Uzbekistan - Urban Transport Project

Document of The World Bank Report No: 18872-UZ PROJECT APPRAISAL DOCUMENT ONA PROPOSED LOAN IN THE AMOUNT OF US$29.0 MILLION TO THE REPUBLIC OF UZBEKISTAN FOR AN URBAN TRANSPORT PROJECT April 20, 2000 Infrastructure Sector Unit Central Asia Country Unit Europe and Central Asia Region  CURRENCY EQUIVALENTS (Exchange Rate Effective October 31, 1999) Currency Unit = Soum 1 Soum =US$ 0.0074 US$ 1 = 135 Soums FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS APL Adaptable Program Loan CAS Country Assistance Strategy CTC City Transport Commission CTD City Transport Department ERR Economic Rate of Return FSU Former Soviet Union FY Financial Year GDP Gross Domestic Product IFC International Finance Corporation JSC Joint Stock Company MOF Ministry of Finance NPV Net Present Value PIP Public Investment Program PIU Project Implementation Unit SOE State-Owned Enterprise VAT Value Added Tax UAART Uzbek Agency for Automobile and River Transport UATT Uzavtotrans Taminot Vice President: Johannes Lirm, ECAVP, Country Director: Kiyoshi Kodera, ECCO8 Sector Manager: Eva Molnar, ECSIN Task Team Leader: Jean-Charles Crochet, ECSIN  UZBEKISTAN URBAN TRANSPORT PROJECT CONTENTS A. Project Development Objective Page 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 5 C. Project Description Summary 1. Project components 5 2. Key policy and institutional reforms supported by the project 6 3. Benefits and target population 6 4. Institutional and implementation arrangements 6 D. Project Rationale 1. Project alternatives considered and reasons for rejection 8 2. Major related projects financed by the Bank and other development agencies 9 3. Lessons learned and reflected in proposed project design 10 4. Indications of borrower commitment and ownership 11 5. Value added of Bank support in this project 12 E. Summary Project Analysis 1. Economic 12 2. Financial 13 3. Technical 14 4. Institutional 14 5. Social 16 6. Environment 16 7. Participatory Approach 17 F. Sustainability and Risks 1. Sustainability 18 2. Critical risks 18 3. Possible controversial aspects 19  G. Main Loan Conditions 1. Effectiveness Condition 19 2. Other 19 H. Readiness for Implementation 20 I. Compliance with Bank Policies 21 Annexes Annex 1: Project Design Summary 22 Annex 2: Project Description 27 Annex 3: Estimated Project Costs 30 Annex 4: Cost Benefit Analysis Summary 31 Annex 5: Financial Summary 36 Annex 6: Procurement and Disbursement Arrangements 39 Annex 7: Project Processing Schedule 49 Annex 8: Documents in the Project File 50 Annex 9: Statement of Loans and Credits 51 Annex 10: Country at a Glance 52 Annex 11: Urban Passenger Transport Development - Strategy Statement 54 MAP(S) IBRD 30846  UZBEKISTAN Urban Transport Project Project Appraisal Document Europe and Central Asia Region ECSIN Date: April 20, 2000 Team Leader: Jean-Charles Crochet Country Manager/Director: Kiyoshi Kodera Sector Manager/Director: Eva Molnar Project ID: P050508 Sector(s): TU - Urban Transport Lending Instrument: Specific Investment Loan (SIL) Theme(s): Private Sector; Transport Poverty Targeted Intervention: N Project Financing Data X Loan O Credit 0 Grant CIl Guarantee O Other (Specify) For Loans/Credits/Others: Amount (US$m): US$29.0 million Proposed Terms: Variable Spread & Rate Single Currency Loan (VSCL) Grace period (years): 5 Years to maturity: 20 Commitment fee: 0.75 % Front end fee on Bank loan: 1.00% Financing Plan: Source Local Foreign Total GOVERNMENT 2.45 0.00 2.45 IBRD 0.00 29.00 29.00 IDA Total: 2.45 29.00 31.45 Borrower: REPUBLIC OF UZBEKISTAN Responsible agency: UZAVTOTRANS Estimated disbursements ( Bank FY/US$M): FY 2001 2002 2003 2004 2005 Annual 1.5 14.0 9.0 3.0 1.5 Cumulative 1.5 15.5 24.5 27.5 29.0 Project implementation period: 4 years Expected effectiveness date: 09/30/2000 Expected closing date: 12/31/2004 OCS PAD F-,D Re M.&,R 200D  A. Project Development Objective 1. Project development objective: (see Annex 1) Efficient and sustainable urban passenger transport services in Samarkand (population 400,000), Namangan (380,000), Bukhara (270,000), Nukus (250,000) and Almalyk (120,000). 2. Key performance indicators: (see Annex 1) (i) Adequacy of the supply of urban passenger transport services in the five cities to satisfy demand;. (ii) Adequacy of urban transport operators' management of their operations and maintenance of their vehicles in the five cities; (iii) Allocation of bus route franchises in the five cities on the basis of a sound competitive bidding process; (iv) Quality of the planning of urban transport systems and administration of franchise contracts by the city administrations in the five cities; (v) Ability of the efficient transport operators in the five cities to fully recover their costs (including the cost of transporting privileged passengers), and generate a reasonable profit. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 17376 UZ Date of latest CAS discussion: 03/10/98 Given that the Govemnment is cautious in liberalizing the economy and has implemented only partial macroeconomic reforns, the Bank's general strategy for Uzbekistan, as expressed in the latest CAS, is to create incentives for deeper structural reforms through carefully selected investment operations in sectors where the Government is willing to experiment with reforms, in parallel with a continuing policy dialogue. In this context, one of the four major objectives which the Government and the Bank Group have agreed to work on is the removal of inefficiencies in resource utilization in the municipal services, infrastructure, and social services. The proposed project is fully consistent with this strategy. It is included in the CAS and fits the objective of removing inefficiencies in municipal services and infrastructure. It is also in a sector, urban transport, where the Government has taken forceful measures in the past two and a half years to improve the regulatory and institutional framework and to open the provision of services to the private sector (as is explained later). It is expected that the proposed project will help satisfactorily complete the recent sector reforms in five pilot cities, as well as improve the delivery of services in these cities by providing much needed transport capacity and improving the capability of urban transport operators. -2-  2. Main sector issues and Government strategy: The Government has often expressed the view that the urban transport sector is among the country's priority sectors. Indeed, Uzbek cities have special features (shared with most other cities in the former Soviet Union) which make urban passenger transport of special importance for their population. These cities are unusually spread out with low overall population densities and long distances between residential and work areas. Commerce, markets and social services are also not within walking distance of people's residences in most cases. In addition, the climate is difficult, with cold temperatures during the winter and very hot summers. Finally, there are few alternative means of transport (car ownership is about 65 vehicles per thousand people, one of the lowest in the former Soviet Union, and motorcycles are beyond the reach of most of the population). For all these reasons, urban passenger transport is essential for access to jobs and services, and, more generally, for the efficient functioning of the labor and product markets as well as the effectiveness of social and political life. This is particularly relevant for those with unstable employment and uncertain access to support networks, who constitute the majority of the poor. Until about two and a half years ago, urban passenger transport services were provided almost exclusively by companies of the Uzavtotrans group. Uzavtotrans, the Uzbek State Corporation for Automobile Transport, is a very large holding company which took over seven years ago most regulatory and operational functions of the former Ministry of Automobile Transport. It provides international and domestic freight and intercity passenger transport services in addition to urban passenger transport. Many operting enterprises of the Uzavtotrans group have now been established as joint stock companies. However, only about 10-20 % of these companies' capital has in general been sold to private investors (mostly employees of the companies) and the central organization of Uzavtotrans has responsibility for the remaining State-owned share of the capital. This responsibility is carried out by regional management subsidiaries of Uzavtotrans called the Oblasttrans. These keep the operating companies under relatively strict supervision. Starting with the Urban Transport Law of April 1997, the Government has implemented some radical changes in the organization and regulation of urban transport services in Uzbekistan. Increasing responsibility has been delegated to the city administrations to organize and manage the provision of urban transport services on the basis of exclusive bus route franchises. These franchises are allocated through a competitive tendering process open without any restrictions to the Uzavtotrans operating companies (herein referred to as the Joint Stock Companies, or JSCs) as well as to private companies and small owner-operator associations. The tendering process is in each city under the responsibility of the City Tendering Commission (CTC), chaired by a Deputy Mayor, with all technical work (starting with the planning of routes and services) carried out by the City Transport Department (CTD). The CTCs and CTDs perform under relatively precise instructions and control from the central Government, particularly the newly created Uzbek Agency for Automobile and River Transport (UAART), which has authority at the national level for sector regulation and licencing. This franchising system has been implemented by steps over the past two and a half years, and continuously improved with the assistance of the Bank and international consultants. The system is now in place for most public transport routes in almost all important cities except Tashkent. In general, a healthy competition has developed (particularly for the rapidly growing minibus services) and private operators have gained a substantial share of the public transport market. In the five cities which would participate in the project, private operators (including the informal owner-operators who have developed since the mid 1990's) now function under the franchising system and provide on average about 50% of all urban transport services. The Government has also progressively (i) reduced the number of citizens entitled to fare exemptions (now mainly veterans and invalids, who constitute about 5% of all passengers), (ii) increased fares paid by - 3 -  passengers who benefit from reduced fares (students, school children, and pensioneers, who generally constitute about 20% of all passengers), and (iii) increased fares paid by all other passengers to about the cost recovery level. Recently, as a condition of Board presentation of the project, the Government has in addition implemented some key improvements to the franchising system in the five project cities. These include in particular: (i) a better standard form of contract for bus route franchises, which adequately defines the respective responsibilities of the transport operators and their clients (the city administrations), provides remedies in case of disputes, and includes a process for adjusting passenger fares fairly to reflect inflation in the price of inputs; and (ii) measures to ensure that transport operators, private as well as State-owned, are compensated for the transport of passengers who benefit from fare exemptions or reduced fares. There are still some important issues, however, which the Government will need to address in the coming years to increase the efficiency and sustainability of the urban passenger transport sector in the five project cities, in particular as explained below. (i) The regulatory and institutional framework for bus route franchising should still be improved, taking lessons of experience into account. In particular, the evaluation procedures and criteria for the competitive tendering of bus route franchises should be adjusted and refined to ensure that selected bids are the most economic. The institutional capability of the CTCs and CTDs (in terms of systems and procedures, equipment, as well as staff numbers and competence) also need to be developed in order to