Report and Recommendation of the President to the Board of Directors

Transcription

1 Report and Recommendation of the President to the Board of Directors Sri Lanka Project Number: November 2006 Proposed Loan and Administration of Loan Kingdom of Cambodia: Greater Mekong Subregion: Rehabilitation of the Railway in Cambodia Project

2 CURRENCY EQUIVALENTS (as of 29 September 2006) Currency Unit riel (KR) KR1.00 = $ $1.00 = KR4, ABBREVIATIONS ADB Asian Development Bank EIRR economic internal rate of return FIRR financial internal rate of return GMS Greater Mekong Subregion MEF Ministry of Economy and Finance MPWT Ministry of Public Works and Transport OFID OPEC Fund for International Development PPP public private-partnership RRC Royal Railways of Cambodia SKRL Singapore Kunming railway link TA technical assistance WACC weighted average cost of capital NOTE In this report, "$" refers to US dollars. Vice President C. Lawrence Greenwood Jr., Operations 2 Director General R. M. Nag, Southeast Asia Regional Department (SERD) Director J. R. Cooney, Infrastructure Division, SERD Team leader Team members P. Broch, Transport Economist, SERD G. Atay, Principal Counsel, Office of the General Counsel Y. L. Feng, Principal Environment Specialist, SERD M. Huddleston, Senior Social Development Specialist, Lao Resident Mission M. Sultana, Social Development Specialist, SERD V. Tan, Financial Management Specialist, SERD

3 LOAN AND PROJECT SUMMARY MAP CONTENTS Page ii vii I. THE PROPOSAL 1 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 2 III. THE PROPOSED PROJECT 4 A. Impact and Outcome 5 B. Outputs 5 C. Special Features 6 D. Project Investment Plan 9 E. Financing Plan 9 F. Implementation Arrangements 10 IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 12 A. Policy 13 B. Social 13 C. Resettlement 13 D. Financial 14 E. Economic 15 F. Environmental 15 V. ASSURANCES 15 A. Specific Assurances 15 B. Condition for Loan Effectiveness 18 VI. RECOMMENDATION 18 APPENDIXES Design and Monitoring Framework Sector Analysis External Assistance Outline of the Station in Poipet and Port Access in Sihanoukville Policy Letter from the Government to the Asian Development Bank Detailed Cost Estimates Implementation Schedule Procurement Plan 36 9 Terms of Reference for the Supervision Consultant Benefit Monitoring Summary Poverty Reduction and Social Strategy Summary Resettlement Plan Financial Analysis Economic Analysis 53 SUPPLEMENTARY APPENDIX (available on request) Summary Initial Environmental Examination

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5 LOAN AND PROJECT SUMMARY Borrower Classification Environment Assessment Project Description Rationale The Kingdom of Cambodia Targeting classification: General intervention Sector: Transport and communications Subsector: Railways Themes: Sustainable economic growth and regional cooperation Subthemes: Promoting economic efficiency and enabling markets and fostering physical infrastructure development Category B. The Project is not expected to have permanent adverse environmental impacts. Impacts during construction and operation will be managed through the environmental management plan. The summary initial environmental examination is in Supplementary Appendix A. The Project will (i) rehabilitate 594 kilometers (km) of existing railway track and associated structures, passing loops, and spur lines; (ii) reconstruct 48 km of destroyed railway line to Thailand; (iii) construct direct railway access to the container terminal in the port of Sihanoukville; (iv) restructure the railway subsector; (v) assist employees made redundant because of the restructuring; and (vi) provide consulting services and training for project monitoring, engineering design, and supervision of civil works. The railway is owned and operated by Royal Railways of Cambodia (RRC), a state-owned enterprise that falls under the Ministry of Public Works and Transport (MPWT). The railway consists of two lines: the Southern Line (254 km), which links the capital, Phnom Penh, with the country s main seaport in Sihanoukville, and the Northern Line (388 km), which links Phnom Penh with Battambang in northwestern Cambodia and Poipet on the border with Thailand. At the border, the railway connects with the railway in Thailand and from there continues to Malaysia and Singapore. The two railway lines run roughly parallel to two of the country s primary roads: National Roads 3 and 4 to Sihanoukville and National Road 5 to Poipet. Cambodia s road transport system is inefficient because of insufficient modal and route competition. Improving the sector s efficiency requires increasing the diversity of transport so that shippers and passengers have realistic alternatives to existing routes and modes of transport. Rail would be a highly competitive option, because its cost structure differs substantially from that of transport by road and sea. The differences in cost structure would make it difficult to establish and maintain cross-modal collusion between road and rail transport operators. Geographically, rail would also be an efficient competitor because the railway runs parallel to the country s busiest highways, national roads 3, 4 and

6 iii 5, and serves two international connection points at the port of Sihanoukville and at Poipet on the border with Thailand. The railway is also connected to the Mekong River via the port in Phnom Penh. These links would enable multimodal integration that could form the basis for efficient distribution of bulk commodities to northeastern and northwestern Cambodia. The scope for railway traffic is substantial, as reflected in the restructuring study s traffic forecast, which predicts that demand for railway freight traffic will grow by about 7% per year, significantly more than the expected economic growth of some 5.5% per year. The railway is in poor physical condition because of war damage and decades of neglect. The last 48 km of track toward the border with Thailand were destroyed during the war. Railway traffic is declining because of the poor condition of track and equipment, which renders the railway increasingly unreliable and slow, whereas the competing road network has been improved substantially over the past decade. The RRC s staff are underpaid and professional skills and staffing levels are deteriorating. As a result, the railway is operating at a deficit. Neither the RRC nor the Government of Cambodia (the Government) have the resources required to turn the railway around. Without the Project, the railway could cease to operate within a decade. Access to efficient railway services would substantially improve the efficiency of Cambodia s transport system by enabling efficient and safe railway transport for heavy, bulky, and hazardous cargo, such as cement, containers, and fuel, which are currently carried by more expensive and less safe road haulage. The main benefits would be (i) reduced cost of transport for heavy and bulky freight, (ii) reduced road maintenance because of the reduced heavy truck traffic, (iii) reduced road hazards because of the decrease in heavy traffic and the diversion of hazardous materials away from crowded roads that pass through numerous densely populated towns and villages, and (iv) efficient access to import and export markets via the Thai border in Poipet. Achieving these benefits requires rehabilitating the railway s infrastructure, reconstructing the destroyed track leading to Thailand, and restructuring the railway by establishing a new public private partnership (PPP) railway operator to take over the operation and maintenance of the railway on a commercial basis. Restructuring of the railway and the provision of transaction advisory services to establish the new PPP railway operator is ongoing with advisory technical assistance from the Asian Development Bank (ADB). Selection of a PPP railway operator is a condition for loan effectiveness. The Government gives high priority to rehabilitating and restructuring the railway as a way to (i) improve Cambodia s

7 iii international connectivity and competitiveness, and (ii) reduce losses in the public sector. Cambodia s railway is a strategic element of the Greater Mekong Subregion transport sector strategy s southern corridor, which connects Cambodia, Thailand, and Viet Nam. The Project would pave the way for the proposed construction of a new railway line between Phnom Penh and Ho Chi Minh City in Viet Nam. If constructed, this new line, together with the project line, would complete the Singapore Kunming railway link, which is a longterm development priority for the Association of Southeast Asian Nations. Impact and Outcome The Project would support Cambodia s economic development and strengthen subregional integration by enabling cost-effective and efficient railway transport within Cambodia and between Cambodia and Thailand, Malaysia, and Singapore. The Project involves rehabilitating or reconstructing the railway and reestablishing the railway connection with Thailand. The railway is also being restructured and the rehabilitated railway will be operated by a new, commercial railway operator. Project Investment Plan Financing Plan Loan Amount and Lending Terms The estimated project cost is $73.0 million equivalent, including taxes and duties of $7.4 million equivalent. ($ million) Source Total % Asian Development Bank OPEC Fund for International Development a Government of Malaysia (grant in kind) Government of Cambodia Total a Administered by ADB. Source: ADB estimates. A loan of $42 million equivalent will be provided from ADB s Special Funds resources. The loan will have a 32-year term, including a grace period of 8 years, and an interest rate of 1.0% per year during the grace period and 1.5% per year thereafter. The OPEC Fund for International Development (OFID) and the Government of Malaysia will finance $15.8 million through concessionary loans and grant in kind. The Government will finance $15.2 million, which includes all taxes, resettlement costs, and compensation costs for retrenched RRC staff. Period of Utilization Until 30 June Estimated Project Completion Date 31 December 2009.

