavtoyol’s income and expenditures accounted for?

- How are road maintenance contracts awarded? What is the portion of such works on the overall operations of the company?

o Is Uzavtoyol required by law to draw up and publish audited annual financial statements like any other private enterprise? Please provide copies of such statements for the last 3 years.

o What are the cash flows of Uzavtoyol, both in terms of distributions from Uzavtoyol (whether as dividends service charge, repayment of loans, otherwise) made by Uzavtoyol and inflows into Uzavtoyol (other than account receivables in the ordinary course of business). Which body/agency is entitled to profits generated by Uzavtoyol?

- How are the dividend paid? (is there minutes of board or manager regarding such payment?)

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o Are these financial statements subject to the same auditing requirements as any other private enterprise? Please provide copies of audit reports.

o Does Uzavtoyol have the power to raise capital or borrow money? Does it enjoy any privileges (amounts, interest rates, borrowing from state owned banks, etc) in accessing capital as compared to private enterprises?

o Does Uzavtoyol obtain its revenue (mainly) through the sale of goods and services? Are there any other sources of income?

o What decisions of management are subject to prior approval from other entities/agencies?

o To which body/bodies and agency/agencies does the management of Uzavtoyol report?

o Which Authority appoints the Executive Management and which other Executive Appointments are made by such Authority? How is the Executive Management of the Road Fund appointed?

o We understand that various government officials, including officials from the Ministry of Finance and Road Fund, hold positions at SJSC Uzavtuyol or its related entities and vice versa. Please provide an overview of all government officials holding a position at SJSC Uzavtuyol or its affiliated entities and provide a brief explanation of their roles.

o How many present staff are former or current employees of the EA/Borrower?

o Please indicate to which extent the Government has the authority to direct or intervene in the day-to-day management of Uzavtoyol, for example where it regards:

- Uzavtoyol’s operational organization and business decisions; - the development and/or approval of business plans and strategies; - the entry into contracts and arrangements with third parties for collaboration, financing, joint ventures, mergers & acquisitions; - the transfer, lease/rent, lien or mortgage, of important equipment and workshops.

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Annex B.3:

Questions raised to the Road Fund

1. Requested documents:

- Decree establishing the RF; - Organizational chart of RF (and its relation with the Road Council); - Financial data regarding (i) Routine maintenance work and (ii) other works awarded by RF (notably tenders procedures); - Charter of the RF.

2. Questions raised and topics of discussions

- What are the tasks and functions of the Road Fund? - What are the tasks and functions of the Road Council? - Could you elaborate on the price procedure regarding the funding of annual routine maintenance work (a priori control, a posteriori controls?); - Financial data regarding the resources of the RF (is there any contribution or tax contributed by road users or enterprises both private and public operating in the road sector?); - Appointment of RF members and staffing (is there any deputation of staff member from or to Uzavtoyol and its subsidiaries); - Composition of the Project Steering Committee; - Composition of the upcoming tender evaluation committee.

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Annex B.3:

Questions raised to the State Property Committee

1. Requested documents:

- Relevant regulations related to on going and future corporatisation and privatization program - Relevant regulations related to any assignment of asset management tasks to SOE (such as Uzavtoyol); - Relevant disposition regarding valuation of State assets.

2. Questions raised and topics of discussions

- What are the tasks and functions of the KGI? - Which Entity is responsible for the design of any corporatization and privatization program? - Is KGI responsible for management of all State assets, and State participation in SOEs? - To which extend is KGI involved in the nomination of Directors (if any), Managers, and Key Corporate Officers? - Could you elaborate on implemented, ongoing and upcoming corporatization and privatization process (notably in the Road sector)? - Could you elaborate on the notion of “State asset”, “right of operative management”, and “right of economic management” under Uzbek Law? - Could you elaborate on the distinction between the State as Shareholder and the State as Manager? - What are the reporting duties of SOE towards different State entities and notably KGI?

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ANNEX C: List of interviews conducted by the international consultants with relevant stakeholders

Date Institution Interviewees Comments and request. 17/03/08 URM Rafael Nadyrshin Assessment of ADB Portfolio and other (Portfolio Management donors (a). Officer) 17/03/08 Uzbek International Akram A. Mukhidov Operations of road users and comments on Forwarders Association (First Vice-Chairman) Uzavtoyol operations.

17/03/08 PMU Establishment and operation of the PMU. 17/03/08 French Trade Gauthier Mangenot Contacts and information on doing Commission (Attaché sectoriel) business in Uzbekistan

18/03/08 Société Générale Babour Tadjiev Operation of private commercial banks in (Head of Uzbekistan. Representation) 18/03/08 Leges Advokat Azamat R. Fayzullaev Legal Framework for Private enterprises (Director) and SOEs. 18/03/08 Avtomagistral (national Operation of member company of member company of Uzavtoyol. Uzavtoyol)

18/03/08 EBRD Fernand Pillonel Activities of EBRD and other donors in (Head of EBRD Uzbekistan, overview of operation in resident Office) Uzbekistan. 18/03/08 Credit Suisse Zoltan Halasz Operation of private commercial banks in (Senior representative) Uzbekistan. 19/03/08 AMCHAM & AIG Dilshod Rakhimbaev Overview of the private sector and operation in Uzbekistan. 19/03/08 IFC Vsevolod Payevskiy Legal framework of operation in (acting project Uzbekistan and IFC support to the private manager) sector. representative of the legal department 19/03/08 Europa House Pierre Paul Activities of EU and other donors in Antheunissens Uzbekistan, overview of operation in (Coordinator) Uzbekistan. 19/03/08 World Bank Loup J. Brefort Activities of World Bank and other donors (Country Manager) in Uzbekistan, overview of operation in Uzbekistan. 20/03/08 Uzavtoyol General Overview of operation of Uzavtoyol. 20/03/08 Road Fund Nurmat K. Djulibekov Operation of the Road Fund (Director) 20/03/08 Chamber of Commerce Sarkor R. Isonbaev Operation of Private sector in Uzbekistan and Industry of (Head of Investment and comments on road sector and Uzbekistan Department) Uzavtoyol. 25/03/08 State Property M.D. Mansurov (Chief Management of State Assets and Committee of Deparment) denationalization and privatization programmes.

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ANNEX D: List of Laws and regulations governing SOEs in the road sector and other relevant regulations

1. Code

- Civil Code of the Republic of Uzbekistan as amended from time to time.

2. Laws

- Law on property dated October 31, 1990 as amended from time to time; - Law on denationalization and privatization dated November 19, 1991 as amended from time to time. - Law No 223-I on joint stock companies and protection of shareholders’ rights dated April 26, 1996 as amended from time to time; - Law No 310-II on limited liability and additional liability companies dated December 6, 2001 as amended from time to time; - Law No.474-II on bankruptcy dated April 24, 2003 as amended from time to time; - Law No 117 on roads dated October 2, 2007.

3. Decrees

- Decree of the President of the Republic of Uzbekistan No UP-337 dated February 10, 1992; - Decree of the President of the Republic of Uzbekistan No UP-546 on establishment Uzbek State Joint-Stock Concern on construction and operation of roads (Uzavtodor) dated January 26, 1993; - Decree of the President of the Republic of Uzbekistan No PF 3292 on improvement of the management system for construction and operation of common use roads dated August 19, 2003; - Decree of the President of the Republic of Uzbekistan No PP-299 on measures for strengthening control over volumes and quality of road construction works and approval of Roads construction programme in 2006 dated March 3, 2006 - Decree of the President of the Republic of Uzbekistan No PK 511 dated November 14, 2006; - Decree of the President of the Republic of Uzbekistan No UP-3897 on the additional measures aimed at the deepening of privatization processes of enterprises belonging to strategic branches of economy dated July 20, 2007.