ameliorate the planning of urban transport services and the administration of franchise contracts. In addition, the remaining, often informal, links between the CTD/CTC and the Oblasttrans, and between UAART and Uzavtotrans need to be fully severed. (ii) The condition of the bus fleets needs to be improved rapidly. Although the JSCs in the project cities have more than a thousand medium size and large buses on their books, only about two hundred have not exceeded their service life. As a result, bus availability is low (on average, 60% of the buses considered operable) and the number of daily breakdowns is extremely high (of the order of 25% of the buses starting service each day, and sometimes more). Partly for this reason, the JSCs have lost about 50% of the market to private transport operators in the past few years. However, because they lack capital and are not creditworthy, these private operators typically own one small bus (generally a microbus manufactured by Daewoo in Uzbekistan, or a second hand Soviet made van) funded from family savings. These buses are not appropriate for large volume public transport and are more costly to operate. (iii) The managerial and technical capability of the JSCs and the private transport operators is generally low. They need improvement in accounting and financial management, in vehicle maintenance and stock management, and in their tools, equipment and facilities. (iv) Although the Government has the intention to privatize the JSCs, it has made little progress in this, to a large extent because the JSCs are presently in poor financial situation and not attractive to any investor. The Government is aware of these issues and has expressed its intention to design and implement with the assistance of the project adequate measures to correct deficiencies. In order to make its policies explicit and define the actions to be taken, the Government has adopted a strategy for the developement of urban passenger transport services in the project cities for the next five years. This stategy (see Annex 11), which is acceptable to the Bank, was issued on April 17, 2000, as a condition of Board Presentation of the project. In addition, as a loan condition, the Government would (a) by November 30, each year starting in year 2000, review the technical and economic efficiency of the urban bus route franchising system in the -4-  project cities and discuss the result of such review with the Bank, and (b) by March 31, the following year, issue instructions to the City Tendering Commissions in the project cities, acceptable to the Bank, to improve the methodology for evaluation of bids for bus route franchises, the terms of the bus route franchise contracts, and the procedures for supervision of the bus route franchise contracts. 3. Sector issues to be addressed by the project and strategic choices: The project would address selectively most of the issues presented above in Part B.2, by concentrating on the measures which are critical in the next few years to improve the delivery of urban passenger transport services to the population and to establish a sound framework of policies and incentives for the sector's sustainable development. In particular, the project would provide technical assistance, training, and equipment for improving bus route franchising regulations, strengthening related institutions, improving mechanisms for compensating urban transport operators for fare privileges, and developing the technical and management capability of transport operators, whether State-owned or private. The project would also include the provision of new vehicles and the rehabilitation and repair of existing ones. Both are critical for the cost effective delivery of urban transport services. The project would not include assistance for privatization of the JSCs because such privatization does not seem feasible in the medium term and might lead to some weakening of the JSCs' corporate governance. Instead, it is felt that the Government and the Bank should concentrate for the time being on the improvement of the institutional, financial, and regulatory framework for the sector, in particular because it would ensure open entry to the market for urban transport services and promote efficient competition, which are prerequisite for improving the JSCs. C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): The project would include: (i) provision of new buses and the establishment of a commercial leasing scheme for their allocation to competent private and State-owned operators on the basis of full cost recovery; (ii) rehabilitation and repair of existing buses of the JSCs; (iii) strengthening of urban transport operators through the provision of technical assistance, training, and office and workshop equipment; (iv) improvements in the institutional, financial, and regulatory framework for urban transport services through the provision of technical assistance, training, and office equipment; and (v) support to the Project Implementation Unit in project management and procurement through the provision of technical assistance, training, office equipment, and funding of its incremental operating costs. Indicative Bank- % of Component Sector Costs % of financing Bank- |__________________ _(US$M) Total (US$M) financing 1. Provision of New Buses and 23.46 74.6 23.14 79.8 Establishement of a Leasing Scheme for these Buses. 2. Rehabilitation and Repair of 4.83 15.4 3.22 11.1 Existing Buses. 3. Strengthening of Urban Transport 1.42 4.5 0.90 3.1 Operators. -5 -  4. Improvements in the Institutional, 0.32 1.0 0.32 1.1 Financial, and Regulatory Framework for Urban Transport Services. 5. Project Management. 0.63 2.0 0.63 2.2 6. Refunding of PPF Advance. 0.50 1.6 0.50 1.7 Total Project Costs 31.16 99.1 28.71 99.0 Front-end fee 0.29 0.9 0.29 1.0 Total Financing Required 31.45 100.0 29.00 100.0 2. Key policy and institutional reforms supported by the project: The key reforms supported by the project in the five project cities are: (i) the improvement of the bus route franchising system (including bidding procedures, bid evaluation, and franchise contracts); (ii) the strengthening of the City Transport Departments' ability to plan the urban transport system and administer the franchise contracts; and (iii) the implementation of an adequate policy for compensation of the transport operators for the carrying of privileged passengers. 3. Benefits and target population: The main benefits of the project would be the improved quality, reliability, and sustainability of urban transport services in the five project cities. These improvements would in turn translate into better access to employment, markets, social services, and social networks for the residents of the project cities, a total population of approximately 1.4 million people, many of whom are poor and highly dependent on urban transport services. The project is also expected to develop a track record which would later help for the development of the bus leasing sector in Uzbekistan. 4. Institutional and implementation arrangements: Implementation Period. 2000 - 2004 Executing Agencies. Uzavtotrans would have overall responsibility for implementing the project. For this purpose, it has already set up a Project Implementation Unit (PIU) to perform the monitoring, disbursement, accounting, supervision, coordination, and reporting functions related to the project. The PIU would also have responsibility for procurement of all consultants' and training services. Procurement of all project goods would be the responsibility of Uzavtotrans Taminot (UATT), a large subsidiary of Uzavtotrans specialized in procurement of new vehicles, spare parts, and supplies for all daughter companies of the group. In addition, responsibility for implementation of each project component would be as follows: (i) the bus leasing scheme would be established and managed by UATT, which would also have responsibility for the establishment of the new bus maintenance centers; (ii) rehabilitation and repair of the existing buses would be carried out by the JSCs with spare parts procured by UATT; (iii) strengthening of the JSCs and the private operators would be carried out by the central office of Uzavtotrans and the JSCs; and (iv) improvement of the institutional, financial, and regulatory framework would be the responsibility of the Uzbek Agency for Automobile and River Transport assisted by the Interministerial Commission on tendering of public passenger transport and in coordination with the City Administrations of the fivc project cities. UATT and other agencies and enterprises involved in the project would provide to the PIU all the - 6 -  information it would require for fulfilling its supervision, coordination and reporting functions. At Negotiations, it was agreed that: (i) as a condition of loan effectiveness, the PIU would be strengthened with such structure, functions, and staffing acceptable to the Bank; and (ii) the PIU would be maintained until completion of the project. PIU strengthening would include in particular: (i) training of staff in procurement and disbursement matters; (ii) making staff salary and benefits comparable to those offered to staff in similar positions in other organizations; and (iii) purchase of necessary office equipment. Channeling ofIBRD Assistance. The Borrower would be the Government of Uzbekistan. Proceeds of the loan (except for those corresponding to Project Component 4 - Improvements in the Institutional, Financial, and Regulatory Framework) would be passed on to Uzavtotrans by the Ministry of Finance under terms and conditions acceptable to the Bank. These would include an interest rate equal to that of the Bank loan to the Governnent, a maturity of ten years, a grace period of two years, and a 1% front-end fee. Uzavtotrans would bear the foreign exchange risk. Signature of a subsidiary loan agreement, acceptable to the Bank, between the Ministry of Finance and Uzavtotrans would be a condition of loan effectiveness. It is expected that, in turn, the central management of Uzavtotrans would conclude agreements with UATT and the JSCs in the project cities for the repayment of the specific parts of the loan proceeds from which they would benefit. Financial Management and Auditing. The accounting and financial management systems of the PIU were assessed as part of the projecVs pre-appraisal. It was concluded that they needed to be strengthened in order to meet international standards and provide accurate and timely information on project resources and expenditures as mandated by the Bank's Operational Policy 10.02. This strengthening is being carried out in accordance with an action plan agreed at Negotiations. The action plan includes two main stages. First, the PIU has taken action to ensure that minimum Bank requirements are met before Board Presentation. This includes in particular: (i) the preparation of an operations manual that describes the allocation of responsibilities to PIU staff and documents the PIU's internal controls (this manual is based on and complements the instructions which already exist in Uzavtotrans); and (ii) the purchase of computers and installation in the PIU of a computerized accounting and project management system (with a chart of accounts specific to the project) that can produce reports in a format and substance acceptable to the Bank. Second, the PIU's financial management system will be further strengthened and the capability of the PIU in accounting, record keeping, reporting, and, more generally, project management, developed so that it can prepare, starting on June 30, 2001, quarterly Project Management Reports acceptable to the Bank. The project financial statements, the Special Account, and the Statements of Expenditure would be audited at the end of each fiscal year during project implementation, in accordance with international standards on auditing, by independent auditors acceptable to the Bank. Selection and engagement of auditors for the first year of project implementation would be a condition of loan effectiveness. The audit would include: (i) an assessment of the adequacy of accounting and internal control systems to monitor expenditures and other financial transactions; (ii) a determination as to whether the PIU has maintained adequate documentation on all relevant transactions; (iii) verification that expenditures submitted to the Bank are eligible for financing; and (iv) identification of any ineligible expenditures. Copies of