8 ivi Executing Agency Implementation Arrangements Procurement Consulting Services Project Benefits and Beneficiaries Ministry of Public Works and Transport. Restructuring of the railway subsector will take place before initiating the rehabilitation of the railway s infrastructure. Once rehabilitation starts the RRC will be divested of operations and maintenance responsibilities for the railway. In the absence of a specialized agency to implement the Project, the MPWT will be the implementing agency through a project implementation team that has been set up within the MPWT to implement the project preparatory technical assistance for rehabilitation. The team is headed by a project director and staffed with technical staff drawn from the RRC and the MPWT. The team will be expanded with additional technical staff as required to undertake project procurement and implementation. ADB will provide the necessary training to the team s technical staff in relation to procurement and implementation. The National Committee for the Singapore Kunming Railway Project, which is a high-level committee whose aim is to facilitate realization of the Singapore Kunming railway link and is chaired by the deputy prime minister, will act as the steering committee for the Project. Goods and services financed by the ADB and OFID loans will be procured in accordance with ADB s Procurement Guidelines using international competitive bidding. The Government has requested the use of advance action and retroactive financing to permit the execution of preliminary works. The ADB loan will finance consulting services for construction supervision, quality assurance, environmental supervision and monitoring, monitoring and evaluation of the resettlement plan, socioeconomic impact assessment, and project performance monitoring. The international and national consultants will be recruited through a firm in accordance with ADB's Guidelines on the Use of Consulting Services. The Government has requested the use of advance action and retroactive financing to permit early recruitment of the supervision consultant. The traffic forecast is based on projected economic growth using a scenario in which Cambodia maintains its recent pace of economic reform and modernization. The main sources of project benefits are savings from the diversion of heavy freight and container traffic from road transport to more economical rail transport, which include reduced costs of road maintenance and lowered costs of road accidents. In turn, these savings will reduce the costs of providing imported inputs such as cement and fuel and will support the creation of new jobs and other incomegenerating opportunities in export industries, which will become more competitive as a result of reduced transport costs.

9 v The Project s economic internal rate of return is estimated at 24.9% and the financial internal rate of return is estimated at 10.2%, higher than the 4.1% real weighted average cost of capital. Risks and Assumptions The Project is not expected to be subject to any significant technical, environmental, or social risks. The MPWT has proven experience and has performed satisfactorily in implementing internationally financed projects. The Project has been formulated to reduce potential economic, financial, and social risks. The financial and economic risks are associated with operation of the railway, which will depend on the future level of traffic, the costs of construction, and the efficiency of future railway operations. The economic risks are minimized by the establishment of a new PPP railway operator that will realize the Project s benefits by providing railway services on a commercial basis. To mitigate the financial risks, the Government will establish a professionally managed commercial property developer entity to mobilize revenue by developing railway land that is no longer needed for railway operations. The net revenues from property development will preferentially be used to finance the railway s public service obligations, such as maintaining passenger traffic and developing the railway. The social risks include resettlement, the possible spread of HIV/AIDS infection during construction, the possibility of human trafficking after project completion, and the retrenchment of redundant railway staff in connection with restructuring. Appropriate mitigation measures are in place in the resettlement plan and the social safety protection program.

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11 I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on (i) a proposed loan to the Kingdom of Cambodia for the Greater Mekong Subregion (GMS) Rehabilitation of the Railway in Cambodia Project, and (ii) the proposed administration by the Asian Development Bank (ADB) of a loan to be provided by the OPEC Fund for International Development (OFID) for the Project. The design and monitoring framework is in Appendix 1. II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES A. Performance Indicators and Analysis 2. Cambodia s transport sector comprises road, railway, and inland water transport; international sea traffic through the ports in Sihanoukville and Phnom Penh; and domestic and international air traffic centered on Cambodia s two international airports in Phnom Penh and Siem Reap. Much of the country s transport infrastructure was destroyed or substantially degraded during the war. Reestablishing the transport infrastructure has been a primary goal of the Government for the past 15 years and has focused on (i) reconstructing the primary road network, which has now been substantially completed; (ii) modernizing and upgrading the international airports in Phnom Penh and Siem Reap, which has been largely undertaken by the private sector; and (iii) rehabilitating and modernizing the ports in Phnom Penh and Sihanoukville. Railway and inland water transport have received somewhat less attention. Inland water transport is developing slowly, driven by the private sector, but operations are hampered by the lack of navigational aids and shore facilities. The railway has been declining because of insufficient maintenance and investment. Transport operations are run by the private sector except for the railway, which is owned and operated by Royal Railways of Cambodia (RRC), a state-owned enterprise that falls under the Ministry of Public Works and Transport (MPWT). Transport is relatively expensive because of (i) fuel taxes, which are a major source of Government revenues; (ii) poor infrastructure, which increases vehicle operating costs and constrains access; and (iii) inefficiencies and market failure. The sector analysis is in Appendix Cambodia's transport system remains inefficient despite improved roads, ports, and airports, because the choice of routes and modes of transport is limited, which constrains the scope for optimizing logistics and enables the formation of cartels by transport providers and transport infrastructure owners to exploit natural monopolies. The enabling environment for these market failures is the existence of physical and regulatory barriers that reduce the diversity of routes and modes, often to a single realistic choice. This locks transport buyers into possibly inefficient or overpriced services 1 because of the lack of an alternative. As a result, the staple commodities on which the poor rely are typically significantly more expensive in Cambodia than in neighboring countries and Cambodia s nascent export industries, primarily garments and tourism, which are the prime generators of new jobs and foreign currency, are threatened because their international competitiveness is being undermined by high transaction costs. This constitutes a major constraint to economic growth and diminishes the scope for the economy to diversify into new sectors such as agro and assembly industry. 1 As an example of constrained choice, consider the movement of a 20-foot container from Bangkok to Phnom Penh. Currently, ship transport through the port of Sihanoukville is the only realistic route. This costs $983 and the journey time is 11 days because no direct container route exists between Bangkok and Sihanoukville. The cost of similar transport by rail were this possible would be about $320 and the journey time would be about 13 hours (Canarail Consultants, Inc Restructuring the Railway in Cambodia: Traffic Forecast and Financial Analysis Report. Montreal, Canada. [p. 28].

12 2 4. Breaking down the barriers that hinder competition and efficiency requires increasing the diversity of transport so that shippers have effective and realistic alternatives to existing routes and modes. Railway could be a highly competitive operator, because its cost structure differs substantially from that of road and sea transport. The differences in cost structure makes it difficult to establish and maintain cross-modal collusion between road and railway transport operators. Geographically, Cambodia offers excellent scope for rail competition because (i) the railway runs parallel to the country s busiest highways, national roads 3, 4 and 5; (ii) it has two international connection points, at the port of Sihanoukville and at Poipet on the border with Thailand; and (iii) the railway is connected to the port in Phnom Penh, which would enable multimodal integration of rail and inland water transport to allow for the efficient distribution of bulk commodities to northeastern and northwestern Cambodia. The scope for railway traffic is reflected in the restructuring study, 2 which projects that demand for railway freight traffic will grow by about 6.5% per year, which is well above expected economic growth of % per year. 5. Cambodia s railway is a strategic element of the GMS transport sector strategy s southern corridor, 3 which links Cambodia, Thailand, and Viet Nam. Construction of a proposed railway line to Viet Nam is one of the Government s strategic goals, and the Project would help pave the way for the proposed railway line between Phnom Penh and Ho Chi Minh City in Viet Nam. If constructed, this new line, together with the Project line, would complete the railway component of the GMS southern corridor, and at the same time would complete the Singapore Kunming railway link (SKRL), a long-term development priority for the Association of Southeast Asian Nations. 6. Efficient railway transport would improve subregional traffic and significantly reduce the cost of transport by offering cheaper alternatives and by providing competition to existing modes and routes. Railway transport would also reduce road maintenance requirements and the incidence and severity of traffic accidents by diverting heavy and hazardous road haulage to the railway, which is inherently safer. Finally, efficient rail operations would directly improve the Government s finances by reducing the railway s deficits. The Government recognizes these benefits and gives high priority to rehabilitating and restructuring the railway as a means of (i) improving Cambodia s international connectivity and competitiveness, and (ii) reducing losses in the public sector. However, neither the RRC nor the Government has the resources required to implement such rehabilitation and restructuring. B. Analysis of Key Problems and Opportunities 7. The railway was severely damaged during the war, when temporary repairs kept it running. Since then, little has been expended on investment and maintenance. ADB has supported emergency repairs on two occasions: repair of critically damaged railway sections and bridges and of 35 wagons under the Special Rehabilitation Assistance Project 4 and repair of flood-damaged bridges and railway embankments under the Emergency Flood Rehabilitation Project. 5 The World Bank has also supported the acquisition of wagons and the Government of 2 Canarail Consultants, Inc., Restructuring the Railway in Cambodia: Traffic Forecast and Financial Analysis Report. Montreal, Canada. 3 ADB Technical Assistance for the Transport Sector Strategy Study. Manila. 4 ADB Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Cambodia for the Special Rehabilitation Assistance Project. Manila (Loan 1199, for $67.7 million, approved on 26 November 1992). 5 ADB Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Cambodia for the Emergency Flood Rehabilitation Project. Manila. (Loan 1824 for $55.0 million, approved on 21 December 2000).