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4. Resolutions of the President of the Republic of Uzbekistan

- Resolution of the President of the Republic of Uzbekistan No.PP-475 dated September 27, 2006; - Resolution of the President of the Republic of Uzbekistan No PK 511 dated November 14, 2006; - Resolution of the President of the Republic of Uzbekistan No.PP-335 dated April 26, 2006; - Resolution of the President of the Republic of Uzbekistan PP-499 on measures for improvement of the procedure for design, construction and reconstruction of common use roads dated October 25, 2006; - Resolution of the President of the Republic of Uzbekistan No PP-672 “On measures aimed at further deepening of the privatization processes and active attraction of foreign investments during the years of 2007-2010” dated July 20, 2007.

5. Resolutions of the Cabinet of Ministers

- Resolution of the Cabinet of Ministers No 58 on establishment and function of Uzbek State Joint-Stock Concern on road construction and operation "Uzavtodor" dated May 2, 1993; - Resolution of the Cabinet of Ministers No 334 on establishment of Republican Road Fund dated May 7 1993; - Resolution of the Cabinet of Ministers No.362 dated July 26, 1999; - Resolution of the Cabinet of Ministers No 302 about measures on improving tender process in capital construction dated as March 7, 2003; - Resolution of the Cabinet of Ministers No.189 dated April 19, 2003; - Resolution of the Cabinet of Ministers of Republic of Uzbekistan No 361 dated August 21, 2003; - Resolution of the Cabinet of Ministers No 295 dated June 25, 2004; - Resolution of the Cabinet of Ministers No.215 dated October 16, 2006; 1. Resolution of the Cabinet of Ministers No 266 on improvement of organization and assurance of quality control in construction and operation of common use roads dated November 11, 2006.

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ANNEX E: Composition of the Project Steering Committee

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ANNEX F: Road Fund Revenue and expenditure budget 2006

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ANNEX G: Composition of the Road Council

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ANNEX H: Financial information on Uvavtoyol

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BALANCE SHEET SJSC "UZAVTOYUL" Consolidated Industry FY 2004 - 2006 (as of Dec.31) All figures are in '000 UZS

2004 2005 2006 2004 2005 2006 ASSETS LIABILITIES & O/EQUITY Long Term Assets Owners' Equity Fixed assets 665 465 261 790 833 026 961 991 180 Chartered capital 654 815 906 778 519 728 944 705 781 - initial book (replacement) value 829 859 981 958 330 815 1 145 448 618 Additional capital 1 902 783 1 064 021 3 082 392 - accumulated depreciation 164 394 720 167 497 789 183 457 438 Reserve capital 23 818 318 24 426 755 30 425 728 Intangible assets 128 818 5 426 4 152 Treasury stock - - 88 826 - initial book value 195 587 9 905 8 399 Retained earnings 9 650 819 10 189 398 13 415 938 - accumulated amortization 66 769 4 479 4 247 Funds received for special purposes 4 479 153 4 691 861 6 060 225 Long term investments 397 006 642 109 1 743 755 Reserve of future expenses and payments 24 915 664 437 172 576 749 - securities 316 550 487 697 387 331 Subtotal Owners' Equity 719 582 644 819 328 935 998 355 639 - subsidiaries 485 90 413 536 789 - in affiliated com panies 18 282 50 000 819 635 Long Term Liabilities - companies with foreign share - 13 999 - Long term accounts payable - - - - other long term investments 61 689 - - from them: outstanding - - - Ongoing projects, equipment 1 645 764 - - To suppliers and contractors - 6 615 615 469 093 Ongoing projects, construction 516 867 1 144 612 833 564 To subdivisions - 1 696 454 312 301 Long term accounts receivable 4 930 372 4 746 823 2 706 329 To subsidiaries and affiliated com p. - 935 456 3 402 259 from them: outstanding - - - Long term deferred earnings 136 976 - - Long term delayed expenditures 5 015 086 5 666 575 179 Deferred liabilities on taxes and duties 310 821 315 035 303 189 Subtotal 678 099 174 797 377 662 967 854 159 Other deferred long term liabilities - - - Advance payment from consumers 280 987 - - Current Assets Long terms bank credits 137 000 224 000 570 175 Inventories 60 689 510 35 334 517 40 349 503 Long term loans, bonds and notes 2 548 002 251 676 - - m aterials 24 353 307 31 033 985 29 866 971 Other long term liabilities 9 572 567 831 229 5 784 584 - work-in-process 26 498 243 1 481 168 6 958 652 Subtotal 12 986 353 10 869 465 10 841 601 - finished goods 863 039 1 391 025 2 062 910 - purchased goods 8 974 921 1 428 339 1 460 970 Current Liabilities Prepaid expenses 2 515 457 5 649 807 7 603 972 from them: outstanding 21 400 338 713 447 723 Deferred expenses 1 368 695 409 878 651 579 A/P to suppliers 12 711 130 17 743 390 22 665 917 Accounts receivable, total 45 306 901 23 461 426 33 262 211 A/P to subdivisions 14 043 049 - 765 998 from them: outstanding 40 668 793 577 432 027 A/P to subsidiaries and affiliated com p. 18 406 064 - 229 620 - from customers 7 066 094 7 234 662 12 494 661 Deferred earnings 277 237 1 993 860 - - from subdivisions 4 175 783 1 295 538 4 353 841 Deferred liabilities on taxes and duties 119 878 37 674 170 644 - from subsidiaries and affiliated com p. 26 873 838 5 030 434 4 383 249 Other deferred liabilities 121 384 6 941 206 397 - advances given to personnel 7 269 81 540 6 631 Advance payments received 1 614 389 514 384 1 728 071 - adv. given to suppl. and contractors 6 073 762 9 172 663 9 973 550 Debts on payments to budget 5 787 727 7 625 294 14 547 205 - adv. payment on taxes and duties 379 717 241 244 1 113 179 Insurance payable 773 087 575 492 437 732 - adv. payment on insurance 39 236 32 093 176 962 Accounts payable to state funds 1 623 666 3 147 757 3 848 382 - receivables from founders 2 501 - 219 553 Accounts payable to founders 149 551 7 825 - other receivables from personnel 39 053 30 623 209 145 Salary accruals 4 041 113 4 998 612 4 356 961 - others 649 648 342 629 331 440 Short term bank credits 508 085 927 391 984 541 Cash 5 975 065 6 569 946 10 218 923 Short term loans 969 201 62 363 30 172 - on hand 29 19 348 Current part of long term liabilities 167 839 479 326 84 - on settlem ent account 5 020 961 3 817 847 8 384 983 Other payables 394 509 630 166 1 257 578 - in foreign currency account 77 473 1 603 369 682 598 Subtotal 61 558 507 38 743 201 51 237 127 - other cash and cash equivalents 876 602 1 148 711 1 150 994 Short term investments 122 268 1 059 66 820 Subtotal Liabilities 74 544 860 49 612 666 62 078 728 Other current assets 50 434 137 306 427 200 Subtotal 116 028 330 71 563 939 92 580 208 Total Liabilities and O/Equity 794 127 504 868 941 601 1 060 434 367

Total Assets 794 127 504 868 941 601 1 060 434 367

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PROFIT & LOSS STATEMENT SJSC "UZAVTOYUL" Consolidated Industry FY 2004 - 2006 (as of Dec.31) All figures are in '000 UZS