the audit reports would be submitted to the Bank within six months of the close of the country's fiscal year. Terms of Reference for the audit and the selection of the auditor would be reviewed by the Bank every year. Leasing and Maintenance Arrangements for the New Buses. It was agreed at Negotiations that the new buses would be leased by UATT to private and State-owned operators under operational and financial policies and procedures acceptable to the Bank, based on sound business principles, and detailed in an agreed manual of policies and procedures. These would include in particular: (i) transparent and uniformly -7 -  applied procedures for appraising potential lessees, fixing the level of lease payments, covering against risks of damage or loss, supervising that buses are properly used, and dealing with cases of inadequate performance of their obligations by lessees; (ii) full cost recovery, with depreciation and a financial return on fixed assets in line with standard practices included in the calculation of cost; and (iii) the prompt retrieval of leased buses in case of termination of a lease agreement. UATT would also maintain adequate financial management systems for this purpose. Preparation of the manual and establishment of financial management systems, acceptable to the Bank, would be a condition of disbursement of loan proceeds allocated to the purchase of new buses. UATT's financial statements related to the bus leasing operations, and the extent to which UATT has consistently applied its operational and financial policies and procedures, would also be audited every six months during the first two years of project implementation and every year thereafter by independent auditors acceptable to the Bank. It was also agreed at Negotiations that the new buses would be maintained under a maintenance contract acceptable to the Bank, and that the Government would provide all necessary authorizations to the vehicle maintenance enterprise(s) for the import of spare parts and supplies necessary for the maintenance of these buses during the post-warranty period. It is anticipated that the maintenance contract (which would be paid out of UATT's leasing revenues) would be with the bus supplier. Finally, it was agreed at Negotiations that the Government would prepare not later than December 31, 2003, a plan acceptable to the Bank for privatization of the new bus fleet and the leasing organization and would take actions for the implementation of this plan under a timeframe agreed with the Bank. The project would include services for preparation of the privatization plan and support in its implementation. It is understood that the plan would be consistent with the lease contracts and, in particular, any commitment that the lessees may have received contractually from the lessor that they may purchase the buses at the end of the lease period. Monitoring and Evaluation. Quarterly progress reports would be prepared by the PIU and furnished to the Bank within thirty days from the end of each quarter. Agreement would be reached with the Government on the substance and format of the reports during the project launch workshop. Progress on achievement of agreed project performance indicators would be reported annually. A Mid-Term Review would be carried out jointly with the Government in May 2002 to monitor procurement and implementation progress against schedules, and review implementation capacity. D. Project Rationale 1. Project alternatives considered and reasons for rejection: Specific investment loan (SIL) versus adaptable program loan (APL). The Bank considered an APL approach, especially in view of the Government's desire for a larger loan ($60.0 million) and a wider coverage of cities. The first phase would have covered the five project cities and the second phase a much larger number of regional centers, once institutional, financial, and regulatory reforms would be fully implemented. This approach was not retained, however, since there was uncertainty as to whether the leasing mechanism used for the first phase would be appropriate for the second phase. In addition, it was felt that once reforms would be implemented, the sector should be amenable to private sector funding, for example with the participation of IFC. An APL approach was also considered just for the five project cities with a smaller first phase focused on completing reforms and rehabilitation and repair of the existing bus fleet, and, once this would be achieved, a second phase focused on the establishment of a leasing company. This approach was also not retained because of the need for a prompt increase in the capacity of the bus fleets in the five cities, and the Government's expectation that Bank financial assistance would recognize the progress achieved so far in sector reforms. -8 -  Number of cities to participate in the project. The Government initially proposed to include a large number of cities (12 to 24) in the project. After discussions with the Bank, it has agreed to initially include five cities, to keep the reform program and Bank support focused. The five selected cities vary in population size and economic base, and provide a good geographical coverage of the country. This allows many of the variations which can be expected across other cities to be reflected in the results of this project. In this way, conclusions reached and lessons learnt would be relevant to most Uzbek cities. Arrangements for making new buses available to transport operators. Various options to channel the new buses to transport operators were examined for their compatibility with the long term objective of creating a competitive, privately supplied market. Options included: (i) creation of a State-owned bus pool with buses leased to private and State-owned transport operators under full cost recovery; (ii) development of a bus leasing company owned by commercial investors (particularly commercial banks); (iii) development of intermediary financing for vehicle purchase by operators through a line of credit; and (iv) development of a guarantee arrangement to support private sector vehicle leasing. After discussions with the Government and the private sector, it was concluded that the limited size of the market, together with the unfamiliar legal and political systems, was likely to preclude efficient direct foreign investment in the bus industry in the short run. It was also concluded that, given the lack of experience and track record with the bus route franchising system, its remaining shortcomings, and general economic uncertainty in the country, any options involving a line of credit and commercial bank loans to transport operators would be implemented very slowly at best. Because of the requirements for collateral, this option would also most likely exclude the independent private transport sector, and hence may limit competition in the sector. Operating lease arrangements were found a sound way to avoid this bias, as well as to ensure that buses were well maintained and operators forced to consider the full costs of their vehicles in making franchise bids. However, extending finance to commercial leasing companies was found premature at this stage, due to the unwillingness of potential investors to bear the presently high risks of vehicle leasing in Uzbekistan. All these considerations being taken into account, it was therefore found necessary at this stage for the Government to underwrite the leasing arrangements. The option retained in the project provides such support for a few years, during which the franchising arrangements would be strengthened, financial sustainability established, and leasing experience gained, so as to later provide a satisfactory basis for purely private financing arrangements. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). T .Latest Supervision Sector Issue Project (PSR) Ratings _________________________________ . __________________________ (Bank-financed projects on _ly Implementation Development Bank-financed Progress (IP) Objective (DO) Strengthening the regulatory and Kazakhstan Urban Transport S S institutional framework for urban bus Project (completed) services, improving cost recovery, strengthening transport operators, and improving the condition of the bus fleets. -9-  Same as above (except for the Russia Urban Transport Project U U strengthening of the regulatory (on-going) framework). Same as above (except for the Budapest Urban Transport HS U strengthening of the regulatory Project (on-going) framwork). Same as above (except for the Turkmenistan Urban Transport S U strengthening of the regulatory (on-going) framework). Same as above (except for improving Kyrgyzstan Urban Transport the condition of the bus fleets). (planned) Other development agencies 1P/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: The Bank is playing an important role in the improvement of urban transport services in Central and Eastern Europe and the Former Soviet Union. Past and present Bank projects have made important contributions towards these objectives. However, the experience has underscored (to varying degrees) the following key issues: (i) the speed with which sector reforms are likely to progress depends on the Government's understanding, commitment, and ownership of the reform program; (ii) project execution agencies generally have a weak implementation capacity, and have been slow in gaining familiarity with Bank procurement procedures; (iii) insufficient attention has usually been given to the maintenance of the vehicles acquired through the project; (iv) State-owned enterprises have generally been slow to understand and accept their deficiencies in management and financial practices and need support to implement corrective measures; (v) financial problems (especially those related to fare policies and compensation for special fares which are politically sensitive) have been the most difficult to address, particularly in the context of drastic fiscal constraints and decreasing per capita income; and (vi) inadequate fiscal and political decentralization may be an impediment to urban transport reforms. The unsatisfactory ratings of the Russia and Budapest Urban Transport Projects are due to circumstances which in essence are independent of these projects. In Russia, a disagreement between the project cities and the Central Government over the repayment of their subsidiary loans (which have increased substantially after the mid 1998 devaluation of the Rouble) has led to the dismissal of the Project Implementation Unit and a stop in project implementation. A new PIU has now been nominated, part of the loan undisbursed balance (US$25 million) has been cancelled, and the remainder of the project is being restructured with a view to completing it by the middle of 2001. In the case of the Budapest Urban Transport Project, the unsatisfactory allocation of responsibilities between the Budapest municipality and the Central Government over fare policies and provision of subsidies (as mentioned in (vi) above), as well as political discord between the two, has resulted in the main public transport enterprise of Budapest, BKV, being underfunded and not able to meet a main (operating ratio) loan covenant. To the extent possible, the design of this project incorporates these lessons of experience. The Government has demonstrated in particular an up-front commitment to sector reforms by implementing in the past two - 1 0 -  and a half years major changes in the institutional, financial, and regulatory framework for urban transport services. It has also agreed to review lessons of experience with these reforms and formulate further improvements in the organization and regulation of the sector on an annual basis with the Bank. New vehicles would not be provided directly to State-owned enterprises, but would be made available to both private and State-owned operators through a commercially based leasing scheme. Maintenance of the new vehicles would be entrusted to a separate maintenance contractor. Technical assistance would be provided as part of project implementation to strengthen the management and financial systems of the bus companies and the planning and procurement capacity of the Project Implementation Unit. Measures to improve financial sustainability of urban transport services have also been implementated prior to the project's final approval. The design of the leasing scheme also uses the experience of IFC with leasing in Central Asia in