13 3 France has supported the importation of spare parts for locomotives. Details on external assistance are in Appendix 3. The combined impact of war damage and more than three decades of little or no maintenance and minimal investment have led to severe deterioration of the railway. Maximum train speed is now 15 kilometers (km) per hour, compared with a design speed of 70 km per hour on the Southern Line and 90 km per hour on the Northern Line. Current traffic is about 6 or 7 trains per day, compared with 37 trains in around Even with this modest level of traffic, there is an average of one derailment per week. Technical review of the railway s infrastructure indicates that many bridges are in danger of collapse and indicates that collapse of bridges will make railway operations impossible within the current decade. 8. In the 1990s, railway traffic grew rapidly, partly in response to improving security and economic growth, and partly because of a lack of viable alternatives to railway transport. Railway freight traffic peaked in 2002 at about 560,000 tons, but then fell to about 270,000 tons in Passenger traffic peaked in 1992, when the railway transported about 1.4 million passengers. Today, passenger traffic on the Southern Line has ceased and on the Northern Line is minimal, serving about 40,000 passengers annually by means of a single weekly departure in each direction between Phnom Penh and Battambang. The decline in traffic is due to the combined impact of progressing physical deterioration of the railway, which renders it increasingly unreliable and slow, and to increasing competition from road transporters operating on an expanding network of good highways. The loss of freight traffic results in mounting operational losses for the railway that are absorbed by the Government. The passenger service on the Northern Line is used primarily by passengers to and from isolated communities along a section of the Northern Line that does not have reliable road access, and is therefore dependent on the railway for transport. The Project foresees that minimal passenger services will continue as a public service obligation. 9. The issues and opportunities facing the railway were first identified in Loan 1824-CAM, 6 which concluded (i) that access to efficient railway transport would be economically beneficial for Cambodia, and (ii) that the railway could become commercially viable if rehabilitated. The report recommended that the Government should quickly decide either to restore or to close the railway to minimize its losses. Closure of the railway is, however, not an appealing option. Potential future benefits derived from railway operations would be irretrievably lost unless a new railway were constructed in the future, which would be extremely costly compared with rehabilitating the existing railway, and would probably not be viable. Two small-scale technical assistance (TA) studies were launched (i) to assess the likely future demand for railway traffic (the transport study 7 ), and (ii) to examine the possibilities for establishing commercially viable railway operations (the business opportunity study 8 ). The transport study confirmed sufficient future demand for railway transport to make rehabilitation of the railway economically and financially viable. The business opportunity study showed that future losses to the Government could be eliminated if the railway were operated commercially. It also indicated that operation of the railway and investment in rolling stock and terminals could be viable for the private sector if the railway s infrastructure were rehabilitated using concessionary funds, as this could not be financed by the private sector under commercial conditions, nor by the Government, nor by the railway, because of the lack of resources. Thus the study recommended that private sector investment and management resources be mobilized by spinning off railway operations into a 6 ADB Technical Assistance to the Kingdom of Cambodia for the Transport Sector Strategy Study. Manila. 7 COWI Assessment of Modal Competitiveness and Traffic Potential of a Rehabilitated Railway in Cambodia, Final Report. Lyngby, Denmark: COWI. 8 Canarail Consultants, Inc Consulting Services for the Development of a Public Private Partnership Plan for Royal Railways of Cambodia, Final Report. Montreal, Canada.

14 4 commercial railway operator established as a public private partnership (PPP). The Government subsequently asked ADB to provide TA for preparing a project for rehabilitation of the railway 9 and for advisory TA to restructure the railway A major portion of external assistance to the Cambodian transport sector has come from ADB, the governments of France and Japan, and the World Bank. ADB's assistance to the sector began in 1993 with the Special Rehabilitation Assistance Project (footnote 4), which included rehabilitation of national highways, sections of the railway track, and the port of Sihanoukville. In 2000, ADB provided a loan for the Emergency Flood Rehabilitation Project (footnote 5), which rehabilitated sections of the national highway network that were damaged by the 2000 floods, along with critical sections of track and embankments. France has provided grant financing for new bridges, rehabilitation of railway tracks, and spare parts for locomotives. Japan's assistance has been for bridge reconstruction and road rehabilitation. The World Bank has provided loans for rehabilitating roads and widening bridges and culverts. It has also provided TA for transport sector policy and strategy, institutional strengthening, and road maintenance. The People's Republic of China has provided assistance for procuring 10 locomotives. Other bilateral sources of assistance to the transport sector include the governments of Australia, Sweden, and Thailand. Appendix 3 lists ADB-financed TA and assistance by other development partners. III. THE PROPOSED PROJECT 11. The proposed Project will restore the railway s infrastructure by rehabilitating its existing track and reestablishing Cambodia s rail connection with Thailand. This will be initiated in 2007 for completion in The railway s operations will be improved through restructuring, which is ongoing and will be completed in 2007 with the award to a private railway operator of a concession to operate the railway commercially for a period of 33 years under a PPP arrangement. Restructuring is being implemented through an advisory TA that advises the Government on the future structure of the railway subsector and is advising on the selection of the PPP railway operator. The PPP railway operator will be selected after competitive international bidding for the concession. The rehabilitation investment and the associated restructuring will together set the stage for efficient rail services, which in turn will realize the Project's objectives, namely: improving the transport sector's efficiency by increasing the diversity of transport modes and routes and resurrecting the railway on a sustainable basis. 12. The governments of Malaysia and Thailand have discussed with the Government of Cambodia support and cooperation to reconstruct the destroyed link between Sisophon and Poipet and to reconnect the railways in Cambodia and Thailand. Malaysia has confirmed the provision of reclaimed rails for reconstruction of the destroyed link on a grant basis. Thailand has expressed its intent to undertake the necessary works in Thailand to reconnect the two railways, and negotiations between Cambodia and Thailand on renewing the railway crossborder agreement between the two countries and reestablishing the physical link between the two railways are ongoing. 13. The railway consists of two lines: (i) the Northern Line, which was built in the 1930s and connects Phnom Penh to Poipet on the border with Thailand, where it links with the railway in Thailand; and (ii) the Southern Line, which was build in the late 1960s and connects Phnom 9 ADB Technical Assistance to the Kingdom of Cambodia for GMS: Rehabilitation of the Railway in Cambodia. Manila. 10 ADB Technical Assistance to the Kingdom of Cambodia for Restructuring of the Railway in Cambodia. Manila.

15 5 Penh with Cambodia s main seaport in Sihanoukville. The Northern Line is 388 km long, of which the last 48 km to the border with Thailand were destroyed during the war. The Southern Line branches off the Northern Line about 9 km from the station in Phnom Penh. The Southern Line is about 254 km long from where it branches off. The total distance by rail between Phnom Penh and Sihanoukville is 263 km. The railway is meter gauge, as are the railway networks in neighboring countries. A. Impact and Outcome 14. The outcome of the proposed Project would be a rehabilitated and restructured railway that would (i) increase the efficiency of the overall transport sector by increasing the competitiveness of the railway, (ii) secure the long-term sustainability of the railway subsector through improved productivity and efficiency and adoption of a market based tariff, and (iii) reduce road damage and road traffic risks associated with the movement of heavy and dangerous goods. The Project would also (i) facilitate economic growth in Cambodia by providing cost-effective and efficient railway transport, (ii) facilitate subregional trade and economic growth in Thailand, (iii) pave the way for proposed future construction of a new railway line between Cambodia and Viet Nam, (iv) reduce wear and tear from heavy cargo haulage on Cambodia s road network, (v) improve road safety by diverting heavy and hazardous cargo from the roads to inherently safer railway transport, and (vi) reduce public sector losses. The Project assumes that the railway subsector has been successfully restructured and that a commercial PPP railway operator is in place. B. Outputs 15. The output of the proposed Project would be about 650 km of rehabilitated or reconstructed railway line with associated stations and terminals; train traveling at speeds of 50 km per hour; and a maximum axle load of 15 tons on the Northern Line, which is consistent with the axle load standard in Thailand, and 20 tons on the Southern Line, which is consistent with the original design axle load for that line and would be required to operate bulk cement trains and other heavy loads to and from Sihanoukville. The railway would connect with the railway in Thailand and with water transport in Sihanoukville and Phnom Penh. 16. The Project will undertake the following: (i) Rehabilitate the Southern Line. This will involve (a) rehabilitation of the Southern Line from Phnom Penh to Sihanoukville (approximately 254 km), including making major repairs to embankments, replacing worn out and unserviceable sleepers, fittings and ballasting; (b) rehabilitating or reconstructing structures inclusing bridges, culverts, buildings and drains; (c) constructing a new passing loop; (d) tamping track to restore an operational speed of 50 km per hour; (e) rehabilitating the rail link to the port in Sihanoukville and extending it to the container port (a schematic outline is in Appendix 4); and (f) undertaking ancillary works at level crossings. (ii) Rehabilitate the Northern Line. This will involve (a) rehabilitating the Northern Line from Phnom Penh to Sisophon (approximately 340 km), including making major repairs to embankments, ballasting, and installation of missing fittings; (b) rehabilitating or reconstructing structures including bridges, culverts, buildings and drains; (c) tamping track to restore an operational speed of 50 km per hour; (d) rehabilitating an existing rail link to the port at Phnom Penh on the Mekong River and (e) undertaking ancillary works at level crossings.