Particulars 2004 2005 2006 Net sales 100 839 394 148 543 460 176 557 788 COGS -82 218 432 -122 444 272 -146 605 041 Gross Profit 18 620 962 26 099 188 29 952 747

Sales costs - -761 711 -528 831 Admistrative costs -6 217 265 -8 642 875 -10 322 171 Other operating costs -7 792 987 -12 426 267 -14 532 716 Period costs excl. from taxable amount -262 280 -15 040 0 Other operating income 1 004 989 1 469 650 3 759 592 EBIT 5 353 418 5 722 945 8 328 621

Dividends received 27 801 44 038 30 474 Interest received 767 261 1 598 Income from long term lease - - - Exchange gains 306 226 81 012 21 853 Other income from financial activities 789 609 244 830 193 935 Interest paid -18 969 -105 715 -321 687 Interest paid on long term lease - - - Exchange losses -124 572 -48 785 -826 975 Other expenses on financial activities -324 133 -25 414 -39 474 Finance net 656 729 190 227 -940 276

Income before tax 6 010 148 5 913 172 7 388 345

Extraordinary income 2 123 - 3 931 Extraordinary losses -759 - - Income before tax 6 011 512 5 913 172 7 392 276

Income tax -2 170 133 -2 291 933 -2 125 772 Other income based taxes and duties -469 544 -455 535 -788 885 Net Profit 3 371 834 3 165 704 4 477 619

Notes: Income Statement form is based on the Decree of the Ministry of Finance of the Republic of Uzbekistan No 140 of 27 December 2002, Appendix 2

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Final Report – June 24, 2008 Confidential

ANNEX I: INFORMATION ON TENDERS IN 2007

Winning bid № Object name and station Length Situated area Participants of the bid Winner value

1 234567 South-Nothern 4Р-176 "Nukus c. - Chimboy c.- The Republic of HDAAYSITFK 1 5 km NukusТYHPТFK 1,662,574,147 Tahtakupir c." road 1-6 km Kharakalpakistan NukusТYHPТFK Hodjaili ТYHPТFK

South-Nothern 4Р-191 "Nukus kucik halka yuli" road 1- The Republic of HDAAYSITFK South-Nothern 2 7 km 3,267,355,652 8 km Kharakalpakistan NukusТYHPТFK HDAAYSITFK Hodjaili ТYHPТFK

"Mukammal yul 4Р-134 "Kuyganyor v. - Siza v.-Eski kurilish" Ltd Balikchi 3 5 km Andijan region Andijan KHSITFK 640,843,844 Hakkulobod." highway 9-14 kм ТYHPТFK Andijan KHSITFK

Peshku ТYHPТFK 4Р-220 "Vobkent c. - Shofirkon c.- 4 5 km Bukhara region Shofirkon ТYHPТFK Shofirkon ТYHPТFK 1,515,923,838 Jilvon v." highway 6-11 kм Romitan ТYHPТFK

The bidder was М-39 "Оlма-оtа-Bishkek-Tashkent- awarded based on 5 Jizzakh region Quqon MYKPTFK 184,699,437 Termez" bridge on the highway 1015 kм protocol of steerring comettee

Dehkonobod YHTPТFK М-39 "Оlма-оtа-Bishkek-Tashkent- OJSC 6 8 km Kashkadarya region Shahrisabz RPREPDH 947,576,104 Termez" highway 1279-1287 kм Tashtransspesstroy Tashtransspesstroy Guzar YHTPТFK

Southern М-39 "Оlма-оtа-Bishkek-Tashkent- HDAAYSITFK Guzar Southern 7 10 km Kashkadarya region 3,100,500,000 Termez" highway 1240-1250 kм ТYHPТFK HDAAYSITFK Kitab ТYHPТFK

Muborak ТYHPТFK А-378 "Samarkand-Karshi" road 62-67 8 5 km Kashkadarya region Koson MYHPTFK Koson MYHPTFK 615,379,384 kм Kitab ТYHPТFK

DAEWOO Highway М-37 "Samarkand c.-Ashhobod- 9 5 km Navoiy region Kiziltepa ТYHPТFK Karmana ТYHPТFK 1,634,551,020 Turkmanboshi" road 184-189 kм part Karmana ТYHPТFK

4Р180 "Uchkuduk c. - Serkesh v. - Kiziltepa ТYHPТFK 10 Ashibuzan v. - Chukurkak ovul - 5 kм Navoiy region Navbahor ТYHPТFK Kiziltepa ТYHPТFK 516,856,500 Balikchi c/v" road 88-93 kм Uchkuduk ТYHPТFK

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The bidder was А-373 "Tashkent - Ush" road 144-159 awarded based on Western 11 Namangan region 438,911,810 kм (take away stones) protocol of steerring HDAAYSITFK comettee

DHO «Mahsustranskurilish» ДХО А-373 "Тashkent - Ush" road workman «Kommunalkurilishser 12 Namangan region «Mahsustranskurilish 265,054,953 house on the163 kм vis»Ltd CHF » «Korman-2002»

The bidder was А-373 "Тashkent - Ush" the system awarded based on 13 Namangan region "Elektra" MCHJ 302,441,898 which lights Rezak tunnel protocol of steerring comettee

Southern А-373 "Тashkent - Ush" road 169-173 HDAAYSITFK Western 14 4 km Namangan region 619,572,411 kм Buvayda ТYHPТFK HDAAYSITFK Fargona ТYHPТFK

"Bulungur" YTHPТFK М-39 "Аlmati - Bishkek - Тashkenт - "Samarkand" "Samarkand" 15 7 km Samarkand region 2,476,268,865 Тermez road 1050-1057 kм HDAAYSITFK Тaylok HDAAYSITFK ТYHPТFK

4Р-43 "Тashkent-Тermez" road- Narpay ТYHPТFK Marjonbulok v.-Zarmitan v.-Kushrabot 16 8 km Samarkand region Kushrobod ТYHPТFK Narpay ТYHPТFK 615,663,456 v. the project of total repair of the road Nurobod ТYHPТFK 77-85km

ООО "PMK-2" АО"Samarkand 4Р-45 The project of total repair of Оbodonchilik" Samarkand 17 Samarkand encircling road on the 5 km Samarkand region "10 Kishlok kurilish 2,008,027,000 HDAAYSITFK road 33-38 kм korhonasi" ОАО Samarkand HDAAYSITFK

4Р-46 "Samarkand c.-Juma c. - Narpay ТYHPТFK 18 Kattakurgan c." the project of total 5 km Samarkand region Pastdargom ТYHPТFK Narpay ТYHPТFK 854,271,937 repair of the road 38-43 kм Nurobod ТYHPТFK

ООО «Тinchlik rohat 4Р28 "Gulistan c. - Ettisay v." e/h 4Р29 servis» 19 5 km Sirdarya region ЧП «Кarvon yol» 1,429,795,172 "Gulistan - Gagarin" on the section 0-5 ЧП «Кarvon yol» ООО «Sev Aidar»

4Р26а "Sirdarya c.- Sirdarya ж/х- JV OSC Dehkonobod v.-Kiyat v.-Beckobod c. Meliotranskurilish 20 from the road М-39 "Alma-ata-Bishkek- 6 km Sirdarya region Sirdaryo ТYHPТFK Sirdaryo ТYHPТFK 331,695,582 Tashkent-Termez" road (871 kм) Mirzaobod MYHPТFK шохобча йўл Havast PADREP