general and Uzbekistan in particular. New bus leasing operations will be run by an existing organization (UATT) rather than a new one which may have been very slow to start. UATT was selected because of its experience with urban transport operations and contract administration, and will be strengthened by technical assistance. Also, giving the present lack of bus dealerships and maintenance capability in Uzbekistan, operating leases rather than finance leases will be used. 4. Indications of borrower commitment and ownership: The Government is strongly committed to making the urban passenger transport sector commercial, competitive, and financially sustainable. For this purpose, as explained earlier, it has implemented some major policy changes in the past few years. In particular, it has: (i) enacted a framework law on urban transport (April 1997) creating the basis for competitively tendered bus route franchises as well as decentralization of urban passenger transport planning and monitoring fLnctions to each City Administration; (ii) introduced the franchising system on a few bus routes in the five pilot cities late in 1997, including needed institutional arrangements, and designed and implemented progressive refinements since then; (iii) progressively extended the franchising system to cover all urban transport services throughout the country, except Tashkent, by the end of 1999; (iv) established in 1998 the Uzbek Agency for Automobile and River Transport to rationalize the licensing of transport operators and progressively take over road transport sector regulation; (v) encouraged the private sector to develop associations and participate in tendering for bus route franchises; and (vi) issued a strategy, acceptable to the Bank, for development of urban passenger transport services in the project cities in the next five years. The reform process has been led by the Cabinet of Ministers. Numerous meetings have been held over the past two and a half years with staff at the regional (Oblast) and city (Hakimiyat) levels and with the private bus operators to explain the reform agenda and discuss and assist with implementation of refonrs. The Government has also shown its commitment to the project itself The project is the result of a request by the Government to the Bank to design a program for improving urban transport operations in all main - 1 1 -  cities in the country except the capital, Tashkent. Project preparation was supported by a PPF advance. 5. Value added of Bank support in this project: The role of the Bank in Uzbekistan's urban transport sector is essentially two fold. First, drawing upon its international experience and particularly its experience in working with other CIS countries, the Bank is in a strong position to assist the Government in formulating the strategies necessary to ensure that efficient and sustainable public transport services are available to city residents. Second, the Bank can assist the Government in implementing these strategies through direct Bank analytical support, supervision/enhancement of the technical advice and training provided by consultants through the project, and helping correct the course of action whenever necessary in view of the experience. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): * Cost benefit NPV=US$7.8 million; ERR = 60.4 % (see Annex 4) O Cost effectiveness o Other (specify) The economic analysis of the investment in the new buses compared the "with project" solution with the alternative of delaying investment in new vehicles for three years and providing a reduced level of service, eighty per cent, in the interim with the existing fleet at relatively high maintenance costs. This alternative was selected as it is the most stringent from the economic standpoint. The main quantifiable economic benefits accounted for were benefits due to savings in time for passengers, and operational and maintenance cost savings for bus operators. Maintenance cost savings were estimated by using costs required to maintain a vehicle in good condition over its economic life. Also included in the analysis were small benefits from improved comfort levels and reduction in overcrowding. Other benefits, naamely reduction in unreliability of service and environmental improvements, were not quantified. Due to lack of reliable information on which to base travel growth estimates, travel demand was assumed to remain constant over the investment horizon. A comprehensive financial and economic model was used for the economic analysis. The net present values were calculated from incremental costs and benefits of the proposed investments. The overall net present value of investment in new buses is US$7.8 m, based on a discount rate of 12%. The ERR for the investment in the new buses is 60.4%. On a city by city basis, the results were as follows: Sarnarkand Bukhara Almalyk Namangan Nukus Overall New vehicles NPV US$ (m) 2.6 1.9 1.0 1.1 1.2 7.8 ERR % 59 60 58 66 62 60 Sensitivity analysis showed that the project justification is robust and the economic return remains well above the assumed opportunity cost of capital. If capital costs increase by 20%, savings in maintenance costs decrease by 30%, value of time is reduced by 50%, and there is no generated demand due to new and rehabilitated buses, economic rates of return remain well above 12%, as shown in Annex 4. - 12 -  The investment in bus rehabilitation, which is a much smaller part of the project was also analyzed. The economic rate of return for the rehabilitation of the Turkish made Belde buses, which accounts for the bulk of the rehabilitation undertaken under the project, was found to be slightly above 15%, as also shown in Annex 4. 2. Financial (see Annex 5): NPV=US$ 2.7 million; FRR = 9.2 % (see Annex 4) A financial analysis of the bus leasing operations was carried out on the basis of relatively conservative assumptions regarding maintenance cost, depreciation, and cost of funds (which are the main costs by far in operating leases). Simplified assumptions were also made regarding the development of the leasing business. In addition, the analysis was carried out for a homogeneous fleet of nine meter buses. Revenues (lease rentals) were estimated on the basis of a standard model used by leasing companies known to the project preparation consultants. This model produced monthly lease rentals varying from about US$2,300, the first year, to about US$1,800 the fifth year. Down time due to maintenance or unused time between leases was assumed to be 6%. On this basis, the leasing scheme turns a profit every year. The cumulated funds balance over the first five years, taking account of losses during the scheme's settling-in period before operations start, would be about US$3.3 million. The calculation was carried out in US$ under the assumption that the lessees would make payment to the lessor, UATT, in Soums at the official exchange rate. This is acceptable since UATT's main costs (spare parts, interest payments, depreciation) will de facto be in US$ expressed in Soums at the official exchange rate. All fluctuations in the official exchange rate would be passed on to the lessees. As could be expected, the profitability of the scheme over a five-year period depends very much on the ability of UATT's clients (the urban transport operators) to pay adjusted rentals in case of currency devaluation. This in turn would depend on the clients' ability to raise passenger transport fares above the rate of inflation. During the past two years, the Government has been willing to regularly increase passenger fares to meet rising operating costs, and it may be assumed that this will continue. However, in case of a major devaluation, it is likely that, in order to cushion the social impact, UATT will be able to raise lease rentals only gradually. A two year grace period in the repayment by UATT and Uzavtotrans of their subsidiary loan from MOF would provide a financial cushion which would allow UATT to maintain liquidity during the price adjustment period. The down side of this cushion is that the net worth of the leasing scheme at the time of its privatization (expected to take place in 2004) could be negative. The implied subsidy would not be felt by the State until later because of the long grace and repayment periods of the Bank loan to the Government. The lease rentals produced by the above mentioned model and validated by the analysis, were then used to calculate the operating cost of a standard nine meter bus in urban transport service. Operating costs were based on actual costs of the JSCs regarding fuel and lubricants, tires, personnel, and overheads. Assuming that each nine meter bus would carry on average 1100 passengers per day (which is realistic if bus routes are properly designed and operations adequately organized), the cost per passenger trip would be US$0.12 in 1999 terms, an average result for a country with very low labor costs. At the official exchange rate in May 1999, this was equivalent to about 13 Soums per trip, well below the then prevalent fare of 20 Soums, which provides an acceptable margin for profits and risks. These results would not be affected in substance by a decision to procure, instead of nine meter buses, a mix of seven, nine, and twelve meter buses as anticipated earlier in project preparation, or only seven meter buses as recently decided by Uzavtotrans. The analysis therefore shows the leasing scheme to be financially sound. The main risk relates to currency devaluation. - 13 -  Fiscal Impact: The project would not result in increased recurrent costs for the Government as project goods would be operated by commercial companies. However, the project could impact Government finances in two ways. First, as the system of compensation for fare exemptions and discounts has been rationalized, the Government may have to spend more than it has in the recent past on compensation payments to transport operators. The total amount of compensation that will need to be provided in the next few years by the central Government may be estimated at US$1.0 million equivalent annually for the five cities, which is very small compared to the State budget. Second, as explained above, gradual adjustment of lease rentals in case of a major currency devaluation, would reduce the net value that the Government would realize from the leasing scheme at the time of its privatization. The Government has the ability to control both impacts by better targetting fare privileges and by allowing speedier fare adjustments. 3. Technical: Uzavtotrans and its consultants carried out during project preparation and appraisal an analysis of options regarding the size and technical standards of the buses to be procured, and the pros and cons of procuring one single bus type compared to a mix of different bus types. This included a review of the international bus market and thorough surveys of passenger demand in the five project cities. On this basis, it was agreed to procure a medium size (about seven meter) bus with simple and proven technologies, and technical standards which minimize the costs of operating and maintaining the buses while ensuring that a satisfactory level of comfort is offered to the passengers. This selection is well justified. To limit the purchase to one bus model would make procurement easier and faster, which is important given the lack of expericnce in Uzbekistan with international competitive procurement and the present shortage of urban buses in the project cities. It would also ensure that there is a fleet of identical buses in each city, which is large enough to achieve scale economies in maintenance. In addition, medium size buses are easier to operate and would put lower financial requirements (in terms of down payments and collateral for example) on small private operators. Draft bidding documents, including technical specifications, have already been prepared taking into account the experience gained in previous bus procurements under Bank financed projects. Before launching the bidding process, the bidding documents would need to be revised in order to incorporate the results of an on-going consultation with manufacturers of the selected bus type, as well as provisions for maintenance services to be provided by the winning bidder during and after the warranty period. 