16 6 (iii) (iv) Reconstruct the destroyed rail link. This will include (a) reconstructing the destroyed rail link from Sisophon to Poipet (48 km) and reestablishing the railway connection across the border, including making major repairs to embankments, preparing track bed and ballasting, rehabilitating or reconstructing structures including bridges, culverts, buildings and drains, and laying track; (b) constructing ancillary facilities at level crossings; and (c) building passing loops and a station at Poipet with facilities for border crossing (a schematic outline is in Appendix 4). Mitigate the adverse impact of restructuring. Restructuring will affect the current approximately 1,100 railway employees. The impact will be mitigated through (a) providing compensation for future income losses for redundant railway employees, (b) providing compensation for lost pension rights for railway employees whether made redundant or rehired by the future PPP railway operator, and (c) counseling and retraining railway employees. 17. Lessons. The MPWT's capacity to handle ADB-financed projects has improved considerably in recent years. Overall, project implementation is generally satisfactory, but certain aspects need improvement. Earlier loans, both closed and ongoing loans, encountered delays in relation to procurement, resettlement and compensation, and counterpart fund payments. The key lessons from these loans were that there was a need to ensure that (i) procurement approval is delegated to the project management unit; (ii) processes for approving bid documents and awarding contracts that are applicable to ADB-financed contracts under a loan are clarified at the outset; (iii) satisfactory resettlement plans and frameworks are in place before loans are approved; (iv) specific environmental requirements, including documentation and reporting requirements, are included in loan covenant and bidding documents; and (v) agreement on the release of counterpart funds is reached with the Ministry of Economy and Finance (MEF). The MPWT's capacity in relation to social and environmental safeguards will be further strengthened under the Project, and discussions with MEF have been held to streamline the disbursement of counterpart funds. The MPWT's dependence on consultants was high under earlier loans, especially with respect to procurement, social and environmental studies, and project performance monitoring. Enhancing the MPWT s capacity will be built into this loan by involving MPWT staff in all stages of project implementation. C. Special Features 1. Regional Cooperation 18. Cambodia s railway is a strategic element of the GMS transport sector strategy s southern corridor (footnote 3), which connects Cambodia, Thailand, and southern Viet Nam. The corridor encompasses three road links and one railway link. The road links are the southern link from Bangkok in Thailand, along the coast via Kampot in Cambodia, to Nam Can in Viet Nam; and the central and northern links are from Bangkok to Sisophon in Cambodia, where they split, with the northern link continuing via Siem Reap, Stung Treng, and Ratanakiri to Quy Nhon in Viet Nam and the central route continuing via Phnom Penh to Ho Chi Minh City and the port of Vung Tau in Viet Nam. The railway link generally follows the central road route from Bangkok to Phnom Penh, where it ends. The governments of Cambodia and Viet Nam are considering developing a new railway line from Phnom Penh via Kampong Cham in Cambodia and Loc Nech in Viet Nam to Ho Chi Minh City. The section in Viet Nam is included in the

17 7 Vietnamese Government s master plan for railway infrastructure development, 11 with construction planned during to support the development of mining resources around Loc Ninh. In Cambodia, the Interministerial SKRL Committee, chaired by the deputy prime minister, has been established to develop and coordinate the proposed new railway section in Cambodia and is currently preparing a technical feasibility study. Implementation of the Project and subsequent construction of the proposed railway line between Phnom Penh and Ho Chi Minh City in Viet Nam would complete the railway component of the GMS southern corridor and at the same time would complete the SKRL, which is a long-term development priority for the Association of Southeast Asian Nations. 2. Restructuring the Railway 19. The Government has previously invited private sector participation in the provision of transport infrastructure and services. Successful examples are the toll-financed road maintenance concession for National Road 4 and the concession for developing and operating the country's two international airports in Phnom Penh and Siem Reap. The ongoing restructuring TA emphasizes transparency at all stages of the process of granting concessions by establishing an adequate regulatory and contractual framework for the concession, employing transparent and competitive bidding procedures to appoint the concessionaire, implementing proper staff retention and replacement mechanisms, and providing adequate and timely information on the process to the public. The restructuring process is intended to serve as a model of best practice for future concessions in the country. 20. The key activities of the ongoing restructuring TA (footnote 10) are to (i) plan and prepare restructuring of the railway subsector; (ii) provide advisory services to assist the Government with the formation of a PPP railway operator using internationally recognized best practices for international competitive bidding among interested private sector consortia; (iii) advise the Government on the choice of a depository authority for the Government's holdings of railway land and infrastructure; (iv) advise the Government on the best approach for establishing regulatory oversight of the railway subsector in terms of the regulatory regime, the scope of regulation, and the structure of the regulator; (v) provide TA in relation to the establishment of the transport regulator and the depository authority; (vi) advise the Government on how best to handle staff retrenchment in a transparent and fair manner; and (vii) document the process in sufficient detail to allow for future replication. The restructuring TA was initiated in January 2006 for completion in July The Government approved the strategy and plan for restructuring developed under the restructuring TA on 30 June In summary, it outlines the following main principles for restructuring and future operation of the railway: (i) The Government will (a) rehabilitate the railway s infrastructure with support from ADB and others, and (b) restructure the railway subsector. (ii) A new railway operating company will be established that is owned and operated by a private concessionaire. The railway operator will be granted exclusive rights to provide railway services under a concession agreement that will be protected by law. The Government will award the concession after international competitive bidding. The railway operator will operate commercially and will be free to set prices and service levels. If the Government decides that non-commercial passenger services are required for social reasons on part or all of the railway infrastructure, the concession agreement shall provide how this public service 11 Government of Viet Nam Decision No. 06/2002QD-TTg, approval on January , Prime Minister s Decision on the Master Plan on the Development of Vietnamese Railway Transport Sector until 2020.

18 8 (iii) (iv) obligation shall be provided and compensated. The railway operator will pay a concession fee to the Government for use of the railway s infrastructure. The Government will (a) prepare and present a railway reform law for approval by Parliament; (b) encourage fair modal competition by enforcing existing restrictions on road vehicle load limits; (c) negotiate a new cross-border railway transport agreement with Thailand; (d) create and maintain a dedicated railway reform Internet web site to promote and create public awareness about the railway reform law, the railway operator concession, and the process of granting concessions; (e) establish a concession management unit within the MPWT to manage the railway operator concession; and (f) undertake to monitor the PPP railway operator s compliance with health, safety, labor, and environmental requirements. The Government will establish a property development entity and make available to it the right to rent and develop designated parcels of the RRC s land assets to ensure that funds are available to meet the Government s expenses towards financing of the railway and its future expansion. Such land shall not be required for railway operations and will not be alienated from state ownership. The property development entity shall be structured in accordance with principles of good governance, transparency, and accountability, and will preferentially dedicate its net revenues to provide funding for public service obligations, such as noncommercial passenger traffic, and for future capital works for the railway. 22. The principles of the strategy and plan for restructuring are summarized in a policy letter from the Government to ADB s President, dated 17 July 2006 (Appendix 5). 23. The shortlisting of potential bidders to undertake the railway operator concession was approved in November 2006, and bids, bid evaluations, and concession contract negotiations are scheduled to be completed by late March Award of the concession is a condition for loan effectiveness. 3. Staff Redundancy 24. As of February 2006, the RRC had 1,102 permanent staff. Restructuring will affect these staff in varying ways, namely: (i) The property holding entity that will manage railway land and infrastructure after the privatization of railway operations is expected to require about 30 RRC employees for its operations. Their service-related benefits are expected to continue without interruption. (ii) The new PPP railway operator is expected to hire about 630 RRC staff as new employees. These employees will continue to enjoy employment income, but will lose their accumulated service benefits, principally those associated with employment termination notices, indemnification payments, retirement pensions, and annual leave. (iii) Of the remaining staff, about 27 are expected to retire before the restructuring becomes effective, leaving about 375 redundant staff who will have to be transferred to other Government employment, find new employment in the private sector, or take early retirement. 25. A mitigation plan for railway staff affected by the restructuring of the railway subsector has been prepared and was approved by the Government on 30 June 2006 (footnote 10). The mitigation plan provides for compensation, counseling and retraining of redundant staff, and

19 9 compensation for loss of pension rights. The plan will be implemented under the proposed Project. D. Project Investment Plan 26. The Project investment cost is estimated at $73.0 million (Table 1). The detailed cost estimates are in Appendix 6. The cost estimates include taxes and duties amounting to $7.4 million. Table 1: Project Investment Plan Item Amount a ($ million) A. Base Cost b 1. Civil Works Equipment c Land Acquisition, Resettlement, and Social Mitigation Restructuring Costs Consulting Services 3.4 Subtotal (A) 63.6 B. Contingencies d 7.9 C. Financing Charges during Implementation e 1.5 Total (A + B + C) 73.0 a Includes taxes and duties of $7.4 million. b In mid-2006 prices. c Rails for the destroyed link, provision of which has been confirmed by the Government of Malaysia as a grant. d Physical contingencies are computed at 10% for civil works. Price contingencies are computed at 2.5% on total costs and include a provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate. e Includes interest during construction. Source: Asian Development Bank estimates. E. Financing Plan 27. The Project s financing plan is shown in Table 2 and details are in Appendix 6. ADB will provide a loan of $42 million equivalent (57% of the total cost) from ADB s Special Funds resources. Interest financing charges during implementation will be capitalized. OFID will provide a loan of $13 million to jointly finance the civil works component with ADB. The OFID loan will be administered by ADB. 12 The Government of Malaysia will provide a grant in kind of reclaimed rail valued at about $2.8 million equivalent (4%) and the Government will finance $15.2 million equivalent (21%), comprising all costs of Project administration, taxes, clearance of unexploded ordnance, compensation of railway staff in connection with restructuring, and resettlement and land acquisition, but not the cost of associated consultants, which will be financed by ADB. The ADB loan will have a 32-year maturity, including, an 8-year grace period. Interest will be at 1.0% per year during the grace period and 1.5% per year over the remaining term of the loan. The OFID loan will be repayable over 20-years, including a 5-year grace period, with a fixed interest rate of 1% per year and a 1% fixed service charge per year. The Borrower will be the Kingdom of Cambodia. 12 OFID acknowledged the Government s request for cofinancing of $13 million in April 2006.