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Uzun ТYHPТFK 4Р-106 "Denov c.-Bobotog да?аси- Shurchi ТYHPТFK 21 6 km Surhandarya region Uzun ТYHPТFK 1,097,311,391 Okmachit v." road 19-25 kм "Devon obodonchiligi" MCHJ JV OSC «Meliotranskurilish» Yukori-Chirchik М-34 "Тashkent - Dushanbe" the ТYHPТFK JV OSC 22 Karakulduk bridge on the section of the 45 m Tashkent region 445,348,109 Western «Meliotranskurilish» road 21 kм HDAAYSITFK Tashkent SDMAREP GUP The bidder was А-373 "Тошкент - Ўш" автомобил awarded based on SDRSO 23 8 km Tashkent region 2,570,000,000 йўлини 90-98 км protocol of steerring "HIGHWAY" comettee The bidder was А-373 "Тashkent-Ush" total repair awarded based on SDRSO 24 Tashkent region 528,333,058 diagnostic center of the road 117 kм protocol of steerring "HIGHWAY" comettee The bidder was 4Р-1 "Тasheknt encircling road" to build awarded based on SDRSO 25 Tashkent region 1,922,562,805 undergroundon the road 6-7 kм protocol of steerring "HIGHWAY" comettee The bidder was 4Р-1 "Тasheknt encircling road" road 7- awarded based on SDRSO 26 4 km Tashkent region 1,518,150,800 11 kм protocol of steerring "HIGHWAY" comettee

The bidder was 4Р-253 "Tashkent c. -Turkistan ш/х - awarded based on YANGIYUL 27 border of the republic of Khazakstan" 2 km Tashkent region 1,146,555,224 protocol of steerring TYHPTFK road 0-2 kм comettee

Ohangaran RPREPDH Ohangaran 28 А-373 "Tashkent-Ush" road 85-90 kм 5 km Tashkent region Buka TYHPTFK 621,565,552 RPREPDH Parkent TYHPTFK

Karvon Yul Private Enterpreneuer 4Р-3 “Тashkent c.-Mineral suvlar health- OJSC OJSC 29 5 km Tashkent region 466,263,319 center-Abay v.” road 0-5 kм Toshtransspesstroy Toshtransspesstroy SRG at UAMT and HO UVD

Westrn HDAAYSITFK Ahunbabaevavtoyul А-373 "Тashkent - Ush" road 283-293 Fergana TYHPTFK 30 10 km Fergana region Fergana TYHPTFK 2,150,020,012 kм JV ОАО «Melotranskurilish»

The bidder was 4Р-158 "Urganch c. - Khiva c." road 0- awarded based on 31 25 km Khorezm region Khorezm KTFK 2,423,467,964 25 kм protocol of steerring comettee Honkz TYHPTFK 4Р162 "Urganch c. encir/road" road 0- 32 5 km Khorezm region Khorezm KTFK Khorezm KTFK 1,193,732,900 5 kм Khiva TYHPTFK

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Winning bid № Object name and station Length Situated area Participants of the bid Winner value

1 234567

The bidder was awarded А-380 "Guzar - Bukhara - Nukus - Beyneu" road SDRSO 1 7 kм Bukhara region based on protocol of 2,288,163,025 405- 412 kм "Highway" steerring comettee

Gijhduvon DRSU А-380 "Guzar - Bukhara - Nukus - Beyneu" road 2 25 kм Bukhara region Gazli AYMFB Gazli AYMFB 6,657,736,000 327-352 kм Romitan TYHPTFK

SE Nazarbekavtoyul М-37 by direction Samarkand-Bukhara-Olot road 3 12 kм Bukhara region Bukhara DMEU Bukhara DMEU 3,852,630,000 346-351, 356-363 kм to reconstruct DPSamaraks

Khorezm Highway А-380 "Guzar - Bukhara - Nukus - Beyneu" road Khorezm 4 11 kм Khorezm region Urganch YHTPTFK 5,939,784,770 459-470 kм highway Hazarsp YHTPTFK

Koson MYHPTFK 4Р-87 "Guzar c. - Chim v. - Kukdala v." road 58- Kashkadarya Koson 5 15 kм Kitob TYHPTFK 2,725,450,000 73 kм to reconstruct region MYHPTFK Karshi TYHPTFK

Kitob YHTPTFK "Tashtransspesstroy" OJSC М-39 "Almati - Bishkek - Tashkent - Termez" road Kashkadarya Andijan YKKTK Kitab 6 19 kм 4,295,000,000 1260-1279 kм region "Nazarbekavtoyul" DK YHTPTFK Mubora YHTPTFK Karshiavtomagistral YKTB

The bidder was awarded 4Р-57 "Kizilkum encircling highway" road 110 - Nurota 7 10 kм Navoiy region based on protocol of 2,283,570,275 120 kм TYHPTFK steerring comettee

4Р112 "Fergana encircling highway" road's 86 kм "Feyting" SKICHK and 4Р126 "Balikchi v. - Mingbulok v. - Nayman "Ulugnor" TYHPTFK Mukammal yul 8 8 kм Namangan region 2,356,842,444 v. - Pungan v." road's 14 kм joining road (a part "Mukammal yul kurilish" kurilish Ltd passed from Namangan region) Ltd

4Р-112 "Fergana encircling road" road (86kм) and The bidder was awarded 4Р-126 "Balikchi v.- Mingbulok v. –Nayman v. – Kuprikkurilish 9 287 kм Namangan region based on protocol of 8,476,930,262 Pungon v." to reconstruct joining road (14kм) to trust steerring comettee build a bridge over Sirdarya river

4Р112 "Fergana encircling road" road 86 kм and The bidder was awarded 4Р126 "Balikchi v.- Mingbulok v. –Nayman v. – "Mukammal yul 10 4,42 kм Andijan region based on protocol of 1,980,394,957 Pungon v." road 14 kм joining road (a part passed kurilish" Ltd steerring comettee Andijan region)

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The bidder was awarded М-37 "Samarkand - Ashhabod" road to reconstruct Samarkand Kuprikkurilish 11 156 kм based on protocol of 2,871,832,380 the bridge over Koradaryo river on the 6 km region trust steerring comettee

М-37 "Samarkand - Ashhobod-Turkmanboshi" Samarkand YKFB Samarkand Urgut TYHPTFK Kattaqurgan 12 road 73-83 kм (encircling highway of Kattakurgan 10 kм 4,211,895,710 region Kattaqurgan YHTPTFK TYHPTFK c. second part) to reconstruct Okdaryo YHTPTFK

Samarkand TYHPTFK А-378 "Samarkand-Karshi" road to reconstruct 35- Samarkand Urgut TYHPTFK Samarkand 13 22 kм 3,946,100,000 57 kмs region Kattaqurgan YHTPTFK TYHPTFK Okdaryo YHTPTFK

Gulistan-Ohangoron road's new direction The bidder was awarded including: Gulistan c. М-34 from 104 km SDRSO 14 24 kм Sirdarya region based on protocol of 8000000000 encircling highway to 4Р29 21 km encircling "Highway" steerring comettee highway 24 kм

М-39 "Almati - Bishkek - Tashkent - Termez" road Buz MYKPTFK 15 8 kм Andijan MYHPTFK Buz MYKPTFK 8,390,668,168 1335-1343 kм Denau RPREPDH

Sherobod TYHPTFK М-39 "Almati - Bishkek - Tashkent - Termez" road Surhandarya Denau 16 12,6 kм Boysun TYHPTFK 4,690,032,100 1373-1385 kм region Denau TYHPTFK TYHPTFK Koson TYHPTFK

The bidder was awarded 4Р-253 "Тashkent c.-Turkistan c -border of the Yangiyul 17 6 kм Tashkent region based on protocol of 3,262,967,724 republic of Kazakstan" road 2-8 kм TYHPTFK steerring comettee

