Report and Recommendation of the President to the Board of Directors

Project Number: 50312-003 January 2018

Proposed Loans and Administration of Technical Assistance Grant People’s Republic of Bangladesh: Railway Rolling Stock Operations Improvement Project Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB's Public Communications Policy 2011.

CURRENCY EQUIVALENTS (as of 8 January 2018)

Currency unit – taka (Tk)

Tk1.00 = $0.0120 $1.00 = Tk82.9750

ABBREVIATIONS

ACEF

ADB – –

Asian Clean Energy Fund Asian Development Bank

APU – auxiliary power unit CEFPF – Clean Energy Financing Partnership Facility

CO2 – carbon dioxide EIRR – economic internal rate of return ERPIT – enterprise resource planning information technology

IT km

– –

information technology kilometer

NIS – National Integrity Strategy OCR

PAM – –

ordinary capital resources project administration manual

TA – technical assistance

NOTES

(i) The fiscal year (FY) of the Government of Bangladesh and its agencies ends on 30 June. “FY” before a calendar year denotes the year in which the fiscal year ends, e.g., FY2018 ends on 30 June 2018.

(ii) In this report, “$” refers to United States dollars.

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

Vice-President Wencai Zhang, Operations 1 Director General Hun Kim, South Asia Department (SARD) Director Ravi Venkat Peri, Transport and Communications Division, SARD

Team leader Tsuneyuki Sakai, Senior Transport Specialist, SARD Team members Eloise Fluet, Social Development Specialist, SARD

Johan Georget, Transport Specialist, SARD Mohammad Nazrul Islam, Senior Project Officer (Transport), SARD

Yanying Li, Counsel, Office of the General Counsel Theresa Mora, Project Analyst, SARD Faithful Ramirez, Senior Operations Assistant, SARD Karma Yangzom, Senior Environment Specialist, SARD

Peer reviewer Takeshi Fukayama, Transport Specialist, Southeast Asia Department

CONTENTS

Page

PROJECT AT A GLANCE

MAP

I. THE PROPOSAL 1

II. THE PROJECT 1

A. Rationale 1

B. Impact and Outcome 4

C. Outputs 4

D. Summary Cost Estimates and Financing Plan 5

E. Implementation Arrangements 6

III. ATTACHED TECHNICAL ASSISTANCE 6

IV. DUE DILIGENCE 7

A. Technical 7

B. Economic and Financial 7

C. Governance 8

D. Poverty, Social, and Gender 9

E. Safeguards 9

F. Summary of Risk Assessment and Risk Management Plan 10

V. ASSURANCES 10

VI. RECOMMENDATION 10

APPENDIXES

1. Design and Monitoring Framework 11

2. List of Linked Documents 13

Project Classification Information Status: Complete

PROJECT AT A GLANCE

Source: Asian Development BankThis document must only be generated in eOps. 10022017112619930585 Generated Date: 05-Oct-2017 14:26:13 PM

1. Basic Data Project Number: 50312-003Project Name Railway Rolling Stock Operations

Improvement Project Department/Division

SARD/SATC

Country Bangladesh Executing Agency Bangladesh RailwayBorrower Government of Bangladesh

2. Sector Subsector(s) ADB Financing ($ million)Transport Rail transport (non-urban) 359.00

Transport policies and institutional development 1.00

Total 360.00

3. Strategic Agenda Subcomponents Climate Change Information Inclusive economic growth (IEG)

Pillar 1: Economic opportunities, including jobs, created and expanded

Environmentally sustainable growth (ESG)

Eco-efficiencyGlobal and regional transboundary environmental concerns

Mitigation ($ million) 360.00CO2 reduction (tons per annum) 120,096Climate Change impact on the Project

Low

4. Drivers of Change Components Gender Equity and MainstreamingGovernance and capacity development (GCD)

Institutional developmentOrganizational development

Partnerships (PAR) Bilateral institutions (not client government)Official cofinancing

No gender elements (NGE)

5. Poverty and SDG Targeting Location ImpactGeographic TargetingHousehold TargetingSDG Targeting

NoNoYes

Nation-wide High

SDG Goals SDG9, SDG13

6. Risk Categorization: Complex.

7. Safeguard Categorization Environment: C Involuntary Resettlement: C Indigenous Peoples: C.

8. Financing

Modality and Sources Amount ($ million)

ADB 360.00

Sovereign Project (Concessional Loan): Ordinary capital resources 6.00

Sovereign Project (Regular Loan): Ordinary capital resources 354.00

Cofinancing 0.00

None 0.00

Counterpart 93.37

Government 93.37

Total 453.37

Note: An attached technical assistance will be financed on a grant basis by the Asian Clean Energy Fund under the Clean

Energy Financing Partnership Facility in the amount of $500,000.