20 10 Table 2: Project Financing Plan Total ($ million) 42.0 Source Asian Development Bank OPEC Fund for International Development (administered by the Asian Development Bank) Government of Malaysia (grant in kind) Government of Cambodia Total Source: Asian Development Bank estimates. F. Implementation Arrangements Percentage of Total Project Costs Project Management 28. The MPWT will be the executing agency for the Project. Special implementation arrangements have been developed for the Project that take into account the fact that physical implementation of the rehabilitation works will take place while the RRC, which has the knowledge and experience for undertaking the envisaged rehabilitation works, is being divested of the functions of railway operation and maintenance in favor of a new PPP railway operator. 13 A project implementation team that was set up within the MPWT to implement the project preparatory TA will be expanded with additional qualified technical, financial, and support staff for project management and implementation. The team will be responsible for Project implementation, including handling procurement, withdrawing loan proceeds, and reporting to ADB. 29. The National Committee for the Singapore Kunming Railway Project, which is a highlevel committee to facilitate realization of the SKRL in Cambodia and is chaired by the deputy prime minister, will act as the steering committee for the Project. Representatives of relevant local governments and the PPP railway operator will be invited to committee meetings as necessary. 2. Implementation 30. The Project will be implemented over 3 years for completion in December Exceptional floods in 2006 damaged parts of the Southern and Northern lines to the extent that transportation of materials and equipment for the Project s civil works could be affected and Project implementation could be delayed. To ensure timely project implementation, the Project s civil works contract will require the contractor to complete urgent repairs required to keep the railway operational within the first 3 months of contract mobilization. The Government has requested, and ADB has approved, the use of retroactive financing up to $1.5 million and advance procurement to enable accelerated recruitment and mobilization of the supervision consultant prior to the declaration of loan effectiveness in March or April 2007 and early selection and mobilization of civil works contractors. The Government has agreed to ensure that the concession agreement with the PPP railway operator allows for temporary adjustment of the train timetable and train speed limitations as required to ensure that civil works under the 13 For the same reason, during the selection of the railway operator, bidders will be advised of the procedure for implementing track rehabilitation and rebuilding bridges, including phasing, requirements for track possessions and temporary slowdowns to facilitate the civil works. The procedures for implementation of the works have been incorporated into the preparatory documents for bidding of the concession.

21 11 Project can be completed in accordance with the implementation schedule. The implementation schedule is in Appendix Procurement 31. The Procurement financed from the ADB and OFID loans will be done in accordance with ADB s Procurement Guidelines. Civil works contracts will be procured through international competitive bidding. Contracts for supply and works with an estimated value of less than $1 million will be procured through national competitive bidding using the Government s standard operating procedures and procurement manual, which are acceptable to ADB. Supply and small works contracts will use shopping for contracts with an estimated value of less than $100,000. The procurement plan is in Appendix Consulting Services 32. The Project will require 104 person-months of international and 176 person-months of national consultant inputs. The MPWT will engage an international consulting firm for construction supervision, quality assurance, environmental supervision and monitoring, resettlement supervision and monitoring, socioeconomic impact assessment, and project performance monitoring. All recruitment will be in accordance with ADB's Guidelines on the Use of Consulting Services using the quality- and cost-based selection procedure and simplified technical proposals. Outline terms of reference for supervision consulting services are in Appendix Anticorruption Policy 33. The Government has agreed that relevant provisions of ADB s Anticorruption Policy 14 will be included in the Loan Agreement and in all bidding and contract documents for the Project. The Government has also agreed that this policy will apply to the selection of the railway operator and the implementation of the concession agreement. All contracts financed by ADB and OFID in connection with the Project will include provisions specifying ADB s right to audit and examine the records and accounts of the MPWT and all contractors, suppliers, consultants, and other service providers as they relate to the Project. The Government has agreed to establish a web site for procurement under the Project to enhance transparency by presenting detailed information on the procurement process, bidders, and contract awards in English and Khmer. This information will also be published on public notice boards at commune centers and other public buildings in the project area. 6. Disbursement Arrangements 34. All disbursements under the ADB and OFID loans will be carried out in accordance with ADB s Loan Disbursement Handbook (2001). 7. Accounting, Auditing, and Reporting 35. The MPWT will maintain separate accounts for the Project, including assets, and will have such accounts and related financial statements audited annually by an external auditor in accordance with auditing standards acceptable to ADB. The MPWT will, within 6 months of the end of each fiscal year, submit certified copies of audited project accounts and financial 14 ADB Anticorruption Policy. Manila.

22 12 statements and the auditor's reports, in English, to ADB. The audit of the financial statements will include (i) an assessment of the adequacy of accounting and internal control systems with respect to project expenditures and other financial transactions, (ii) an assessment of compliance with loan covenants and ADB s project management requirements, and (iii) an opinion on the use of the statement of expenditures procedure. 36. The MPWT will make satisfactory arrangements for reporting the progress of project implementation by submitting quarterly progress reports, the form and content of which will be agreed with ADB. The MPWT will monitor project implementation in accordance with the implementation schedule and will keep ADB informed of any significant deviations from the schedule. The quarterly report will include basic data on utilization of funds, achievement of immediate development objectives, compliance with covenants, implementation progress, land acquisition, resettlement progress, and major issues and problems. Within 3 months of physical completion, the MPWT will submit a project completion report to ADB that will provide a detailed evaluation of the project design, costs, contractors and consultants performance, social and economic impact, economic rate of return, and other details as may be requested by ADB. 8. Project Performance Monitoring and Evaluation 37. The MPWT has agreed to a set of indicators for evaluating Project performance in relation to its impacts, outcomes, outputs, and conditions. Sample indicators, to be reviewed at the start of project implementation, are in Appendix 10. At the beginning of project implementation, the MPWT will establish baseline and target values for the indicators. The indicators will be measured at project inception, project completion, and 3 years after Project completion and compared with the baseline. Where relevant, indicators will be disaggregated by gender. Support for monitoring and evaluation to help establish the monitoring and evaluation system will be provided as part of supervision consulting services. The main sources of data will include (i) secondary data from the Borrower s sources, (ii) traffic counts, (iii) railway statistics, (iv) shipper and passenger surveys, (v) traffic accident database, (vi) producer and price surveys, and (vii) trade and customs statistics. The MPWT shall submit a report to ADB summarizing the key findings of monitoring at inception, project completion, and 3 years after project completion. 9. Project Review 38. In addition to regular annual reviews by ADB staff, the Government and ADB will jointly undertake a midterm review of the Project in about mid-2008 to assess (i) the status of implementation, (ii) the design and construction standards, (iii) the performance of consultants and contractors, (iv) the impacts of the Project, (v) the progress of sector reform, (vi) the status of compliance with the covenants stipulated in the Loan Agreement, and (vii) the need for any changes in the project scope or schedule to achieve the project s impact and objectives. IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 39. The Project s benefits and impacts were assessed along with potential risks associated with the assumptions made in the project design. The combined benefits and impacts are expected to outweigh the costs, given the likelihood of the risks occurring.

23 13 A. Policy 40. Successful restructuring of the railway subsector would transform the railway into a commercially-oriented transport operator, which is required to realize the Project s benefits in full. Successful restructuring is a condition for loan effectiveness and has been agreed with the Government. International railway operators have expressed interest in bidding for the railway operator concession. This significantly decreases the risk that private sector participation will not proceed as intended. B. Social 41. The social and gender strategy set out in the summary poverty reduction and social strategy (Appendix 11) includes strategies for participatory resettlement activities, social protection measures for affected railway employees, Project-related gender issues and HIV/AIDS prevention. The socioeconomic survey indicates that the Project is not expected to have any specific impact on ethnic minority groups that differs from the impact on the majority Khmers. ADB s Policy on Indigenous Peoples (1998) is not triggered. The gender strategy includes capacity building for the MPWT, other relevant agencies, and leaders of those affected. Increased capacity on the part of the MPWT and those affected will enable effective implementation of resettlement and livelihood activities. Capacity building during the construction phase will include an HIV/AIDS and human trafficking awareness program and will involve women leaders and youth from affected households in squatter settlements, district women officials, and women health workers. 42. The Project is formulated to minimize potential risks relating to involuntary resettlement; however, compensation, resettlement, and income restoration measures might not be delivered as agreed, thereby impoverishing those affected and delaying the start of civil works. The reestablishment of railway traffic does not affect the transportation of goods across the border with Thailand by pushcart and motorcycle, and therefore does not adversely impact the income of pushcart pullers and motorcycle drivers in Poipet. At the same time, increased transportation of goods in the border area would improve commerce and the general economy in the area, which would generate new income-earning opportunities in the services sector and in informal sector economic activities. Restructuring of the railway could impoverish laid-off railway employees, and the Project includes a mitigation program to address this. The MPWT will help prepare and implement the mitigation program with assistance from international and national consultants recruited under the Project. C. Resettlement 43. The Project will permanently clear a 7-meter wide corridor of impact centered on the middle of the railway track. The corridor of impact is narrower than the railway s right-of-way to minimize immediate resettlement impacts. Estimates indicate that about 2,630 households 15 will be affected by the Project, of which about 965 households (about 4,150 people) will be displaced and about 1,660 households (about 7,140 people) will experience minor impacts caused by the loss of secondary structures (wells, fences, etc.) and trees. Four large structures (three privately owned buildings and one publicly owned building) will be fully or partially affected. Displaced households and businesses face the risk of losing access to their sources of 15 The number of households is equivalent to the number of project-affected people as defined in ADB s resettlement policy, where it is the number of affected household heads. The term household is used here to distinguish from the total number of persons affected, which is the total number of people living and working in the affected households.