The bidder was awarded М-34 road's to reconstruct by direction Tashkent- Kuprickurilish 18 2 kм Tashkent region based on protocol of 6,768,411,666 Yangiyul-Olmazor-Chinoz 54-56 kм trust steerring comettee

А-373 "Тashkent - Ush" (Encircle Kukan city) Western HDAAYSITFK Gergana 19 direction of road fron 216 kм 4Р-126 to reconstruct 10 kм Fergana region Buvayda TYHPTFK 3637000000 KHSITFK the road crossed from Pungan v. road 81-91 kм Gergana KHSITFK

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ANNEX J: Minutes of the workshop

[ ]

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ANNEX K: Study Tour in Indonesia

Study Tour of Uzbekistan Government 26 - 28 May 2008

No Day/DateTime Person To Meet Venue From To Meeting Agenda

1 Monday 10.00 11.00 Mr. Jean-Marie Lacombe ADB-IRM, Conference Room I - Presentation of ADB portfolio Gedung BRI, 7th Floor, Jl. Jend. Sudirman (with focus on road and 26-mai Head, Portfolio Management Kav.44-46, Jakarta transportation sectors); - Previous experience in dealing with SOE eligibility issues

2 16.00 17.00 Mr. Nurdin Manurung MOPW, Gedung Sapta Taruna, 2nd Floor - Organization and structure, Chairman of Badan Pengatur Jalan Tol Jl. Pattimura No.20, Kebayoran Baru - Experience in managing road assets, - Implementation of regulatory functions (and separation with operations), - Experience in PPP, - Experience in valuation of Toll fees and concession rights.

3 Tuesday 10.00 11.00 Mr. Dedi Krisnawirawan Kantor Pusat PT Jasa Marga (Persero) - Establishment and corporate 27-mai Division Head of Highway Development Tol Plaza 1st Fl., TMII, Jakarta Timur form - Corporate structure (GMS, BoD, BoM) - Rules of Governance with the State as shareholder - Dealing with ADB and other IFI eligibility rules. Notably conflict of interests.

4 14.00 15.00 Mr. Hermanto Dardak MOPW, Gedung Bina Marga, 5th Floor - Infrastructure development in DG, Directorate General Highways Jl. Pattimura No.20, Kebayoran Baru Indonesia - Overview of Road sector development, - Road construction, upgrade and maintenance financing, - Interactions with market players (SOE and private enterprises), - Experience in tendering and ICB (local and international projects).

5 16.00 17.00 Mr. Said Didu MSOE, Gedung 16 Lantai (ex-Gedung - Organization of the Ministry; Secretary the Ministry of State-Owned Balai Pustaka), 3rd Floor Jl. Dr. Wahidin - Overview of existing SOEs (with Enterprises No.2, Jakarta focus on road and transportation sectors); - Rules of governance where the State or Government act as a shareholder, a customer or a regulator; - Conversion, privatization and denationalization process; - Control and supervision of SOE operations, reporting obligations.

6 Wednesday 10.00 12.00 Mr. Kiming Marsono PT Waskita Karya (Persero), 8th Floor - Establishment and corporate 28-mai Director of PT Waskita Karya (Persero) Jl. M.T. Haryono Kav.10, Jakarta form - Corporate structure (GMS, BoD, BoM) - Rules of Governance with the State as shareholder - Dealing with ADB and other IFI eligibility rules. Notably conflict of interests.

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PARTICIPANTS

1) Mr. Nurmat Djulibekov – Executive Director, Road Fund under the Ministry of Finance of Uzbekistan; 2) Mr. Oybek Elmuratov – Senior Specialist, Summary Analytical Department, Ministry of Finance of Uzbekistan; 3) Mr. Abror Echonkulov - Director of Road Scientific-Research Institute under Uzavtoyul 4) Mr. Alisher Tashmatov – Director, PIU under the Road Fund of the Ministry of Finance, Uzbekistan 5) Mr. Nicolas Audier, Legal Advisor, Consultant 6) Mr. Etienne Laumonier, SOE Advisor, Consultant

Page 152 of 167 Final Report – June 24, 2008 Confidential

ANNEX L: Comments received from the Uzbek Government

Comments and proposals of the concerned Ministries and Agencies of the Republic of Uzbekistan on Draft Final Report on the Eligibility of State Owned Enterprises to Bid for ADB-funded Projects

1. The Report does not have the analysis of practice of participation in ADB-funded projects of SOEs from other countries, which were originally targeted in the Memorandum between Uzbekistan and ABD on TA 7053-UZB. 2. The team did not examine the eligibility of other state-owned road construction organizations – non-members of Uzavtoyul. 3. Enterprises under SJSC “”Uzavtoyul”, according their Charters, operate under commercial law, i.e. they: - are established in compliance with the provisions of the Civil Code of the Republic of Uzbekistan and are commercial organizations pursuing the gaining of profit as the primary objective of their activities; - are liable for their debts and commitments; - independently make their own decisions on financial and economic activities; - are entitled to get loans from the banks, obtain equipment for leasing, etc.

4. According to Annex I “Regulations on State-Owned Enterprises” to the Resolution of the Cabinet of Ministers No. 215 dated 16.10.2006 “”On measures for ensuring efficient management of the enterprises with the state shares in the Chartered capital and proper state property accounting” the Founder is entitled, as established by the law, to remove any redundant, unused or used for other purposes property of state- owned enterprise and dispose of it (Item 12). Such decision is also financially and economically acceptable for founder of the enterprise of any form of property. Based on the aforesaid, the conclusion of the consultants that SJCS “Uzavtoyul” can remove or dispose of the property of its member companies is not justified. 5. Uzavtoyul member enterprises independently bid for tenders carried out by the Republican Road Fund, Single Customer Office of the local government authorities, other customers, including international tenders. Therefore, the statement of the experts on limited autonomy of the enterprises is also unjustified. 6. According to the Law of the Republic of Uzbekistan No.ZRU-117 “On roads” dated 02.10.2007 it is a specially authorized State body works out and implements national programs for the development of main roads, determines the prospects of development and improvement of rod networks, while the Cabinet of Ministers approves national road programs. In accordance with the Resolution of the President of the Republic of Uzbekistan No. 511 dated 14.11.2006 State Joint Stock Company shall be regarded as a specially authorized State body of regulation of common use roads. Therefore it is SJSC “Uzavtoyul”, rather than the Republican Road Fund as it has been stated by the consultants, is responsible for the elaboration of common use road development programmes. 7. Uzavtoyul member enterprises enter into contracts on building and construction works based on the results of tenders, if they became the winners of such tenders (except for direct contracting in case Uzavtoyul member enterprises are assigned to be the contractors based on government decisions). As for road maintenance activities, SJSC

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“Uzavtoyul” enter into contracts with territorial road maintenance organizations of SJSC “Uzavtoyul”. Thus, Uzavtoyul member enterprises are not dependent on Executive Agency and independent from the Republican Road Fund. 8. Normally, those enterprises having direct organizational legal or financial relations between each other represented in the form of act of foundation, financial participation, holding and any other forms, are prohibited from participation in bidding. Absence of such dependency among Uzavtoyul member enterprises and presence of proprietary interest to win the tenders as separate commercial organization show that there is no conflict of interest. 9. State property management issues are defined in the Resolution of the President of the Republic of Uzbekistan No. 335 dated 26.04.2006 “On measures for improvement of State Committee of the Republic of Uzbekistan on State Property Management activities”. The main lines of activities of State Property Committee is deepening of economic reforms, acceleration of the denationalization and privatization processes, organization of state property management, post-privatization monitoring of enterprises, as well as assistance in market infrastructure development. State Property Committee is a state management body and is not a part of economic management bodies defined by the Decree of the President of the Republic of Uzbekistan No.UP- 3366 dated 22.12.2003 “On improvement of the system of economic management bodies”. 10. ADB’s eligibility criteria for SOEs to bid for ADB-financed projects are as follows:

ADB Criteria SOEs’ compliance with these criteria The integrity and fairness of the bidding Tender biddings and evaluation thereof are process is not threatened performed by the ad hoc Tender commission consisting of the experts from relevant ministries and agencies separate from executing agency and SJSC “Uzavtoyul” Enterprise is operating under commercial law All state-owned road construction and repair enterprises are operating under commercial law, it is established by the law and implemented in practice Enterprise is legally autonomous from the Enterprises are legally autonomous from the borrower or the executing agency Borrower or the Executing Agency. Relations between them are governed by the appropriate agreements and legislation. Enterprise is financially independent as SOEs are financially independent; they have demonstrated by the requirement for separate their own accounts, financial audits and audited accounts and return of capital; powers respective examination of accounts are to raise capital, and obtain its revenue performed in prescribed manner; they can through the sale of goods and services raise capital, dispose of the enterprise’s net profit at their discretion, sale of goods and services, should it be stipulated in their Charters, can be performed in prescribed manner Enterprise is managerially autonomous as SOEs are managerially autonomous, and the evidenced by decision-making authority decision-making authority is granted to the granted to the management, e.g., for management in accordance with the Charters, contracting obligations and hiring and including hiring and terminating of services terminating the services of personnel of personnel.

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Enterprise is not a dependent agency of the SOEs are not dependent agencies of the borrower or the agency executing the project Borrower or Executing Agency. SJSC “Uzavtoyul” is a holding company, enterprises are not dependent on Uzavtoyul’s Executive Office in all economic activities matters, and relations are regulated by the relevant Memorandum of Association Enterprise meets all bidding and contractual Enterprises passed through qualification and conditions including the prequalification and meeting all contractual requirements shall be post-qualification requirements including eligible, following ADB’s approval financial and technical capabilities, experience and past performance

11. To cancel the comment on publication of annual financial statements by Uzavtoyul member enterprises it would be possible to issue an Order of the Chairman of SJSC “Uzavtoyul” on publication of financial statements of 7 Avtomagistral Enterprises on an annual before 01.06. 12. The next step of road sector reforms in the republic can be staged (within 3 to 7 years) introduction of a selection system through tenders of the road enterprises to perform common roads maintenance. This measure shall increase the application efficiency of funds allocated for current maintenance of the roads, as well as improve the quality of roads. 13. Measures proposed by the Consultants to transfer Uzavtoyul member enterprises to the State Property Committee and regulatory oversight and the pursuit of commercial objectives – to the SJSC Uzavtoyul are already in place. 14. Tender biddings carried out by the Republican Road Fund under the Ministry of Finance of the Republic of Uzbekistan give evidence of availability of competition between state owned enterprises in road construction and repair industry. 15. The proposal on establishment of a full-fledged Ministry of transport is not applicable as the reforming of the whole national economy in Uzbekistan is aimed to reduce the administrative command role of the ministries and agencies through the establishment of sector-specific holdings operating on commercial basis and uniting on a voluntary basis enterprises of the sector. 16. The road sector reform models proposed by the consultants are not adapted to the local conditions in Uzbekistan, and the results thereof are fated to failure without considering local road sector operational environment and role of roads in development of national economy and economies of other countries in the region. 17. The conclusion on impossibility of bankruptcy of Uzavtoyul member entities does not have grounding, as the prejudicial regulation and bankruptcy of road enterprises is possible (‘all is permitted except what is specifically prohibited by the law’ principle). Here the consultants seem to confuse current road maintenance with the works on road construction, repair and reconstruction, which are foreseen in the Project. The Law of the Republic of Uzbekistan “On bankruptcy” (revised version dated 24.04.2003 No. 474-II) regulates the relations in the area of bankruptcy of legal entities and individual entrepreneurs, and it is not applied only to the state-financed organizations (Article 2). 18. The conclusion the “Limited application or no application of bankruptcy and liquidation laws and statutes to SOE established in the form of State unitary enterprises could expose commercially viable firms to entities that are no longer commercially viable and by doing so hamper effective and fair competition in the

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market” is not confirmed by the practice, as the participation and winnings of private road enterprises in the tenders of the Republican Road Fund serve as evidence. 19. Availability of existing set of rules on state property management issued by the State Property Committee (“Regulations on procedure of operating performance monitoring of state trustees, managing companies and beneficial owners on management of state shares”, approved by the Resolution of the State Property Committee No. 01/06-15 dated 21.07.2004, registered by the Ministry of Justice No.1394 dated 30.07.2004; “Regulations on accounting procedure and maintenance of state-owned enterprises and entities register of the Republic of Uzbekistan”, approved by the Resolution of the State Property Committee No. 01/16-712 dated 13.07.2007, registered by the Ministry of Justice No.1708 dated 03.09.2007; “Regulations on procedure for conducting activities on state shareholding (participation) management in the chartered capital of economic entities”, approved by the Resolution of the Ministry of Finance No.33 dated 14.03.2005 and of the State Property Committee No. 01/06-18/02, registered by the Ministry of Justice No.1473 dated 27.04.2005) exclude the need for development and introduction of new rules. 20. Administrative allocation of resources for road sector is not applied. Such resources are sold and purchased on commercial basis through appropriate exchanges and trading enterprises. Road construction works in road sector are performed based on tender procedures.

Tendering for current maintenance, as was specified in Para.15 would be performed gradually based on the role of road transport for national economy and real growth rate of private sector in road business that is professionally prepared to bear responsibility on current maintenance of common use roads.

21. Road privatization suggested by the Consultants will result in increased social strain and decentralized management of the country. Indeed, in the future it could be possible to introduce toll roads system, under mandatory condition that they be constructed by the private companies (new roads), and subject to mandatory availability of alternative free public road (right of choice). 22. Clear separation of functions on carrying out current maintenance and contractual works on road construction, repair and reconstruction between road sector entities can be performed through the licensing and certification of relevant activities. However, the government strategy is aimed to mitigating the level of bureaucratic regulation in economy and reducing the number of types of activities subject to licensing. 23. State property management is exercised solely by the State Property Committee (“Regulations on the State Committee of the Republic of Uzbekistan on state property management”, Resolution of the President of the Republic of Uzbekistan No.PP-335 dated 26.04.2006), therefore the proposal by the Consultants duplicates actual state of affairs.

N.Djulibekov, Director Republican Road Fund under the Ministry of Finance of the Republic of Uzbekistan

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ANNEX M: COMMENTS AND RECOMMENDATIONS OF NATIONAL CONSULTANTS ON FINAL REPORT

The Final report does not differ much from Draft Final Report, though after submission of Draft Final Report there were several discussions with national consultants, discussions in the workshop held in Tashkent as well the visit to Indonesia and these findings are not reflected.

Moreover the position of the Government was not reflected accordingly. Considering that the beneficiary of this TA is the GOU, national consultants think that the findings in the report should give some room for both ADB and GOU to find the win win situation.

Therefore national consultants use different approach in assessing Uzavtoyul’s seven SOEs with requirements of eligibility criteria and attempted from this point of view assess real solution and come with the real proposals both for GOU and ADB.