4. Institutional: a. Executing agencies: The distribution of responsibilities for carrying out the project is presented in Section C4. The project executing agency, Uzavtotrans, is a large organization issued from the Uzbek Ministry of Automobile Transport. It is highly decentralized with a small central office controlling more than 250 autonomous joint stock companies. It is also the main custodian of expertise in urban transport services in the country. Throughout the transition period, since 1992, despite extremely difficult financial and operational constraints, Uzavtotrans has maintained a high degree of organization and discipline. It has managed to retain a good part of its staff, usually skilled and competent, and these have succeeded in making ends meet in sometimes admirable ways. Uzavtotrans, however, still has management weaknesses, and its information systems are sorely lacking. The project includes assistance to address these problems within the JSCs. - 14 -  UATT, which would be in charge of procuring project goods and managing the bus leasing scheme, is Uzavtotrans' subsidiary organization for all procurement activities. Having to deal with a very large number of suppliers (many of them outside Uzbekistan) and clients, and the intricate payment systems used in the Former Soviet Union, UATT is organized, well versed in financial matters, and has the potential to grow. It also has a good knowledge of the passenger transport business, although no previous experience in the operating lease business (there is not a single operating lease company in Uzbekistan). UATT will therefore need to be supported by technical assistance, continuously during the first year of project implementation and at regular intervals thereafter. This assistance will also train UATT's staff and prepare the manual of operational and financial procedures and policies mentioned earlier in Section C4. This manual will rule the way in which the leasing operations will be carried out. As mentioned earlier, also, UATT's financial statements with regards to bus leasing, as well as the degree to which it will have complied with the stipulations of the manual, will be audited every six months during the first two years of the project and annually thereafter. An assessment of Uzavtotrans' and UATT's procurement capacity was carried out during project preparation. Based on the assessment's findings, an action plan was prepared, which includes a schedule for designation of procurement committees, definition of detailed internal procurement arrangements, provision of training, and recruitment of international procurement assistance. The main objective of this plan is to enhance Uzavtotrans' capacity to conduct competitive procurement and apply Bank procurement guidelines under the project. The action plan was finalized and agreed upon with the Borrower during Negotiations. b. Project management: The PIU is a newly created unit, and it lacks knowledge of the Bank procurement guidelines and practices, as well as disbursement procedures. Although it has functioned well during the preparation of the project, it will need to be strengthened for project implementation. Actions needed to do so were agreed at Negotiations and loan effectiveness will be conditional on their implementation (Section C4). In addition, the PIU (as well as UATT) will need assistance in project management, procurement, and contract administration; this will be provided by a foreign consulting firm under the project. It is proposed that the loan finance 100% of the PIU incremental operating costs during project implementation. The rationale for this is the following: (i) there is doubt that, in this period of drastic resource constraints, the PIU would be financed adequately if a share of its incremental operating costs is left to local funding sources; (ii) satisfactory functioning of the PIU is critical for the sound and timely implementation of the Project; (iii) PIU incremental operating costs are of the order of only 0.7% of total project costs; (iv) these costs will decline considerably after the first three years of project implementation; and (v) PIU incremental operating costs are costs to be incurred for the creation of capital assets, and should be viewed as investment costs (in the same way as the costs of setting up the leasing unit), and not as recurrent costs. - 15 -  5. Social: The project is expected to have a positive social impact since it will lower the cost and increase the quality of a service, public transport, which the population of the five project cities considers as essential. In order to assess the projects social impact, a social assessment (SA), including a household survey and a survey of urban bus operators, was carried out in 1998 as part of project preparation. The SA was in particular used to: (i) prepare a socio-economic profile of public transport users; (ii) identify travel behavior of households and their valuation of time; (iii) assess public perception of service standards provided by different transport modes; (iv) identify the most critical interventions to improve urban transport services, and (v) assess specific concerns of the private bus operators in operating and maintaining large buses. The household survey, which was carried out in Samarkand and Almalyk, indicated that about six per cent of the average monthly family expenditure of $74 equivalent was spent on transportation. Work trips constituted the largest share of bus passenger trips, followed by trips to the market. Affordability of motorized transport emerged as one of the main concerns of passengers, especially lower income ones. This concern was reflected in the high share of personal trips for which people preferred walking. The project would potentially address this concern, as the vehicles to be provided would be medium size buses with a lower cost per passenger than the minibuses which, in the past few years, have replaced the larger vehicles while charging higher fares. This is of special interest as about 34 per cent of the surveyed population in Samarkand and Almalyk has declared a monthly family expenditure below $36 equivalent. The project would also improve the frequency and reliability of urban transport services which is generally essential to facilitate people's mobility. The survey data also revealed that women walked more than men; to the extent that larger vehicles are more affordable than smaller vehicles, the project is likely to benefit women as a group. It was agreed that, under the project, the social assessment would be repeated in 2002 in order to (i) update knowledge of the social impact of urban transport in the project cities, and (ii) review changes resulting from the project, particularly on the mobility of lower income groups and their access to jobs and social services. 6. Environmental assessment: Environment Category: B As shown by an environmental analysis carried out during project preparation, the project would not result in any major negative environmental impact. Instead, a number of environmental benefits are expected to be realized as explained below. First, the current vehicle stock consists of end-of-life vehicles (LAZ, LiAZ, PAZ, RAF, KAvZ, Ikarus and Belde) which are predominantly gasoline-powered engines (except for Ikarus and Belde) with high emission levels. The project would provide new vehicles and therefore help gradually decommission old vehicles. Each replacement vehicle has the potential to perform significantly better in terms of emissions, noise and fuel consumption than the existing vehicles which it replaces. Second, although each vehicle would operate more kilometers per annum due to higher availability, the overall number of kilometers operated is unlikely to increase, if compared to a few years ago, so that improved emission levels and fuel consumption would not be offset by increased use. Third, better maintenance, supported by improved maintenance facilities and equipment, would ensure that existing vehicles remain within their specifications throughout their operating life. The generation of wastes such as scrap metals, used parts, tires, oils, and batteries (including in particular those due to the decommissioning of old buses) is the main potential environmental concern related to the project. There is a developed body of regulations and instructions in Uzbekistan regarding the disposal and recycling of wastes in particular related to road transport vehicles, and these are known and implemented at the local level. However, in the current context of resource shortages, there are shortcomings in - 16 -  environmental practices, and some improvements would in any case be desirable. At Negotiations, the Government agreed to prepare not later than December 31, 2000, an Environmental Management Plan. (EMP), acceptable to the Bank, for the project, and to take actions for implementation of the EMP under a timeframe agreed with the Bank. The EMP would comply with the requirements under Operational Policy/Bank Procedures/Good Practices 4.01 (Environmental Assessment), and address, inter alia, the issue of waste management. It would be available prior to arrival of the new buses and rehabilitation or repair of the existing ones. The EMP would include a monitoring plan, the results of which would be summarized annually in the PIU's project implementation progress reports. As part of the technical assistance provided by the project, consultants would also help the Government improve the recycling and recovery of urban transport related wastes in the five project cities. Their work would include: (i) a review of existing waste management practices and the extent to which they comply with environmental regulations; (ii) a review of recycling opportunities in terms of financial and technological constraints; (iii) a review of the adequacy of concerned staff and facilities; and (iv) the preparation of recommendations for improvements, and assistance in their implementation. 7. Participatory Approach (key stakeholders, how involved, and what they have influenced or may influence; if participatory approach not used, describe why not applicable): a. Primary beneficiaries and other affected groups: The primary beneficiaries of the project would be the residents of the project cities. Their socio-economic profile, urban transport needs, and views on priority improvements in the sector were analyzed through a social assessment (see Section E 5 above). b. Other key stakeholders: State-owned and private urban transport operators have been consulted throughout project preparation, especially in the assessment of their capabilities and the condition of their assets, and the identification of priority investments. The social assessment included in particular a survey of private bus operators. The project component for improving the institutional, financial, and regulatory framework for urban transport services was also designed with the main stakeholder, the Uzbek Agency for Automobile and River Transport, in consultation with the administrations of the project cities. Participation of key stakeholders as well as academic institutions thoughout project preparation, implementation, and operation has been, and is expected to continue, as presented in the Table below. The social assessement has been the main vehicle for consulting with the residents of the project cities and the academic institutions. Preparation Implementation Operation Beneficiaries/community IS/CON CON/COL CON/COL groups Academic institutions CON CON CON Central and local governments IS/CON/COL COL COL IS: Information Sharing CON: Consultation - 17-  COL: Collaboration F. Sustainability and Risks 1. Sustainability: The long term sustainability of the main project investments would depend on the sustainability of the urban transport sector in the project cities and, therefore, on the full implementation of the reforms which the project would be promoting, particularly the financial reforms. This has been and would continue to be the main focus of the Bank dialogue with the Government in the sector, especially through the annual reviews of the franchising system. The Government policy in these regards is well spelled out in its urban transport strategy statement of April 17, 2000. In the medium term, the sustainability of the investment in the new buses would also depend on the quality of the operational and financial management of the leasing scheme. This would be in accordance with policies and procedures acceptable to the Bank. Preparation of a manual of operational and financial policies and procedures, and establishment of financial management systems for the leasing scheme, acceptable to the Bank, are conditions of disbursement of loan proceeds allocated to the purchase of the new buses. The degree to which these policies and procedures are applied would be subject to regular audits by independent auditors. 