24 14 income if they are moved too far away from their current residence, thus resettlement sites have been identified close to current places of occupancy. Resettlement is most significant in Poipet, on the border with Thailand, where large numbers of people have settled on the railway s currently unused land. About 635 households (about 2,730 people) will be displaced in Poipet, equivalent to 66% of total displacement. The area required for reconstructing the Poipet station has been reduced from 6 hectares to 3 hectares to minimize displacement. 44. In addition to clearing structures within the right-of-way, bamboo rail transport operators 16 are currently transporting people and goods along the railway and will lose their livelihoods once the railway has been rehabilitated. Some villages along the railway lack road access, thus the bamboo railway service is villagers only means of access. In such places, the Project will compensate for the loss of bamboo railway services by establishing road access for light (motorcycle) traffic using the railway s right-of-way. A census of bamboo rail transport operators identified a total of 189 operators, 12 of whom were women. For more than half of these operators (102 men and 3 women), providing bamboo rail transport services is their main source of income. The Project will provide the bamboo rail transport operators with funds to enable them to switch from rail to road transport providers. 45. The summary resettlement plan is in Appendix 12. The resettlement plan ensures that all those affected, irrespective of their tenure status, will be able to restore or improve their socioeconomic conditions. The resettlement plan has been disclosed to affected persons by means of a public information booklet and they will be further consulted on resettlement site options. Following detailed project design, the MWPT will update and implement the resettlement plan with guidance from the Interministerial Resettlement Committee under MEF and assistance from international and national consultants recruited under the Project. 46. The Government has agreed that in the event that all or parts of the right-of-way outside the corridor of impact would need to be cleared in the future, the resulting resettlement would be performed according to the same standards as under the Project. D. Financial 47. The financial analysis indicates that the Project will have a financial internal rate of return of about 10.2%, well above the real weighted average cost of capital of 4.1%. The Government will establish a property development entity to monetize the railway s landholdings that are no longer needed for railway operations. The net revenues of the property development entity will underwrite the Government s public service obligation expenditures associated with noncommercial passenger traffic; and future capital expenditures for development of the railway, notably, the possible future construction of a railway line to Viet Nam. The concession agreement will require the railway operator to submit annual audited accounts and operating statistics that include performance indicators for monitoring by the Government and ADB for 5 years following Project completion. The financial analysis is in Appendix Bamboo railway services are provided by means of small, motorized trolleys constructed and operated by smallscale private operators. The Project includes full mitigation for the operators as part of the resettlement plan and will also establish access for light traffic along sections of the Northern Line, where bamboo railway services are currently the only means of motorized access to some isolated communities without road access. Where needed, the contractor s construction roads will be left in place after construction has been completed.

25 15 E. Economic 48. The main sources of benefits are associated with savings from the diversion of heavy freight and container traffic from road transport to more economical rail transport that include reduced costs in relation to road maintenance and accidents. The traffic forecast is based on projected future economic growth in Cambodia and assumes that the railway will capture a significant share of the traffic generated by three new cement plants that are currently being planned and constructed and of future container traffic to and from Sihanoukville. Projections of container traffic on the Southern Line assume that the railway has direct access to the container port s stacking area for loading and offloading containers. Under these assumptions, and assuming in the base case that economic growth is in line with Cambodia s recent performance, the economic analysis indicates that the Project will have an economic internal rate of return of about 24.9%. The economic analysis is in Appendix 14. F. Environmental 49. The railway alignment is outside environmentally sensitive areas such as national parks and other protected areas and their buffer zones and the proposed Project falls into environmental category B. The MPWT will submit the initial environmental examination report to the Ministry of Environment for its review and approval. The Project s environmental impacts can be mitigated by proper engineering and environmental management measures, which have been included in the Project s environment management plan and will be implemented by the MPWT with support from international and national consultants. The Supplementary Appendix presents the summary initial environmental examination. V. ASSURANCES A. Specific Assurances 50. In addition to the standard assurances, the Government and the MPWT have given the following assurances, which will be incorporated in the legal documents: 1. Draft Railway Reform Law (i) The Government will undertake to present a draft railway reform law or equivalent legislation to the National Assembly. The draft law will follow the principles outlined in the Government s Policy Letter issued to ADB and dated 17 July The Government will use its best efforts to facilitate passage of the draft law before the end March 2007, by which time a concession agreement is anticipated to have been negotiated for private sector operation of the restructured railway. (ii) The Government will ensure that prior to enactment of the railway reform law (or equivalent legislation), it will not take any actions that would be inconsistent with the principles described in the Policy Letter. (iii) The Government will establish a commercially operated railway property development entity. This entity s net revenues will ipreferentially be used to subsidize public service obligation railway traffic, such as noncommercial passenger traffic, and for development of the railway system, such as the possible future construction of a new line to Viet Nam. 2. Safeguards (iv) The Government will ensure that all civil works contracts under the Project incorporate provisions to ensure that contractors (a) comply with the

26 16 Government s environmental regulations, ADB s Environmental Policy (2002), the environmental management plan for the Project, and the initial environmental examination; (b) comply with all applicable laws and regulations of Cambodia, including ratified international treaty obligations; (c) do not employ child labor and provide safe working conditions for male and female workers; (d) do not provide male and female workers with different wages or benefits for work of equal value; (e) implement the provisions set forth in the gender action plan, to be prepared for the Project to operationalize its gender strategy, to the extent that it is applicable to contractors; and (f) carry out training programs and awareness campaigns on HIV/AIDS and human trafficking at campsites and in communities along the railway lines. The MPWT will monitor compliance through an independent monitor. 3. Resettlement (v) The Government will ensure that the MPWT updates the resettlement plan after detailed project design based on a detailed measurement survey of losses following the recruitment and mobilization of an independent monitoring agency and of the resettlement supervision consultants. The update will be prepared in full consultation with affected persons and will be disclosed to them. The updated resettlement plan for any section of the railway will be submitted to ADB for review and approval before commencement of any land acquisition and relocation activities for that section. The MPWT will implement the approved, updated resettlement plan in accordance with the Government s laws, regulations, and procedures and ADB's policy on Involuntary Resettlement (1995). In the case of discrepancies between the Government s laws, regulations, and procedures and ADB's policy, ADB's policy will prevail. (vi) Where involuntary resettlement impacts cannot be avoided, civil works contractors will not be issued a notice of possession of the pertinent section of railway until (a) the satisfactory completion of compensation payments and relocation to new sites for that particular section, (b) the agreed rehabilitation assistance is in place, and (c) the particular section is free from all encumbrances. (vii) The Government will ensure that if people in the remaining right-of-way beyond the corridor of impact are resettled in the future, the resettlement will be carried out in accordance with the standards established for this Project. (viii) The Government will ensure that only land owned by the RRC as of the date of loan effectiveness will be considered for development by the property development entity. The Government will also ensure that people residing on such land who would need to be resettled to enable development are resettled using the standards of this Project. (ix) The Government will ensure the timely provision of counterpart funds for resettlement to meet any unforeseen obligations in excess of the resettlement budget estimates to satisfy resettlement requirements and objectives. 4. Anticorruption Policy (x) The Government will comply with, and will cause the MPWT to comply with, ADB s anticorruption policy (footnote 14). The Government (a) acknowledges ADB s right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the Project; and (b) agrees to cooperate fully with, and to cause the MPWT to cooperate fully with, any such investigation and to extend all necessary assistance, including providing access

