Uzbekistan - Urban Transport Project

Report No. PID6869 Project Name Uzbekistan-Urban Transport Project (+) Region Europe and Central Asia Sector Transportation-Urban Project ID UZPE50508 Borrower Republic of Uzbekistan Implementing Agency Uzbek State Stock Corporation of Automotive Transport (Uzavtotrans) Mr. Kahramon Sidiknazarov, Chairman 6 Amir Temur St., pass. 1 Tashkent 700000, Republic of Uzbekistan Environmental Category B Date This PID Prepared September 24, 1998 Projected Appraisal Date January 15, 1999 Projected Board Date May 15, 1999 Country and Sector Background The Republic of Uzbekistan is the most populous of the Central Asian countries, with a population of about 23 million, of which some 60% live in rural communities. Agriculture is the predominant economic activity in this landlocked semi-arid country, though there are also significant centers of mining and manufacturing. Like other Central Asian countries that used to be part of the FSU, Uzbekistan inherited a centrally-planned economic structure and an almost complete absence of necessary market structures. Since attaining independence in late 1991, significant progress has been made in addressing key structural and macroeconomic issues, though often relatively more slowly than in some comparable countries. The IMF and Bank have supported the Government's comprehensive reform program by providing a Structural Transformation Facility and stand-by arrangement (IMF), as well as a Rehabilitation Loan (IBRD). Progress in building market institutions, sectoral development, and improving social protection has been generally satisfactory, with a considerable emphasis on investing in the modernization of the productive sectors of the economy, leading to substantial investment in joint ventures and in major state enterprises. However, there has been less progress in structural adjustment, with the State still retaining and exercising wide discretionary powers in the microeconomic management of the economy, with relative prices often bearing little relationship to market reference points. As in the case of many other FSU countries, Uzbekistan inherited a relatively well-developed transport infrastructure for a country of its income level. Under central planning, the Uzbek economy was unusually transport intensive, since the sources of raw materials, population centers, and centers of economic activity were often located at enormous distances from each other, with little regard for the cost of transport or for other considerations of economic efficiency. With the development of market relations in the country and the establishment of pricing structures and mechanisms more reflective of the true cost of providing transport services, there has been a significant drop in the demand for those services. However, the Government still does retain a relatively significant role in the pricing of transport services,  with price controls or caps still in existence in several modes of transport. And while the process of overhauling the regulatory framework for transport has started, much still remains to be done to ensure that the regulations adequately address the needs of the country's transport sector, as well as its transition economy in general. But the single most significant problem faced by the transport sector in Uzbekistan is the deterioration of transport assets, and the unavailability of funds to adequately maintain, rehabilitate, or replace them. With the drying up of central Government subsidies, the previous system of funding collapsed, leaving transport operators in the position of trying to provide the same services with an ever-shrinking number of available vehicles and/or other assets. This lack of investment is especially evident and acute in the urban transport subsector, particularly in cities other than Tashkent, where the operating companies have for several years been unable to renew or rehabilitate their vehicle fleets . In fact, their financial situation is so acute that those UT companies cannot even afford to provide for the adequate maintenance of vehicles, or appropriate spare parts for them . This results in a low percentage of the vehicle fleet being available for service on any given day causing severe capacity shortages and overcrowded buses and trolleybuses. Though the formerly-unified road transport company, Uzavtotrans, has been converted into more than 400 joint-stock companies, including 84 city bus enterprises, those newly-corporatized urban transport operators are not able to function as financially independent companies. In almost every city, political decision-making bodies set urban passenger fares. These are generally kept at levels much below those needed to ensure full cost recovery, and bear little relation to the true cost of providing the service. In addition to the low fare levels, the UT operators are obligated to transport certain categories of passengers either free of charge, or at fares substantially lower than those charged to full fare-paying passengers. The companies are generally not sufficiently compensated for having to provide these exemptions and privileges, but even current levels of subsidies provided to them by the municipal governments place a heavy burden on those governments' already strained finances. Part of the shares in the large UT joint-stock companies are owned and held by the State Property Committee, which delegates responsibility for their management to Uzavtotrans. Uzavtotrans in turn delegates this responsibility to its regional subsidiaries, the Oblasttrans organizations. Despite the State's legal position as a minority shareholder, the fact that the remaining shares remain unsubscribed means that in practice the State continues to be regarded by company managers as having the controlling interest. This is in contrast to the status of the trolleybus companies, which are wholly owned and operated by the Ministry of Domestic Community Services. Coordination between bus and trolleybus services in operational and investment decisions is generally very poor. Capacity shortages in urban passenger transport have recently been partly alleviated by the entry of private bus and minibus operators, mostly single- owner operators of 7 to 15-seater vehicles, within the regulated fare structure. The private bus operators' share of the total number of bus passenger-trips varies from city to city, generally ranging from 15% to 50%. The growth in