2. Critical Risks (reflecting assumptions in the fourth column of Annex 1): Risk 7777 Risk-Rting-- T RXik Minimization Measure From Outputs to Objective 1. Insufficient political and institutional S 1.1 Annual review of the franchising system. will within the Government, Uzavtotrans, 1.2 Regular audits of the new bus leasing and the transport operators to use the scheme. new/improved systems and procedures 1.3 Bank continuous dialogue with senior (for bus route franchising, bus leasing, Government decision makers, particularly as and enterprise management), and to fully part of the implementation of the Government's base decisions on their results. urban transport strategy statement. 1.4 Dissemination of information on international best practice and potential benefits from taking action. 2. Inadequate increase in transport fares S 2.1 Same as 1. 1, 1.3, and 1.4 above following a devaluation of the national currency. 3. Formal and informal barriers to entry M 3.1 Same as 1.3 and 1.4 above. into the urban transport business. 4. Constraints put on entrepreneurship S 4.1 Same as 1.3 and 1.4 above. and investment in the sector by the 4.2 Commitment by the Government to provide Government's general economic policies, all necessary authorizations to the vehicle and restricted access to spare parts for maintenance enterprise(s) for the import of bus maintenance. goods necessary for the maintenance of the new buses. From Components to Outputs - 18-  1. Disruptive reorganization of N 1.1 Bank continuous dialogue with senior Uzavtotrans, and the JSCs and the City Government decison-makers on the efficiency of Administrations in the five project cities. administrative organization, and the benefits of better corporate governance. 2. Low willingness of managers and staff M 2.1 Mid-term project implementation review. of the Central and City Administrations, 2.2 Dissemination of information on Uzavtotrans, and the JSCs to learn new international best practices and potential knowledge and to implement new systems benefits from change. and procedures. 2.3 Bank continous dialogue with the managers of the concerned organizations. 3. Inability of sector organizations to S 3.1 Same as 2.1, 2.2, and 2.3 above. retain or hire competent staff in sufficient numbers. Overall Risk Rating S Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) 3. Possible Controversial Aspects: There are risks associated with the ownership of the new buses and management of the leasing scheme being entrusted to a State corporation, Uzavtotrans. However, other options, especially that of providing Bank funds to a joint stock leasing company owned by commercial investors (especially commercial banks) have been considered and not found feasible at this time. The risks of State ownership would be mitigated by the establishment of strict operational and financial policies and procedures, the auditing of the extent to which these would be applied, the contracting out of bus maintenance, and the privatization of the new buses and the leasing scheme after four years. G. Main Loan Conditions 1. Effectiveness Conditions (i) PIU to be strengthened with structure, functions, and staffing acceptable to the Bank. (ii) Independent auditors, acceptable to the Bank, to be selected to undertake the audit of the project financial statements for the first year of project implementation. (iii) Signature of a subsidiary loan agreement, acceptable to the Bank, between the Ministry of Finance and Uzavtotrans. 2. Other [classiiy according to covenant types used in the Legal Agreements.] Condition of Disbursement (for loan proceeds allocated to the purchase of new buses) Preparation of a manual of operational and financial policies and procedures, and establishment of a financial management system, acceptable to the Bank, for the new bus leasing scheme. Loan Covenants - 19 -  (i) PIU to be maintained during the entire life of the project with funds, facilities, and resources, including qualified and experienced staff, necessary, as may be deemed by the Bank, for successful implementation of the project. (ii) Uzavtotrans to carry out an action plan acceptable to the Bank for the strengthening of the PIU's financial management system in order to enable the PIU, not later than by June 30, 2001, to prepare quarterly Project Management Reports acceptable to the Bank. (iii) The Government, (a) by November 30, each year starting in year 2000, to review the technical and economic efficiency of the urban bus route franchising system in the project cities and discuss the result of such review with the Bank, and (b) by March 31, the following year, to issue instructions, acceptable to the Bank, to the City Tendering Commissions in the project cities, to improve the methodology for evaluation of bids for bus route franchises, the terms of the bus route franchise contracts, and the procedures for supervision of these contracts. (iv) New buses to be leased to private and State-owned transport operators in accordance with operational and financial policies and procedures acceptable to the Bank. (v) New buses to be maintained in accordance with a maintenance contract acceptable to the Bank. (vi) The Government to provide all necessary authorizations to the vehicle maintenance enterprise(s) for the import of spare parts and supplies necessary for maintenance of the new buses during the post-warranty period. (vii) UATT's financial statements related to the bus leasing operations and the extent to which UATT has consistently applied its operational and financial policies and procedures, to be audited every six months during the first two years of project implementation and every year thereafter by independent auditors acceptable to the Bank. (viii) The Government to prepare not later than by December 31, 2003, a plan acceptable to the Bank for privatization of the new bus fleet and the leasing organization in the project cities and take actions for the implementation of this plan under a timeframe agreed with the Bank. (ix) The Government to prepare not later than by December 31, 2000, an Environmental Management Plan (EMP) acceptable to the Bank, and take actions for the implementation of the EMP under a timeframe agreed with the Bank. H. Readiness for Implementation 1 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. 1 1. b) Not applicable. 1 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. 1 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. O 4. The following items are lacking and are discussed under loan conditions (Section G): Draft bidding documents for the purchase of new buses have already been prepared, but need to be revised, particularly in order to incorporate the results of an on-going consultation with bus manufacturers (see Section E 3). This is expected to be completed shortly. - 20 -  1. Compliance with Bank Policies 1 1. This project complies with all applicable Bank policies. Dg 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. ( L_ \ _ _ k __ _ Jean- arles Crochet Eva Molnar Kiyoshi Kodera //i Team Leader Sector Manager/Director Country ManagerlDirector - 21 -  Annex 1: Project Design Summary UZBEKISTAN: Urban Transport Project 4 e Perff ance' Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) 1. Removing the 1.1 Increased level of cost 1. Bank economic and sector 1. Complementary measures inefficiencies in resource recovery. work. are taken in other spheres utilization in the municipal 1.2 Strengthened institutional (agriculture, credit, efficiency services, infrastructure, and capacity. of markets, governance, etc) to the social services. 1.3 Introduction of raise the living standards of competition between service the poor. providers and increased privatization of services. - 22 -  Key Performnance Hierarchy of Objectives Indicators Monitoring & Evaluation Critical Assumptions Project Development Outcome / Impact Project reports: (from Objective to Goal) Objective: Indicators: 1. Efficient and sustainable 1.1 Supply of urban passenger 1. Bank supervision missions 1. Senior decision makers are urban passenger transport transport services in the five assessments. convinced of the effectiveness services in Samarkand, project cities is adequate to of the changes introduced Namangan, Bukhara, Nukus, satisfy demand. 2. Updated social assessment. through the project and and Almalik. willing to scale-up these 1.2 Urban transport operators 3. Annual survey of urban changes to other cities and in the five cities adequately transport operators. possibly other sectors. manage their operations and maintain their vehicles. 1.3 Bus route franchises in the five cities are allocated on the basis of a sound competitive bidding process. 1.4 City administrations in the five cities take sound decisions regarding the (i) planning of their respective urban transport systems and (ii) the administration of franchise contracts. 1.5 Efficient urban transport operators in the five cities fully recover their costs (including the cost of privileged passengers) and generate a reasonable profit. - 23 -  Key P,e rftKormance Herarchy of Objectives tors _ Moniorg & Evaluation Critical Assumpions Output from each Output Indicators: Project reports: (from Outputs to Objective) component: 1. New modem urban buses 1.1 About 350 new buses are 1. PIU quarterly and annual 1. There is the political and are made available to urban available by mid 2002. reports. institutional will within the transport operators 1.2 Sound leasing Govemment, Uzavtotrans, and arrangements are in place to 2. Bank supervision missions the transport operators to use provide the buses on a full cost assessments. the new/improved systems and recovery basis by mid 2001. procedures (for bus route franchising, bus leasing, and enterprise management), and to fully base decisions on their results. 2. Increased availability of 2.1 About 60 existing "Belde" 2. The cost impact of a existing vehicle fleets buses are rehabilitated by end devaluation of the national 2002. currency are reflected into 2.2 Most existing buses with transport fares within a remaining service life are reasonable period of time. operable by mid 2002. 2.3 Daily Availability of operable buses is increased from about 60% presently to 75% by end 2002. 3. Increased capability of 3.1 Better financial 3. Entry into the urban urban transport operators. management and maintenance transport business remains systems/procedures are in widely open. place in the JSCs by end of project. 4. General economic policies 3.2 Sufficient tools and do not restrain equipment are available to the entrepreneurship and JSCs for maintenance of their investment in the sector, and bus fleets by end of project. in particular, do not restrict 3.3 About one hundred and access to spare parts for bus fifty staff of JSCs and private maintenance. operators are trained in financial management, vehicle maintenance, and bus route franchising by end of project. - 24 -  4. A sound bus route 4.1 Sound systems and franchising system is in place procedures are in place in the city transport departments to (i) plan urban transport services; (ii) competitively tender bus route franchises; (iii) compensate urban transport operators for the transport of privileged passengers; and (iv) administer franchises by end of project. 4.2 About seventy five CTC, CTD, and UAART staff are trained in subjects (i) to (iv) above by end of project. - 25 -  W0X* ~~~~Key Peroiiiaice Project Components / Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) 1. Provision of new buses and $23.46 million 1. PIU quarterly and annual 1. There is no disruptive establishment of a leasing reports. reorganization of Uzavtotrans, scheme. and the JSCs and the City 2. Bank supervision missions Administrations of the five assessments. project cities. 2. Rehabilitation and repair of $4.83 million 2. Management and staff of existing buses. the Central and City aAdministrations, Uzavtotrans, and the JSCs are willing to learn new knowledge and implement new systems and procedures. 3. Provision of technical $1.42 million 3. Competent staff in assistance, training, and sufficient numbers are equipment for strengthening retained or hired, as urban transport operators necessary. 