27 17 to all relevant accounts and records, as may be necessary for the satisfactory completion of any such investigation. (xi) Without limiting the generality of the preceding paragraph, the Government will (a) ensure that the MPWT conducts periodic inspections of contractors activities related to fund withdrawals and settlements; and (b) ensure and cause the MPWT to ensure that all contracts financed by ADB in connection with the Project include provisions specifying ADB s right to audit and examine the records and accounts of all contractors, suppliers, consultants, and other service providers as they relate to the Project. (xii) In addition to these requirements, to deter corruption and increase transparency, the Government will set up a web site to disclose information about procurements related to the Project. For each contract, the web site shall include a list of participating bidders, the name of the winning bidder, the basic details of the bidding procedures adopted, the amount of the contract awarded, and the list of goods and/or services procured. In addition to the web-based disclosure, the public shall be provided with detailed information about procurement on public notice boards (for example, at commune council facilities) in the Project area. (xiii) The Government will ensure (a) that the process for selecting the railway operator and execution of the concession agreement are subject to ADB s anticorruption policy (footnote 14), specifically including ADB s right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the selection process or to the implementation of the concession agreement; and (b) that the concession agreement includes provisions that no corrupt, fraudulent, collusive, or coercive practices will be tolerated in connection with the agreement and that all parties to the agreement will fully cooperate with any investigation into any alleged corrupt, fraudulent, collusive, or coercive practices and shall extend all necessary assistance, including providing access to all relevant accounts and records as may be necessary for the satisfactory completion of any such investigation. 5. Gender Strategy (xiv) The Government will ensure that women, in particular, those who belong to women-headed households and ethnic minority groups, participate to an extent satisfactory to ADB in (a) public consultation meetings on resettlement planning; (b) detailed measurement of losses; (c) capacity-building programs relating to resettlement; and (d) relocation, compensation, and livelihood improvement activities to be undertaken under the Project. (xv) The Government will ensure that (a) any land rights granted to affected people will be issued in the names of both husband and wife; (b) women railway staff affected by restructuring are included in counseling and retraining programs for securing employment opportunities; and (c) gender sensitization training is undertaken, particularly in the context of resettlement, for pertinent MPWT staff and district resettlement committees, district officials, and commune leaders. 6. Project Monitoring (xvi) At the beginning of Project implementation, the MPWT will establish baseline and target values for the indicators before the start of works. The indicators shall include, at a minimum, information on railway passenger and freight traffic; effective average train speed; container traffic; traffic accidents; railway, road, and sea transport costs; heavy traffic on the railway versus roads; and producer prices as a share of the value of exports. The indicators shall be measured at

28 18 project inception, project completion, and 3 years after project completion and compared with baseline values. Support to help establish the monitoring and evaluation system shall be provided as part of supervision consulting services. The main sources of data shall include (a) secondary data from the Borrower s sources, (b) traffic counts, (c) railway statistics, (d) shipper and passenger surveys, (e) traffic accident database, (f) producer and price surveys, and (g) trade and customs statistics. The MPWT shall submit a report to ADB summarizing the key findings of monitoring at inception, project completion, and 3 years after project completion. 7. Cofinancing (xvii) Within 6 months of the effective date of the loan, or at a later date as agreed with ADB, the Borrower shall have obtained the OFID loan or shall have made other arrangements acceptable to ADB to fund the amount to be provided by the OFID loan. B. Condition for Loan Effectiveness 51. Loan effectiveness is conditional on the selection of the railway operator through an international competitive bidding process and signing of a concession agreement, acceptable to ADB, between the Government and the selected PPP railway operator that vests responsibility for railway operations and maintenance with the PPP railway operator for the duration of the concession. C. Condition for Loan Signing 52. Signing of the Loan Agreement will be conditional upon receipt by ADB of the Government s confirmation that rolling stock and other operating assets of the RRC that are currently being allocated to private parties will be duly returned to RRC free of all encumbrances, so they can be available for the new PPP Railway Operator as required on the date of effectiveness of the Railway Operator Concession. VI. RECOMMENDATION 53. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve (i) the loan in various currencies equivalent to Special Drawing Rights 28,277,000 to the Kingdom of Cambodia for the Rehabilitation of the Railway in Cambodia Project from ADB s Special Funds resources with an interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; a term of 32 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft Loan Agreement presented to the Board, and (ii) the administration by ADB of a loan not exceeding $13,000,000 to the Kingdom of Cambodia for the Rehabilitation of the Railway in Cambodia Project to be provided by the OPEC Fund for International Development (OFID) under the terms of a Letter of Administration to be entered into between ADB and OFID. 20 November 2006 Haruhiko Kuroda President

29 Appendix 1 19 DESIGN AND MONITORING FRAMEWORK Design Summary Impact 1. Economic growth by improving Cambodia's international competitiveness. 2. Poverty reduction by reducing the cost of living and generating additional incomes in Cambodia. Outcome 1. Increase the efficiency of the transport sector as a whole by increasing the competitiveness of the railway. 2. Secure the long-term sustainability of the railway subsector through improved productivity and efficiency and the adoption of a market-based tariff. 3. Reduce road damage and road accident risks associated with the movement of heavy and dangerous goods. Outputs 1. About 600 km of rehabilitated railway infrastructure, including rail tracks and damaged bridges, on the Southern and Northern lines to permit safe operations at a mainline speed of at least 50 km/hour. 2. About 48 km of Reconstructed railway line to the Thai border. 3. Rehabilitated and extended the rail links to the Sihanoukville container port and to the port in Performance Targets/Indicators Economic growth and socioeconomic development Reduced incidence of poverty Satisfactory restructuring of the railway subsector that facilitates efficient freight transport services completed in the first quarter of The Government s coverage of the railway s operating deficit is eliminated in The railway captures 80% of the freight market for bulk products between the capital and Sihanoukville and Thailand by Ninety percent of dangerous cargo (fuel, liquefied petroleum gas, chemicals) and at least half of all bulk cargo transports on national roads 3, 4 and 5 are diverted to rail by Civil works are completed in Affected Royal Railways of Cambodia employees are compensated for losses of future income and pension rights when the new public private partnership operator takes over responsibility for railway operations. Data Sources/Reporting Mechanisms Review of economic data in the project area, including gross domestic product, per capita income, and incidence of poverty Railway operator s physical and financial performance results Road traffic surveys Railway traffic statistics Government accounts Project reports, railway accounts, and user surveys Reports by the restructuring technical assistance consultants Reports of project supervision consultants Project completion report Assumptions and Risks Assumption The Government is committed to the development of infrastructure and to economic growth. Risk Political risk of supporting the reform and restructuring of the railway subsector. Assumption The railway is efficiently operated and is competitive. The railway is rehabilitated as planned. The Government is committed to reform. Risk Political risk to support sector reform. The railway operator is not efficient. Assumption The railway is restructured by the end of the first quarter of Agreed milestones in the restructuring process are completed in a timely manner prior to approval of the loan by ADB and the subsequent declaration of loan effectiveness. Risk Track sections are not made available to the contractor as planned.

30 20 Appendix 1 Design Summary Phnom Penh. Performance Targets/Indicators Data Sources/Reporting Mechanisms Activities with Milestones 1.1 Transaction preparation, public bidding, and closure of contract for the public private partnership operator (signing of concession contract in March 2007). 1.2 Selection of consultants for design and supervision (to be completed by March 2007). 1.3 Prequalification and award of civil works contracts (to be completed by March 2007). 1.4 Acquisition of land and resettlement of affected persons (to be completed by December 2007). 2.1 Reconstruction of the destroyed link, including earthworks, ballasting, track laying, stations, and repairs to bridges and culverts (to be completed by September 2009). 2.2 Rehabilitation of the Northern Line, including embankment repairs, ballasting, providing missing fittings, and maintenance of track to improve the riding quality for a minimum operational speed of 50 km/hour (to be completed by November 2009). 2.3 Construction of a new passing loop and link to the port in Phnom Penh to be completed by November Rehabilitation of the Southern Line, including repairs to embankments, renewal of track with concrete sleepers, rehabilitation of bridges and culverts, and maintenance of track, for improved speed performance (to be completer by November 2009). 3.2 Rehabilitation of existing siding tracks and provision of additional tracks for efficient loading and unloading of containers in the Sihanoukville container port (to be completed by November 2009). ADB = Asian Development Bank, OFID = OPEC Fund for International Development. Assumptions and Risks The Government of Thailand does not reestablish the rail connection on time. Inputs ADB OFID Government of Malaysia (in kind) Government of Cambodia $ million

