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LESSONS:

Uzbekistan: Railway Rehabilitation Project and Railway Modernization Project [Loans 1631/1773]

| country: Uzbekistan

Before preparing projects for Central Asia or the Caucasus, ADB should determine if restricting procurement to ADB-member countries will significantly raise the cost of goods and services over unrestricted procurement. For the two railway projects, the least-cost source of rails was nonmember countries, and limiting procurement to ADB member countries raised the cost of rails by more than 150%. Uzbekistan and other countries of Central Asia or the Caucasus still have significant economic ties to other countries of the former Soviet Union, and projects can benefit from being able to procure from former Soviet countries. The membership restriction also affects ADB. First, it puts ADB at a competitive disadvantage relative to other development partners, like the World Bank and the European Bank for Reconstruction and Development (EBRD), which can finance procurement from all former Soviet countries. Second, ADB should use its involvement in projects to promote competitive bidding and other good procurement practices; restricting procurement to ADB-member countries is a less efficient model of procurement for ADB to present to its developing member countries (although ADB charter requires it), and so such restrictions limit ADB’s development effectiveness. As long as ADB’s guidelines restricts procurement to member countries, when ADB determines that project costs are significantly lower in nonmember countries, ADB should advise the borrower on how to request an exemption from the membership requirement from ADB’s Board of Directors.

Loan agreements for projects in Uzbekistan should include a covenant that will avoid unnecessary delays from the contract registration process of the Ministry of Foreign Economic Relations, Investment, and Trade. In each railway project, the ministry’s price verification during the contract registration process unnecessarily delayed procurement. Price verification aims to encourage renegotiation of bid prices when the ministry believes prices are too high. ADB’s guidelines for procurement, however, do not allow renegotiation of bids awarded on a competitive basis, including international competitive bidding. The appropriateness and reliability of the ministry’s method of price verification are also questionable. Hence, the ministry’s price verification has no potential to add value to ADB-financed procurement, and may lead to violations of ADB’s guidelines for procurement, causing ADB to declare misprocurement or cancel part of the loan. A loan covenant requiring the ministry to register ADB financed contracts without qualification would eliminate the lengthy discussions that inevitably result in registering the contracts without qualification, but with long delays that affect project implementation. Such loan covenants are already allowed under Uzbekistan’s tendering procedures, which allow exemption from following national tendering procedures if different rules apply to loan agreements with international financial institutions. Loan agreements in Uzbekistan could include a covenant that ADB-financed projects are exempt from Clause 62 of General Regulations in the Cabinet of Ministers Resolution No. 456, concerning the requirements for examination of tender results, and that no price verification should be exercised for contracts funded partly or in whole by ADB and awarded on the basis of competitive bidding, including international competitive bidding. ADB’s Office of the General Counsel should determine the specific language of such a covenant in consultation with the Government of Uzbekistan.

Future projects should have an implementation consultant or a construction supervision consultant throughout project implementation. In each railway project, the monthly reports prepared by Uzbekistan Temir Yullari did not discuss civil works in detail and lacked information, for example, on detailed designs and who developed them, the exact location of rehabilitated sites, and photographs showing progress. ADB’s limited oversight of civil works probably also contributed to resources being temporarily diverted to another project during implementation of the first project. Although Uzbekistan Temir Yullari capably implemented the projects without support from consultants, a project implementation consultant can supervise implementation on behalf of ADB, and ensure that ADB gets sufficient information on progress.

The first railway project is a good model for ADB to follow when starting a new program in a country. The first railway project was among the first projects that ADB financed in Uzbekistan. When ADB starts a new program in a country, government officials and others must learn about ADB’s policies, procedures, and requirements, including those regarding safeguards, anti-corruption, and procurement. Despite the extra burden of learning about ADB, the first railway project was implemented without major problems for three reasons: (i) it was relatively simple (rehabilitation of an existing railway line, instead of building a new line); (ii) it was among the government’s highest priorities, and so the government was strongly committed to it; and (iii) the project implementation unit (PIU) was strong and capable. The PIU later became a source of knowledge and advice for project implementation units (PIUs) of other ADB-financed projects in Uzbekistan. The lesson of the first project is that, when starting a new country program, ADB should initially stick to simple projects that are among the government’s highest priorities, and build a strong PIU that can lay the foundation for future projects.

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