The approach could be elaborated as following: As we are well aware, Uzavtoyul has dual role in road sector and this fact actually confuses a lot in assessing SOEs of Uzavtoyul. One is the administrative and policy making role and responsibility for the operation and maintenance of public roads. The other role it has is the commercial- construction and reconstruction works carried out by its member companies of Uzavtoyul. If one analyzes carefully the administrative or regulating role of the company, it can be noted that it is arried out by Uzavtoyul’s headquarter with respective departments and 13 regional branches. It also has to be noted that both structures do not have its own road construction equipment or facilities to be involved in construction and they are just administrative or regulating bodies. However on the other hand the commercial role of the company in terms of construction and reconstruction is carried out by its 7 + 161 member companies.

As the aim of this study is to find out the eligibility of potential SOEs who shall be participating in the tender for road construction works in ADB financed regional project, we have to concentrate on these 7 + 161 enterprises. In order to make our study narrower we can concentrate only on 7 of these companies as 161 companies are small and we can say that even if they are eligible they may not be qualified due to financial qualification criteria.

So the key point here is when we talk about eligibility issue we should concentrate on these 7 enterprises and check ADB eligibility criteria on these 7 member companies of Uzavtoyul bearing in mind that these companies are RESPONSIBLE FOR COMMERCIAL ROLE OF UZAVTOYUL.

If we do so the section 4 could be changed in the following manner with our comments in blue color:

2.1 Operation under commercial law

As mentioned in section 2, operation under commercial law may be notably demonstrated when the entity, which must comply with commercial laws and regulations: - Is subject to the bankruptcy law;

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- Is authorized to operate like a commercial enterprise by the way of acquiring rights and liabilities, borrowing, being liable for debts; - Is making its own managerial decisions.

Uzavtoyol member enterprises are not fully subject to market discipline, enjoy soft- budget constraints – and have limited incentives to improve their performance:

(iv) Limited application or no application of bankruptcy and liquidation law and statutes to Uzavtoyol member companies (see section 1) could expose commercially viable firms to entities that are no longer commercially viable and may therefore hamper effective and fair competition in the market.

Above two paragraphs could be commented as following. If we look here from practical point of view we suppose that there is some contradiction here when we talk about the competition in road construction market. We had already noted above sections that road construction is dominated by Uzavtoyul member companies and more than 90% of the Road Fund contracts are implemented by the Uzavtoyul member companies in accordance with Road Fund data. In other words there is no competition yet from private sector and therefore it does not “hamper effective and fair competition” in the market. It has to be also noted from practical point of view again that although there is a law on limited application of liquidation or bankruptcy law on SOEs, in reality there were no cases yet so far these 7 member enterprises went to bankrupt or close to liquidation that indicates that management of the firms feel more responsibility and care about the company’s assets because of State control on their performance. In other words it has actually adverse result.

(v) Uzavtoyol member entities (G7), as State unitary enterprises, appear to only manage the assets consolidated to them by the State which remains the owner and as such may remove and dispose of such assets at its discretion and shall also determine how revenues of such entities are distributed.

In case of JSC or LLC, the situation is the same whereas shareholders have the same right. They can remove or dispose of such assets at its discretion and even everywhere in the world the situation is the same as State being the owner may remove or dispose such assets.

Furthermore, the State is in fine responsible for the liabilities of the enterprises. Considering above criteria of ADB operating under operational law the following should be added here as well:

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(vi) Is authorized to operate like a commercial enterprise by the way of acquiring rights and liabilities, borrowing, being liable for debts; Uzavtoyul member enterprises (7 member companies) operate by the way acquiring rights and liabilities, borrowing, being liable for debts. (vii) Is making its own managerial decisions. Here it has to be noted that considering that these 7 member enterprises have more commercial role under Uzavtoyul umbrella, in practice they make decisions independently first of all regarding participation of tenders financed under Road Fund projects and also regarding day to day management of the company. (viii) If, in many aspect of their activities, Uzavtoyol member entities are subject to the same rules of contract, tort or access to credit, such entities enjoy privileges granted by the Government in respect of tax duties and import duties.

In that context, it may be concluded that Uzavtoyol member entities do not appear to operate under Commercial Law. Considering above points we need to rephrase the sentence in the box at this stage to give more room for compromise.

2.2 Legal autonomy

An SOE may be considered as legally-autonomous when it:

As provided by in the decision of the State body governing their establishment and according to their charters, Uzavtoyol member entities are separate legal entities with full legal capacity.

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Established as State unitary enterprises, Uzavtoyol entities are managed by one single person appointed by the “Board of the Company” of Uzavtoyol. Uzavtoyol member entities are self-standing legal entities distinct from its owners. However, there is no clear definition and distinction of the companies’ own assets and liabilities, on one hand, and the owner’s (i.e. The State represented by Uzavtoyol) assets and liabilities on the other hand.

In that context, it may be concluded that Uzavtoyol member entities are legally autonomous.

2.3 Financial independence

- is not obligated to pass its entire surplus to the State except for the applicable declared dividend; - is not receiving subsidies from the State; - is not receiving any budgetary support from the State.

An enterprise may be deemed autonomous when it is able to obtain revenues, compete and be profitable in an open competitive market.

Uzavtoyol member enterprises are described as “self-financed entities”. Assessment of operation shows that such entities obtain a substantial part of their revenues from commercial operations. Noteworthy, use of revenues and profit engendered by such activities are, by law, determined by the State

As mentioned above, such entities, established as State unitary enterprises, do not own the assets consolidated to them by the State.

Uzavtoyol member entities receive yearly funds from the Road Fund for routine maintenance works of roads under their supervision (see above). If performance of such works is based on a contract, Uzavtoyol member entities are required to enter in such contracts and perform the required works. Revenues generated from such contracts represent on average 16% (16% maximum, 5% is the minimum so the average is about 10,5%) of the revenues from the 7 “national entities”.

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Moreover such contracts generate minimum profit or no profit. In practice, most of these contracts are subcontracted to the 161 “local entities”. Considering that this amount is not large and not even attractive to the 7 member companies it may be concluded that 7 member companies are not financially dependent.

In that context, it may be concluded that Uzavtoyol member entities are not financially independent Considering above points we need to rephrase the sentence in the box at this stage to give more room for compromise.

2.4 Managerial autonomy

Effectively operating a corporation, being a SOE or a private enterprise, and sound corporate governance inevitably require a clear separation of the enterprise’s ownership from its management.

Extend of the owners’ decision making power usually includes:

- Election to the boards of directors (or any similar body, if any), - Naming of key corporate officers, - Approval or disapproval of changes in the corporate charters, - Merges and acquisitions, - Increase and decrease in capital, - Major debts borrowings, - Disposal of major assets, - Determination and deployment of retained earning and dividends, - Setting of managerial pay.

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Such managers shall be appointed on merits rather than connection with the owners or shareholders.

The owner (or its representative) involvement in the directions and operation of the company does not seem to exceed regular practice in law. However, the extent and methods of State ownership (disposal of assets notably) gives the State substantial control and leverage over the activities and the operations of Uzavtoyol member enterprises136. Consultants would have the following comments on above paragraphs again concentrating and based on our approach that we are talking only about seven member companies as potential bidders.

It has to be noted again that these seven member companies follow more commercial objective rather than public utility objectives. The regulating and public utility and policy objectives are fully followed by the Uzvatoyul headquarter and its 13 regional branches and most of their activities are implemented in accordance with National road development program (it is not a strategy) established by the Government. In most cases Company Council shall also monitor the progress on this development program requesting the headquarter and 13 regional branches to report on the progress. However on the other hand 7 member companies in practice mostly involved in construction and reconstruction work. The major construction and reconstructions works in this development program established by the Government, in accordance with procurement rules, are procured based on tender process and each of these seven enterprises independently make decisions to take part or not. So, in other words the Government contracts all these works that are part of national road development program on competitive bidding, where any kind of firm may take part in.