private operations has been facilitated by the supplier's credit available from Asaka Bank , in addition to informal sources of finance for purchasing second-hand large or mini buses. However, the private sector's increased participation in the provision of UT services is severely constrained by the absence of a suitable regulatory - 2-  framework, which would ensure the competition on a fair basis between the formal and informal urban transport sectors. Another issue are the local authorities' practices in implementing existing regulations , which de facto deter the entry of new operators into the subsector, and therefore present an impediment to competition. Indeed, the small private operators' role is primarily seen as one to supplement the service of the large UT companies, on those routes that experience the most critical capacity shortages. Finally, an additional problem that the private operators face is the fact that vehicle maintenance facilities are located within the State-owned companies, meaning that the private sector is handicapped by a lack of alternatives to maintain and repair buses. Project Objectives The project's main objective would be to increase the quantity and improve the quality of public transport services in a sustainable manner in five medium- sized Uzbek cities (Almalyk, Bukhara, Navvoy, Nukus, and Samarkand), through the following: (i) renewal and rehabilitation of the vehicle fleets; (ii) strengthening the policy environment and improving efficiency of public sector management in the urban transport sub-sector; (iii) enhancing private-sector participation in service provision; (iv) improving operations and management of existing bus enterprises; and (v) improving cost recovery of State joint- stock urban bus enterprises. Project Description The proposed project is expected to support investments in the five Uzbek cities. The specific project components will be defined following completion of the on-going preparation studies. Subject to further discussions between the Government of Uzbekistan and the Bank, the project would tentatively consist of the following: Provision of new vehicles and rehabilitation of existing vehicles; Provision of workshop tools and equipment; Provision of spare parts; Operational improvements; Technical assistance and training; and Supervision and monitoring. Financing Given the presently relatively low cost of labor in the country, as well as the fact that most of the vehicles and equipment procured under the project would come from abroad, it is expected that the foreign share of the project's total cost would be about 80-, to be financed by the proposed Bank loan. As a result, the tentative amount of the Bank loan would be about US$60.0 million. Project Implementation Overall responsibility for implementing the project and coordinating the activities in the participating cities will rest with Uzavtotrans . Within Uzavtotrans, a Project Management Unit (PMU) will be set up, in which each of the participating cities will be represented. The PMU will be the Bank's counterpart agency for reporting progress on project implementation, and will coordinate all administrative, procurement, disbursement, and supervision functions for the participating cities. At the city level, a Project Manager will be designated within each City Commission to manage and coordinate the project (including supervising project implementation, procurement, disbursement, and financial reporting) and act as the focal point for communications with the PMU. Bank supervision of project activities will be -3 -  strengthened by establishing appropriate mechanisms for reviewing annual work programs submitted by each city. The implementation arrangements and the specific functions and responsibilities of the PMU and the cities will be discussed and agreed on with the Government during project preparation. Project Sustainability The proposed project would facilitate the development of sustainable urban transport operations in each of the participating cities, which would be achieved by making the sector more commercial and competitive based on the transport operators' financial autonomy, including the ability to generate internally adequate funds for vehicle maintenance and replacement. As part of project preparation, appropriate accounting and management information systems would be developed to support commercial activities by the joint-stock companies. The financial position of the UT operating companies will be strengthened to ensure full cost recovery. The fare structure would be more closely linked to operational cost, with transparent subsidies for privileged or exempted passengers. Lessons Learned from Previous Bank Involvement The proposed project would be the first Bank financed urban transport project in Uzbekistan. However, the Bank is currently financing three other urban transport projects in the FSU (one each in Russia, Kazakhstan, and Turkmenistan), and one in Hungary. All three projects in the CIS are progressing satisfactorily and achieving their development objectives. The key problems affecting these projects to different degrees center on: (i) weak planning and implementation capacity; (ii) insufficient experience with international procurement practices; (iii) weak financial basis of operating enterprises; and (iv) insufficient attention to maintenance of the new vehicle fleet. More generally, experience has shown that the speed with which sector reforms are likely to progress depends on the Government's understanding and commitment, and may be constrained by the dominance of the public sector and underdeveloped financial markets. The project in Kazakhstan has shown, however, that major policy changes can be achieved (even within the context of a "public sector" type project) provided that there is the necessary political will, but that full success requires progress at the same time on all policy fronts (regulatory, institutional, and financial). The proposed project has been designed incorporating all these lessons. Environmental Aspects The project is not expected to have any adverse environmental impact. The environmental benefits that it is expected to yield including the following: (i) the new diesel-powered buses to be financed under the project will be less polluting than the gasoline-powered buses in operation today; (ii) emissions- control equipment will be procured to monitor bus emissions; (iii) CNG-powered