4. Provision of technical $0.32 million assistance, training, and equipment for improving the regulatory, institutional, and financial framework for urban transport services 5. Project management $0.63 million - 26 -  Annex 2: Project Description UZBEKISTAN: Urban Transport Project By Component: Project Component I - US$23.46 million Provision of New Buses and Establishment of a Leasing Scheme: 1. In recent years, the available fleet of medium size and large urban buses in the five project cities has been declining at about 10% per annum because of lack of funds for capital replacement and maintenance. On average, such buses are nearly 10 year old, and in most State enterprises, nearly two-thirds of the bus fleet exceeds the planned life of 8-10 years, and about 30% of the fleet is over 12 years old. As a result, there is a shortage of operable buses, which has constrained residents' mobility and encouraged the use of mini- and micro-buses which are far more expensive to operate on bus routes with sizable passenger demand. The objective of this project component is therefore to provide new buses to satisfy the estimated passenger demand on these bus routes. Calculation of requirements for new buses in each of the cities, prepared by project preparation consultants, has followed three steps: (i) estimation of the total number of buses required to satisfy passenger demand in the base year (1998); (ii) estimation of the total number of currently operable buses, including those which can be returned to service with rehabilitation and body overhaul; and (iii) calculation of requirements for new buses by subtracting (ii) from (i). With relatively conservative estimates of passenger demand and assuming a high utilization factor, it was concluded that the total requirement was for about three hundred and fifty seven meter equivalent new buses. The total cost of these buses (including contingencies) is estimated to be $ 20.45 million (net of custom duties, local taxes, and VAT, as is the case for all costs in the project cost estimate). Draft technical specifications have been prepared which emphasize sturdiness, proven and simple technologies, and easy maintenance. Assumed unit prices are based on discussions with manufacturers. 2. The buses will be owned by Uzavtotrans and leased to private and State-owned operators on a commercial basis, including especially full cost recovery. Uzavtotrans' procurement unit, Uzavtotrans Taminot (UATT), will have responsibility for leasing and maintenance of the buses, and, therefore, will need to establish the leasing scheme in detail at the beginning of the project. This will include among other things: (i) preparation of an operations manual covering in particular policies and procedures for selection of lessees, calculation of lease rentals, and administration of lease. contracts; (ii) establishment of appropriate accounting, financial management, and information systems for the bus leasing operations; (iii) developing procedures for supervising the maintenance of buses; and (iv) developing a small group of competent staff and strengthening UATT's management capability. The bus leasing operations will also be submitted to a regular technical and financial audit every six months during the first two years of the project and annually thereafter. For thes purposes, the project includes the provision of technical assistance and training services as well as office equipment. The cost estimate is $0.58 million for the services and $0.06 million for the office equipment 3. The buses will be maintained under a maintenance contract with the bus supplier. This contract will be paid out of the bus leasing revenues. However, in order to limit risks to the supplier and ensure the lowest possible maintenance costs, the project includes the setting up of the maintenance centers (including provision of facilities and workshop equipment), and the establishment of an initial stock of spare parts. The cost estimate is $0.29 million for the facilities, $0.29 million for the workshop equipment, and $1.52 million for the spare parts. 4. The project also includes services for (i) ensuring that the new buses are manufactured in -27 -  accordance with stipulated quality assurance procedures and conform to the technical specifications; and (ii) preparing a plan for privatization of the new bus fleet and leasing scheme before December 31, 2003. The cost estimate for these services is $0.27 million. Project Component 2 - US$4.83 million Rehabilitation and Repair of Existing Buses 4. Capital Repair. As a result of insufficient preventive maintenance in the past, the operating costs of buses have increased while their performance and availability have decreased substantially. "Capital repair" (i.e. a full rehabilitation) is therefore necessary to restore the full technical performance and earning potential of the vehicles and reduce the cost of operation. The viability of such an exercise depends both on the anticipated cost of capital repair in relation to the replacement price of a new vehicle, and age of the vehicle in relation to its potential economic life-cycle. Basic judgement used in estimating the number of buses to be rehabilitated is that any bus of CIS origin that has alteady been in operation for half its optimal life would not be economic to rehabilitate, whereas the breakeven point for non-CIS bus comes at 60% of its life-cycle. 5. Given the types of buses operating in each of the participating cities and their age profile, it is estimated that mostly Turkish Belde buses, procured in 1993, will fall within the economic criteria defined above. Performance of these buses has been hampered by lack of spare parts throughout their life. It is estimated that capital repair can be done to 60 Belde buses at an average cost of US$16,500 each. 17 buses of 7m length can also be rehabilitated at an average cost of US$6,200 each. Total cost of capital repair (including contingencies) is estimated at US$1.15 million. 6. Intermediate OverhauL The objective of intermediate overhaul is to raise the standard of presentation and comfort of the bus in order to increase its level of passenger acceptability. It would include such items as: repairing and re-upholstering all seats, repairing and re-covering floor and steps, reinstating all stations and grabrails, repairing door operating mechanisms, repairing cracked windows and windscreens and repainting inside and outside. Such works are relatively labor intensive and can be carried out comparatively cheaply. The total cost of intermediate overhaul on the existing bus fleet in the five cities is estimated to be US$1.27 million. 8. Spare parts for emergency repairs and reconstitution of an adequate stock This component includes spare parts to quickly return existing buses to service and improve their service conditions. For lack of funds, JSCs have kept expenditures on spare parts to a minimum for more. than five years, with the bulk of maintenance expenditure being deferred as long as possible. As a result, the operable bus fleet has decreased to record low numbers, and reliability has been very poor. Maintenance activities in all JSCs are also supported by negligible stock levels and spare parts are acquired as and when needed, which results in unnecessary delays. The approach to estimate spare parts requirements includes: (i) preparation of a schedule of missing parts for all vehicles still within their economic life; and (ii) identification of parts requirements for the planned maintenance program and predicted unit failures in relation to planned fleet activity. The total costs of required spare parts is $ 2.42 million. Project Component 3 - US$ 1.42 million Strengthening of Urban Transport Operators. 9. The project includes the provision of consultants' services and training to (i) improve the financial and maintenance management of the JSCs and the private transport operators (in particular their accounting and cost estimating systems, ability to prepare bids for bus route franchises, and vehicle - 28 -  maintenance policies and organization); and (ii) design and implement measures to improve environmental practices of the JSCs and related organizations, including in particular the recycling of materials and safe disposal of wastes. The estimate is $0.23 million. 10. To complement these services and increase the quality and efficiency of the JSCs' vehicle maintenance operations, the project includes (i) improvement of workshop buildings (at a total estimated cost of $0.52 million), (ii) provision of tools and workshop equipment (at an estimated cost of about $30,000 for each of the seventeen JSCs operating in the five project cities, or $0.52 million in total) and (iii) provision of office equipment and software (at a total estimated cost of $0.16 million). Project Component 4 - US$0.32 million Improvement of the Institutional, Financial, and Regulatory Framework for Urban Transport Services 11. The project includes consultants' services and training to (i) help the Central Government improve urban transport policies and regulations, assist city administrations in the management of urban transport, and monitor developments in the sector; (ii) improve the capabilities of the city transport departments (CTDs) of the five project cities in all their activities, in particular the collection of data, planning of urban transport investments, designing of bus routes, administration and supervision of the franchising system, and improvement of fare policies; and (iii) update the social assessment which was carried out in 1998, in order to deepen the CTDs' knowledge of the population's urban transport needs. The estimated cost of these services is $0,23 million. 12. To strengthen the CTDs, the project also includes the provision of office equipment and software for an estimated cost of $0.09 million. Project Component 5 - US$0.63 million Project Management 13. In order to help the PIU procure goods and services for the project, administer contracts, improve its financial management systems, and generally manage the project, the project includes consultants' services and training for an estimated cost of $0.35 million and office equipment and software for an estimated cost of $0.06 million. 14. The project also includes the incremental activities of the PIU related to project management (estimated to cost about $0.23 million) comprising in particular office rental, operation and maintenance of office equipment, travel, provision of utility services, communications, and supplies, audit of project accounts, and provision of adequate staff, based on an annual budget acceptable to the Bank. -29 -  Annex 3: Estimated Project Costs UZBEKISTAN: Urban Transport Project I. Provision of New Buses and Establishment of a Leasing 0.36 19.99 20.35 Scheme for these Buses. 2. Rehabilitation and Repair of Existing Buses. 1.07 3.13 4.20 3. Strengthening of Urban Transport Operators. 0.48 0.75 1.23 4. Improvement of the Institutional, Financial, and Regulatory 0.03 0.24 0.27 Framework for Urban Transport Services. 5. Project Management. 