Managers of Uzavtoyol member entities have a limited margin for manoeuvre and autonomy in conducting the operations of the companies under their management.

135 Resolution of the President of the Republic of Uzbekistan No 535 dated December 12, 2006 “On measures for development of common use roads in 2007-2010”, 136 According to Article 179 of the Civil Code, a State unitary enterprise shall only have the right to alienate or dispose of the assets consolidated to it only with the consent of the owner of the assets (i.e. the State).free to make decision to

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Yes above text in box is true if we talk about all member companies of Uzavtoyul. However considering above captioned comments, the mangers of 7 member companies have extensive room for making decisions in participating bid and their execution in case they win it.

2.5 Not a dependant agency of the borrower or the executive agency

It was clearly noted by you above that reporting exercise of Uzavtoyul member activities (notably in the exercise of any administrative, public utility or regulatory mandate). Again considering that we have to concentrate on potential bidders, in our case these are 7 member companies. And these seven companies as it has been explained above deal mostly with commercial activities of Uzavtoyul that eliminates the factor of dependency.

Dependency could be notably evidenced by:

- Workforce deputation from or to the borrower or the agency executing the project (i.e. the Road Fund):

Responsibility for investment planning and programming in the Road sector were passed to the Road Fund in 2006. However, staffing at the Road Fund is relatively small and is lacking engineering capacity (notably for application of works quality control procedures) and, as of today, Uzavtoyol and its members entities remain the only providers for experienced staff. Again, it has to be noted that all these support and interaction is between Uzavtoyul headquarters and its departments and also 13 regional branches because of their regulating role. - Significant direct power over the management and operations of the entity granted to the borrower or the agency executing the project:

The Road Fund allocates a yearly routine maintenance budget to Uzavtoyol and its member companies for maintaining roads under their supervision. Such works are contract based, however, Uzavtoyol and its members entities are required to enter into such contracts and perform the required work. This was already explained above as this budget is not major and not attractive to these 7 member companies and in practice they are just subcontract it to 161 member companies.

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The above evidence dependence to the Road fund of Uzavtoyol and its member entities. Now above text in the box has to be revised.

3. Absence of conflict of interest

- have controlling shareholders in common:

Uzavtoyol entities have one controlling “shareholder” in common i.e. Uzavtoyol representing the State and having close proximity in the operations of the entities. In that context, provided that other criteria were met, only one of the entities under Uzavtoyol’s umbrella could bid for the project.

The Road Fund, being a public body notably report to the Road Council and the Cabinet of Ministers. Uzavtoyol entities reports to Uzavtoyol and ultimately to the State Property Committee under the Cabinet of Ministers.

The PAI 3.02 §4 speaks about conflict of interest with one or more parties in a bidding process. Let’s identify who would be the parties in the ADB-financed bidding process within the Road Project. We think these are the Road Fund (EA and implementing agency), Tender Evaluation Commission, the PMU, and ADB. And now let’s analyse does the potential bidders, i.e. Uzavtoyol’s 7 road entities, have a controlling shareholder in common. We believe the State as the ultimate shareholder of all the above participants shall be excluded, as otherwise any SOE as such in any country of the world will hardly be able to pass this criterion. The word “shareholder” seems to be a corporate law term, and in this context should be interpreted accordingly, i.e. for purpose of this Project it should mean a supervisory agency or a next-step higher administrative body in a hierarchy of subordination, by whose decision the concerned party in a bidding process was established. In this context, we shall see that those 7 road construction companies that are deemed to be potential bidders all have the State as de jure shareholder, and Uzavtoyol as de facto controlling and supervisory agency, while other parties in a bidding process have different shareholders (i.e. Ministry of Finance for Road Fund, the Government for PMU, etc.). The fact that a representative of Uzavtoyol sits in the Tender evaluation committee might be considered as posing a potential leak of information, but it does not per se evidence presence of conflict of interest. Therefore, more room for compromise need to be placed in this part of the Report.

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- receive or have received any direct or indirect subsidy from any of them:

First this is contract based performance and therefore it can not be considered quite as subsidies. Second, it is not major amount out of total turnover of the seven enterprises and third it is not attractive to these 7 member companies. Again, we have to be more careful when equalling Road Fund’s allocations as subsidy.

A subsidy is a form of financial assistance paid to a business or economic sector, and used to support businesses that might otherwise fail or to encourage activities that would otherwise not take place. Subsidies are often regarded as a form of protectionism or trade barrier by making domestic goods and services artificially competitive against imports.

For example, an agricultural subsidy is a governmental subsidy paid to farmers and agribusinesses to supplement their income, manage the supply of agricultural commodities, and influence the cost and supply of such commodities on international markets. Now, if we consider the financial standing of Uzavtoyol member entities and the proportion of the Road Fund annual allocations, we will find that such allocations are not aimed at encouraging Uzavtoyol entities, but rather their purpose is to keep road in normal conditions in the sector where private road construction companies are represented by a small and weak group of enterprises.

When bidding for the project and considering the “holding structure” in place, Uzavtoyol entities may easily exchange information regarding their respective bids. In reality and in practice, these seven member companies compete with each other and try not to disclose the information or exchange it between themselves. Second of all the detailed design and specifications in the contract are prepared by private independent design institutes and approved by State Committee for Architecture and Construction and all the bidding process is transparent and carried out using basic international bidding principles.

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Involvement in preparatory works and strategic planning for all road works in the country could also engender potential conflicts of interest and put Uzavtoyol and its member entities in a situation where they could access privileged information on tenders and projects, which could impact on the integrity and the fairness of the bidding process. Only Uzavtoyul and its 13 branches are involved in the process of preparing road development programs for each year as they are the one who have database on public roads.

As mentioned above, design and technical specifications for the project were prepared by an independent consulting company (despite existing capacity within Uzavtoyol).

The above evidences potential conflicts of interests in case one or several Uzavtoyol member entities were bidding for the project. Therefore this box has to be also rephrased considering above arguments

Above arguments clearly show that if we concentrate on 7 member companies and asses the eligibility of these enterprises based on approach we adopted at the beginning, these SOEs are more likely to be eligible rather than not eligible. However if we approach in study assessing the whole Uzavtoyul including the headquarters and its 13 regional administrative branches on eligibility issue, it is more likely that Uzavtoyul is not eligible. We therefore strongly recommend that we need to use the first approach that can illustrate what is going on in practice and in order to separate these two roles and make clear judgment. It can be recommended some actions in the form of covenants that can be put in the MOU between ADB and GOU under the framework of this study that can demand what conditions must be followed by these seven member companies of Uzavtoyul in order to be able to participate in the ADB financed bids and remove any doubts. This could be much more practical recommendation and easy to implement in short term rather than issuing new resolution or decree of the Government that could take long time and might be even impossible as there were already some resolutions issued recently on the structure of Uzavotyul and its member companies and also considering that project is reconstruction of only 131 km of the public roads of Uzbekistan.

The recommendations made by the Government could be considered as the covenants that can enable to remove the doubts about eligibility in terms of conflict of interest

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and this also shows that Government is committed to make some changes if necessary that is described in their official position: a.) Establish a Council of stakeholders, Steering board in SJSC «Uzavtoyol», and also in enterprises specialized in services and operations of international and state roads - potential participants of Project tenders. b.) Organize annual reports on SJSC «Uzavtoyol» - potential participants of Project tenders. c.) Engage representative and concerned ministries and authorities in implementation of recommended proposals.

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