buses are being considered for part of the project; (iv) improved maintenance practices and annual inspection programs supported by the proposed project would reduce energy consumption by 15% to 209, resulting in a corresponding reduction in gaseous emissions; (v) suppliers of new buses will be required to furnish recommendations for proper maintenance of the engines when operating on diesel fuel, so that engine performance and durability are not reduced; (vi) procedures will be put in place for limiting harmful effects of the disposal of non-recyclable engine fluids and old tires (petroleum products, rubber, metal wastes, paints, batteries, etc.); and (vii) the work environment in bus garages will be improved. - 4-  Technical assistance will be provided to monitor emissions standards and to implement a maintenance program. An assessment of the proposed project's impact on atmospheric pollution levels will be carried out during project preparation, including different parameters such as NOx, lead, and carbon Program Objective Category The project would essentially contribute to the Bank's environmentally sustainable development objective through improvement in the capacity and efficiency of urban transport operations. By developing the capacity of institutions and helping to establish an appropriate framework for the provision of urban passenger transport services, the proposed project would also contribute to the economic management and private sector development objectives. Participatory Approach As part of project preparation, all key stakeholders (including urban transport users, private-sector, and business groups) will be consulted extensively. Project preparation would also include a Social Assessment, to elicit views of different interest groups, including households, transport users, bus drivers, and public and private bus operators. The SA would be used to: (i) assess public perception of service standards provided by different transport modes; (ii) identify the most critical interventions needed for improving urban transport services; (iii) analyze the relationship between income and public transport demand, and users' ability to pay. A participatory workshop will be held to disseminate the results of SA to all interested groups. Project Benefits The economic analysis of the project will include the following: (i) examination of the relative advantages of different vehicle types, sizes, and costs for each participating city; (ii) an evaluation of savings in time, vehicle operating costs, and other capital requirements, brought about by the proposed investments; (iii) NPV and IRR for each of the major cities and components; and (iii) the investments' distributional impact (the share of benefits going to different income, social, or occupational groups). On a more immediate level, the benefits of the proposed project would include the following: (i) shorter travel and waiting times; (ii) enhanced access to the job market for residents, especially those living in outlying districts and with low incomes; (iii) enhanced transport planning and management capacity in each of the municipalities; (iv) improvements in institutional arrangements, resulting in more efficient public transport enterprises; (v) strengthened financial and technical capacity of bus enterprises, including better utilization of existing capacity; (vi) better management of bus enterprises; (vii) enhanced opportunities for private providers of bus services; and (viii) improved safety of bus services. Project Risks The Project faces substantial but manageable risks in line with other projects of the same type. The main risks are as follows: (i) failure to restructure the former Uzavtotrans companies to ensure genuine competition; (ii) inadequate Public Transport Commission staff to plan and manage urban transport-related functions; (iii) that the procurement of new vehicles under the Bank loan be used as an instrument to drive out private operators; (iv) insufficient management capability of the transport enterprises; (v) that arrangements to package and allocate route franchises not be transparent and - 5 -  objective; and (vi) that UT enterprises continue to lack sufficient financial resources because of continued unsustainable fare exemptions and uncertain subsidy allocations to compensate them. As part of project preparation, agreement will be reached with the Government to minimize these risks. The proposed project includes technical assistance and training to strengthen the capacity of the implementing agencies, thus also contributing to reducing project risks. The average age of the vehicle fleet in small and medium-size cities is nearly 10 years, with over 30t of the fleet being more than 12 years old, and virtually no new buses having been procured during the last four years. In most UT operators' workshops, there are virtually no spare parts in stock. Original spare parts are substituted by improvised parts manufactured "in-house" by the companies 'own mechanics, which do not conform to the bus manufacturers' original specifications and result in shorter service life for the vehicles. Some vehicles are simply cannibalized for spare parts in order to fit them to remaining vehicles. On average, 30-35w of vehicles are unavailable for service at any time, despite extensive efforts to keep vehicles on the road. For 7-seater Damas vehicles produced by Uz-Daewoo. In principle, private enterprises can enter the market by obtaining a license ("patent") from a committee of the Cabinet of Ministers, and subsequently being granted permission to operate in a municipality by the Hakim. Formerly the Ministry of Automobile Transport. Contact Point The InfoShop The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Telephone No. (202)458 5454 Fax No. (202) 522 1500 Jean-Charles Crochet, ECSIN Tel. (202) 473-1159 Fax (202) 477-3378 Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending September 25, 1998. - 6 -  Annex Because this is a Category B project, it may be required that the borrower prepare a separate EA report. If a separate EA report is required, once it is prepared and submitted to the Bank, in accordance with OP 4.01, Environmental Assessment, it will be filed as an annex to the Public Information Document (PID) . If no separate EA report is required, the PID will not contain an EA annex; the findings and recommendations of the EA will be reflected in the body of the PID. -7-