31 Appendix 2 21 SECTOR ANALYSIS A. Background and Issues 1. For more than a decade the Government s emphasis has been on rehabilitating Cambodia's core transport infrastructure to restore national cohesion and create the foundations for economic growth. The two international airports (Phnom Penh and Siem Reap), the two main ports (Phnom Penh and Sihanoukville), and the primary highway network will soon be fully rehabilitated and have adequate capacity. The railway is run down and needs to be rehabilitated and restructured to become an efficient alternative. Restructuring is ongoing and rehabilitation is expected to start in Nevertheless, much remains to be done: (i) most provincial and rural roads are seasonally impassable to motorized traffic and await rehabilitation; (ii) inland water transport has progressed slowly driven by the private sector, but such infrastructure as river ports needs to be upgraded and modernized to effectively support multimodal transport; (iii) domestic airports require repair and an assured financial basis to provide safe operations; (iv) traffic regulation and enforcement is weak or nonexistent and lack a sound legal basis, although a draft road law has been prepared with support from the World Bank; (v) infrastructure development is mostly donor financed, but shortages of funds and a lack of efficient and transparent mechanisms for maintenance planning, disbursement, and execution hinder its subsequent operation and maintenance; and (vii) transport services are inefficient, partly because of poor infrastructure and partly because of market failure and rent seeking. Solving these problems is a prerequisite for continued economic and social development. 3. The constraints to implementing infrastructure development activities are (i) a shortage of qualified and experienced professional staff that is only slowly abating, and (ii) a shortage of Government funding for infrastructure operation and maintenance. There is scope for further involving the private sector as a source of financing and management capacity in certain infrastructure areas, notably, the railway and the sea and river ports and new terminal facilities such as container depots. In other areas, such as road infrastructure, private sector involvement is not currently feasible because traffic levels are generally too low to support toll-financed investment and maintenance. Widespread private sector involvement in road infrastructure provision and maintenance will probably not be viable for at least a decade The execution of safeguard policies, especially resettlement, compensation, and rehabilitation of those adversely impacted, has improved significantly in recent years, but there is still room for further improvement, especially the establishment of a firm legal basis for resettlement, compensation, and rehabilitation and of consistent implementation. The Asian Development Bank (ADB) is providing technical assistance in this regard Infrastructure projects have had little induced development impact in terms of the emergence of national contractors, consulting engineers, and other service providers. 1 The complex and interlinked issues of road maintenance funding, planning, disbursement, and execution are discussed extensively in: ADB Strengthening the Maintenance Capacity Planning and Maintenance Management Capabilities at the Ministry of Public Works and Transport in Cambodia. Phnom Penh. (TA CAM, approved in July 2002). 2 ADB Technical Assistance to the Kingdom of Cambodia for Enhancing the Resettlement Legal Framework and Institutional Capacity. Manila (TA 4490 CAM).

32 22 Appendix 2 B. Government Strategy 6. The primary tools of the Government's strategy since 1994 have been (i) to focus road investments on rehabilitating national highways and selected provincial, rural, and urban roads; (ii) to undertake comprehensive privatization of transport provision; (iii) to selectively relax restrictive regulations, such as most restrictions on importing motor vehicles and all restrictions on access by foreign airlines; and (iv) to franchise the operation, maintenance, and development of National Road 4, the two international airports in Phnom Penh and Siem Reap, and air traffic control to the private sector. The Government's strategy has proven successful in restoring a core transport system that connects the country s main centers and has significantly contributed to integrating the national economy with the regional and global economies. 7. The Government has initiated a process of decentralization and reforms whereby, for example, the delivery of transport infrastructure services, which was previously centrally managed by the Ministry of Public Works and Transport (MPWT), is now delegated to the provincial level. The MPWT itself is in the process of shifting its focus away from direct management of transport infrastructure toward planning and oversight of the sector. The process is moving forward with significant support from ADB, the World Bank, and the Japan International Cooperation Agency, but is encumbered by shortages of the skills and resources required to undertake these new roles both in the provinces and centrally. The reform process is necessary, but given the lack of capacity, is fraught with difficulty in the short term. An example is road maintenance, for which disbursement is now directly to the provinces, which, however, lack the ability to produce credible road maintenance plans and adequately justified budgets. As a result, road maintenance is generally poor even though uncommitted funds are available. 8. The MPWT is currently preparing a revised strategy for future development of the transport sector based on the Cambodia Transport Sector Strategy Study (footnote 3), financed by ADB and completed in December In terms of transport sector development and operation, the draft strategy is likely to emphasize the following objectives and goals: (i) (ii) (iii) Support sustained economic growth and promote external trade and foreign direct investment. Transport is an integral part of the production of nearly all goods and services. Good transport infrastructure and cost-effective transport is a precondition for Cambodia's export drive and for successful development of its tourism potential, and is also a major factor in containing the cost of living and improving rural livelihoods. Increased diversity in transport supply and improved transport logistics using multimodal transport chains are needed to improve Cambodia's international competitiveness and its attractiveness to direct foreign investors. Support poverty reduction and integration of the country. By enabling new productive activities in areas not previously open to economic exchange, transport creates the foundations for more inclusive and pro-poor economic growth. Transport achieves this by providing cost-effective and reliable access to economic opportunities and social services, thereby enabling the poor to participate more fully in society. Accessible and dependable transport networks, especially provincial roads, are needed to link the provinces and to integrate rural areas into the mainstream economy. Streamline and focus sector institutions and expand private sector involvement in infrastructure provision. The Government emphasizes strengthening sector institutions, especially the creation of clear mandates for their activities, as the basis for institutional reform and strengthening. The Government recognizes that given the human resources constraint, reform

33 Appendix 2 23 (iv) (v) requires flexibility in implementation with the focus on efficiency, transparency, and whenever efficient reliance on the private sector. In the past, the Government has shown a readiness to involve foreign and domestic investors in the financing, development, and management of transport infrastructure. The Government intends to pursue this avenue further, and also strongly supports the development of national contractors to undertake infrastructure construction and maintenance services. Secure the sustainability of transport. Fuel taxation is a major source of revenue for the Government, and charging for the use of infrastructure has been introduced in most subsectors, but with a few exceptions, the scope for charging full user costs is limited by low traffic loads. As the scope for direct Government funding is equally limited, meeting the funding requirements for infrastructure development and maintenance in the short to medium term will require supplementary funding from the private sector and development partners. Improve safety and enforcement. The Government is aware of the rapidly growing social and economic costs of poor traffic safety and recognizes that inefficient enforcement because of a weak legal foundation, inadequate resources, and corrupt practices is a root cause of the problem.

34 24 Appendix 3 EXTERNAL ASSISTANCE Table A3.1: Externally Funded Capital Projects in the Transport Sector in Cambodia ADB Loan No. Project Type Scope Source Completion Year Start Year Value ($ million) Road Rehabilitation NR 5 Thailand Emergency Repair NR 5 UNDP Bridge Reconstruction NRs 5, 6 AusAid Road Rehabilitation a NRs 1, 2, 3, 5, 6, 11 ADB Road Rehabilitation Various Sida Road Reconstruction NR 4 USAID Road Reconstruction NRs 6, 7 Japan Ferry Rehabilitation NRs 1, 6, 7 Danida Airport Improvement Siem Reap ADB Bridge Construction NR 7 Japan Road Improvement NR 1 ADB Emergency Flood Repair a NRs 1, 2, 5, 6, 7, 11, ADB , Road Rehabilitation NRs 5, 6, 7 ADB Read Improvement NR 6 Japan Bridge Reconstruction NR 6 Japan Road Improvement NR 7 Japan Port Modernization Sihanoukville Japan Emergency Flood Repair a NR 11 ADB Road Rehabilitation NR 51 Japan Road Rehabilitation NR 2 Japan Emergency Flood Repair a Various World Bank Road Reconstruction NR 48 Thailand Road Rehabilitation NR 3, 6 World Bank Road Rehabilitation NR 51 World Bank Road Improvement NR 1 Japan Road Reconstruction NR 48 Thailand Road Rehabilitation NRs 5, 6, 56, 68 ADB Bridge Construction NR 1 Japan Road Maintenance NRs 33, 56, 68, 72 ADB = not available, ADB = Asian Development Bank, AusAid = Australian Government Overseas Aid Program, Danida = Danish Government International Development Aid Programme, NR = national road, Sida = Swedish International Development Cooperation Agency, UNDP = United Nations Development Programme. a These projects included small railway components. The combined assistance is estimated at about $6 million. Source: Asian Development Bank.

35 Appendix 3 25 Table A3.2: Asian Development Bank Technical Assistance for the Transport Sector in Cambodia Technical Assistance No. Title 1866/1996 Transport Rehabilitation Study (Financed by United Nations Development Programme and Swedish International Year Amount Approved ($) ,319,400 Development Cooperation Agency) 2059 Rural Infrastructure Improvement , Airports Improvement Project , Strengthening of the Ministry of Rural Development ,500, Developing a Planning Capability in the Ministry of Public ,000 Works and Transport 2722 Transport Network Improvement , Siem Reap Airport Project ,000, Project Preparation and Implementation Assistance to the ,000 Ministry of Public Works and Transport 3257 Strengthening the Maintenance Planning and Management ,000 Capabilities at the Ministry of Public Works and Transport 3398 Primary Roads Restoration Project (Australia) Capacity Building for Public Private Partnerships in Transport , Transport Sector Strategy , Economic Analysis of the Cambodia Road Improvement ,000 Project 3854 Environmental Assessment for the Cambodia Road ,000 Improvement Project 3855 Resettlement Study and Social Impact Assessment for the ,000 Cambodia Road Improvement Project 3868 Engineering Design Update for the Greater Mekong Subregion: ,000 Cambodia Road Improvement Project 9048 Mainstreaming Labor-Based Maintenance in the National Road ,000,000 Network (Financed by Japan Fund for Poverty Reduction) 4645 Restructuring of the Railway in Cambodia (France) ,500, Rehabilitation of the Railway in Cambodia (Financed by Japan ,000 Special Fund) 4691 Preparing the Transport Infrastructure Development and Maintenance Project (Financed by Japan Special Fund) ,000,000 Source: Asian Development Bank.

36 26 Appendix 4

37 Appendix 4 27 OUTLINE OF THE STATION IN POIPET AND PORT ACCESS IN SIHANOUKVILLE

38 28 Appendix 5 POLICY LETTER FROM THE GOVERNMENT TO THE ASIAN DEVELOPMENT BANK

39 Appendix 5 29

40 30 Appendix 5