0.20 0.35 0.55 6. Refunding of PPF Advance 0.00 0.50 0.50 Total Baseline Cost 2.14 24.96 27.10 Physical Contingencies 0.21 2.50 2.71 Price Contingencies 0.10 1.25 1.35 Total Project Costs 2.45 28.71 31.16 Front-end fee 0.29 0.29 Total Financing Required 2.45 29.00 31.45 All costs are net of custom duties, local taxes, and VAT. - 30 -  Annex 4: Cost Benefit Analysis Summary UZBEKISTAN: Urban Transport Project Summary of Benefits and Costs: 1. The two main project components for which an economic analysis was undertaken are: (i) bus rehabilitation (or "capital repair"), and (ii) purchase of new vehicles, in the five project cities of Samarkand, Namangan, Bukhara, Nukus, and Almalyk. The economic analysis focused on the calculation and comparison of costs and benefits brought about via rehabilitation and purchase of new vehicles for public transport. Urban public transport in other urban areas would not be affected by these investments, though the sector will benefit from the regulatory and institutional changes that the project is expected to bring about. The main results of the analysis are presented below. Economic Analysis of Bus rehabilitation 2. For the economic analysis of the rehabilitation of the existing vehicles owned by the JSCs in the five cities, the age and mechanical condition of the buses in the five cities was first assessed. Life cycles of each of the vehicle types was then estimated under the two scenarios of preventive maintenance and corrective repair; variations were included for corrosive repair in Bukhara and Nukus. The financial costs of rehabilitation are presented in Table 4.1. For each of the vehicles, the following scenarios were compared: (i) capital repair to allow completion of economic life, (ii) operate as is for three more years and then replace, (iii) replace immediately. Option (ii) was not economic and therefore discarded. The results of the cost-benefit analysis, based on a comparison of (i) and (iii), are shown in Table 4.2. Table 4.1: Financial cost of rehabilitation (US$ '000) Vehicle Type Number Total Rehabilitation Cost Belde 60 918.0 PAZ 22 136.4 LAZ 28 274.4 Total 110 1328.8 Table 4.2: Economic Analysis of Bus Rehabilitation NPV ('000 soums) ERR PAZ LAZ Belde PAZ LAZ Belde Samarkand 4,471 11,913 14985 24.9 28.4 15.2 Bukhara 1,849 24,348 37.5 28.8 Almalyk 1,677 3,096 4,579 37.5 29 15.8 Namangan 14,653 15.8 Nukus 5,338 6,823 18.6 44.5 _ - 31 -  Economic Analysis of New Buses 3. The following scenarios were considered as plausible alternatives for the "without project" case. The first alternative was to assume that the enterprises would be able to replace their fleets in three years, operating at the current service levels in the interim and continuing to bear high maintenance costs. The second alternative allowed for a reduced service level of 80% with the existing fleet, and assumed that the vehicle fleets would be replaced in 2003. The third alternative assumed that the transport enterprises would be unable to find resources for fleet renewal and the decline in enterprise service would be compensated by a private sector expansion of minibuses. A comparison of the "without project" options showed the second option to be the most stringent; this has therefore been used as the "without project" case. 4. On the basis of the above mentioned values and assumptions, the economic evaluation of the project yields an economic rate of return of 60.4%. The net present values, at a 12 percent discount rate, amounts to 1.4 billion Soums. the results are robust to major changes in the assumptions for the economic prices. Investment in new vehicles has been evaluated separately for each vehicle type, and for each city. Each of the investments is individually viable - the individual returns vary between 45 to 80%. Table 4.3 summarizes the results of the incremental costs and benefits, both financial and economic. This analysis was carried out assuming that the new vehicles would be a mix of seven, nine, and twelve meter buses as was anticipated at that time. The results are not affected in substance by Uzavtotrans' recent decision to purchase only seven meter buses. Table 4.3: Financial and Economic Analysis of New Buses Financial Benefits Economic Benefits City NPV ('000 ERR (%) NPV ('000 ERR(%) I_______-____ Soums) Soums) Samarkand 7 m 48,167 41 62,572 49.8 9_ 9m 298,628 46.7 377,441 56.3 12m 11,059 67.8 26,244 89.8 Bukhara 7m 27,111 64.6 31,330 75.2 9 m 68,953 37.9 91,471 47.6 12m 192,036 58 217,566 70.7 Almalyk 7 m 17,837 51.9 21,500 60.8 9 m 117,300 46.9 148,006 56.6 12m 3,051 45.4 8,341 63.1 Namangan 7 m 58,035 41.2 74,564 49.4 9 m 93,182 49.9 115,700 59.8 12m 7,626 144.7 14,991 204.8 Nukus 7 m 15,304 27 22,536 34.9 9 m 20,476 57.4 24,570 68.7 12m 154,270 62.6 171,509 78.6 Total _ 1,133,035 49.3 1,408,341 60.4 (1) NPV is calculated at a discount rate of 12%. The financial values are those which are the basis of the economic analysis. Main Assumptions: - 32 -  5. The methodology and key assumptions used in the analysis to estimate total fleet requirements and the size of investment in rehabilitation versus new vehicles, and to calculate the economic benefits of these investments are described below. General Methodological Approach 6. The economic analysis encompasses the comparison of incremental costs and benefits that the proposed investment will bring about to targeted urban transport systems and consequently to the economy as a whole. Both costs and benefits are calculated for the situation with and without the project to generate the incremental costs and benefits over the life of the vehicles. Investments in capital repair and in purchase of new buses are analyzed separately. The economic appraisal is conducted in domestic currency at the domestic price level, as the project benefits are non-tradable. All conversions to dollar values have been calculated at a shadow exchange rate of 180 Soums/$ to take account of the overvaluation of the domestic currency at the time data was collected for the economic analysis (mid 1998). 7. The number of buses required to service travel demand, in the base year 1998, is calculated for each city. This number is compared with the existing fleets of the transport enterprises and the supply of vehicles by the private sector. It is assumed that half the supply of minibuses (including the "Damas", a 7 seat microbus manufactured by Daewoo in Uzbekistan, which has become extensively used by private operators), will be replaced by large buses. The number of buses in each city which can be economically rehabilitated is subtracted from the total vehicles required to service demand; this yields the number of new buses to be purchased 8. Alternative scenarios were developed for both capital repair and investment in new vehicles. The option of capital repair to extend the operational life of the vehicles by at least three years was compared with the alternative of replacing the vehicles immediately. Both the immediate replacement and rehabilitation alternatives were compared with the base scenario of operating the existing vehicles for three more years and then replacing them. For new investments, the without project scenario considers a delay in investment of three years, during which time a reduced level of service, at 80%, is provided. The alternative of large vehicles being replaced by minibuses, owned and operated by private entrepreneurs, was also considered. This was rejected in favor of the selected without project case as the latter provided a more stringent test against the with project case. Travel Demand 9. Urban public transport in the project cities is provided by a mix of enterprise buses ranging from seven to twelve meters, private sector minibuses, and trolleybuses. The estimated demand by mode is given in table 4.4. The share of the private sector in public transport lies between 25% to 68%. Table 4.4: Estimated passenger demand by mode ('000 /day), 1998 Samarkand Bukhara Almalyk Namangan Nukus Buses 91.5 28.0 39.7 44.0 14.2 (enterprises) Minibuses 104.3 69.5 16.5 52.1 52.0 (private sector) - 33 -  Trolley buses 16.1 3.6 9.4 17.4 5.0 10. Ideally, the size of a city's vehicle fleet and its required growth over time would be derived from data on travel demand, expected population and economic growth rates of the project cities, changes in income distribution, motorization rate, land use planning and related changes in travel patterns. In practice, we do not have reliable projections for these variables on either an aggregate urban or dis-aggregate city level. Urban and rural populations are in flux, and for some time urban areas have been net losers of population due to emigration. The economic crisis in Russia has had an adverse impact on the regional economy, with differential and uncertain impacts on individual countries. Also no detailed passenger surveys had been carried out by the time of the economic analysis (they were completed just before Negotiations). For these reasons, assumptions used in the economic analysis are on the conservative side. 11. It is assumed that there is no growth in travel demand due to the above factors. The project focuses on replacement of vehicles rather than fleet expansion. Generated demand has been included. It is estimated that the higher quality of new and rehabilitated buses will have a modest impact on demand of 5% and 2%, respectively. This demand is expected to be accommodated without running additional vehicles. 12. Based on available surveys, travel demand elasticity is taken to be 0.3. Since passenger travel is sensitive to bus frequencies, a frequency elasticity of 0.15 has also been included. Passengers attach utility to the improved comfort of rehabilitated and new buses and disutility to overcrowding. These costs and benefits, though small, have been assessed and included in the analysis. Passenger benefits of 0,6 soums and 0.24 soums have been included for new and rehabilitated vehicles. Public Transport Fares 13. Break even fares by vehicle type were calculated, using the optimal operations and maintenance cost profile for vehicles. This analysis shows that the lowest break-even fare is provided by the bigger vehicles. The break-even fare is between 9 and 10 Soums per passenger for a bigger bus, and 16 to 18 Soums for a Damas (at mid 1998 costs). These fares include depreciation and capital costs (valued at international prices). At the time of the economic analysis, fares, although they varied by city, were set around 12 Soums for large buses and 20 Soums for minibuses. The fares were thus quite adequate for cost recovery (provided that the Government compensates operators for the transport of privileged passengers). Through continuous fare adjustments, this has been maintained since mid 1998. Any change in the average fare would affect total demand, and demand elasticities change as one moves up the demand curve. Financial and Economic costs 14. The total financial cost of bus rehabilitation and purchase of new vehicles is estimated in the economic analysis at US$21.2 m. The costs included in the financial analysis are operations and maintenance costs, administrative costs, vehicle depreciation costs, interest on debt, taxes and an allowance for risk and profits. To calculate the economic costs, the following adjustments were considered. Taxes were discounted from the pertinent financial costs. Profits have been excluded and passenger time costs have been included in the economic costs. 15. Vehicle Operating and maintenance costs. There is a complex relationship between expenditure on maintenance and optimum vehicle life. As a result of insufficient preventive maintenance in the past, operating costs of vehicles have increased rapidly with age. Rehabilitation of the buses will restore the full - 34 -  technical performance and earning potential of the vehicles and reduce the ongoing maintenance costs. O&M costs used in the analysis, for both rehabilitated and new vehicles, are based on estimates required to maintain a vehicle in good condition over its economic life. 16. Passenger time costs. The time savings of passengers are accounted through the inclusion of the economic value of time. The value of travel time is considered a function of the local hourly wage rate. It is assumed that the value of travel time is half the hourly wage rate of 25 Soums. Waiting time is valued at twice the in-vehicle time. Sensitivity analysis I Switching values of critical items: 17. The estimated net present value and economic rate of return are sensitive particularly to two sets of assumptions: an increase in capital costs and a decrease in maintenance cost savings. A 20 percent increase in capital costs causes the ERR to drop by 15.5 percent, while a 30 percent reduction in maintenance costs leads to an overall economic rate of return of 39.4 per cent. A combination of a 20 percent increase in capital costs and a reduction in maintenance costs (16 percent for new vehicles and 30 percent for old vehicles) gives an net present value of 0.74 billion Soums. The ERR is 30.1 percent, well above the 12 percent cut-off rate. 18. Several other sensitivity tests were completed, including a halving of passenger valuation of time, exclusion of passenger benefits due to comfort and less crowding, exclusion of generated demand; the project results are robust with respect to all these changes. The outcomes of these tests are summarized in Table 4.5 below. Table 4.5: Sensitivity test results Test NPV ('000 Soums) ERR (%) 1. Capital costs increase by 20% 1,238,200 44.9 2. Maintenance costs decrease by 896,522 39.4 30% 3. Value of time is halved 1,342,399 57.8 4. Generated demand and passenger 1,028,813 45 benefits of new vehicles are excluded 5. Capital costs increase 20%, and 740,487 30.1 maint. costs decrease 16% or 30% - 35 -  Annex 6: Financial Summary UZBEKISTAN: Urban Transport Project Years Ending June 30 S~~~~1P~~TT