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed loan to the People’s Republic of Bangladesh for the Railway Rolling Stock Operations Improvement Project. The report also describes the proposed administration of technical assistance (TA) to be provided by the Asian Clean Energy Fund (ACEF)1 under the Clean Energy Financing Partnership Facility (CEFPF) for the Railway Rolling Stock Operations Improvement Project and, if the Board approves the proposed loan, I, acting under the authority delegated to me by the Board, approve the administration of the TA. 2. The Government of Bangladesh proposed a project for financing by the Asian Development Bank (ADB) to improve the operational efficiency of the Bangladesh Railway through the procurement of modern rolling stock, prepare investment projects to enhance its rolling stock maintenance capacity and support the ongoing railway reform. The project will contribute to an increase in the share of the railway as a core mode of transportation and to the shift from roads to rail. This modal shift and the efficient rolling stock will reduce carbon dioxide (CO2) emission.

II. THE PROJECT

A. Rationale

3. Transport sector overview. The Bangladeshi transport system consists of roads, railways, inland waterways, seaports for maritime shipping, and civil aviation facilities that cater to both domestic and international traffic. Historically, the railway enjoyed a monopoly as a carrier and transported most principal commodities, including cement, coal, fertilizer, raw jute, stone, food grain, and sugar cane. However, the railway began losing market share, declining from 30% in 1975 to a mere 4% in 2015 for both passenger and freight transports. By 2015, road transport had become dominant, carrying over 70% of passenger traffic and 60% of freight traffic.2 The drop in the market share of the railway as a carrier is the result of the long-term inadequate investment in railway infrastructure and operational improvement of Bangladesh Railway, causing inconvenient and unreliable operations and uncomfortable experiences for passengers. 4. Railway as a sustainable transport system. While there has been significant underinvestment in the railway infrastructure, road infrastructure has received significant investment. This is because the initial cost of investment in the road infrastructure per kilometer (km) is generally lower than in the railway infrastructure.3 However, once demands exceed the existing road capacity, expansions tend to be financially and socially costly, especially in densely populated areas owing to land acquisition and resettlement requirements. The government recognizes the virtues of the railway as a cheaper, safer, and fuel-efficient transportation mode. It has the potential for greater speed and the capacity to provide demand-responsive sustainable development along core economic corridors without taking much land area if properly planned and developed. In its Seventh Five-Year Plan, fiscal year (FY) 2016–FY2020, the government placed special emphasis on railway development and set targets to increase railway market share from 4% to 15% in freight transport, from 10% to 15% in container transport between Dhaka and Chittagong Port, and from 4% to 10% in passenger transport by 2020 through prioritized investment in railway infrastructure (footnote 2).

1 Established by the Government of Japan. 2 Government of Bangladesh, Planning Commission. 2015. Seventh Five-Year Plan, FY2016–FY2020. Dhaka. 3 ADB. 2017. Meeting Asia’s Infrastructure Needs. Manila.

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5. Network capacity insufficient for traffic demands. Network capacity augmentation progress has been marginal. Since 2006, only about 120 track km (about 3%) have been added to the network. In its Seventh Five-Year Plan, FY2016–FY2020 (footnote 2), the government targets the construction of 856 km of new rail tracks, expediting efforts to augment the capacity of the railway network. Additional fleets are required for use in the enhanced network. 6. Rolling stock unavailable for efficient operations. An adequate number of effective rolling stock should be available for efficient railway operations. Bangladesh Railway had 278 diesel locomotives, 1,249 coaching vehicles, and 8,677 freight wagons at the end of FY2016.4 However, majority of rolling stock are aged over 30 years, most of which exceeds their economic lives. The old rolling stock is no longer reliable to operate, experiencing frequent malfunctions. In the course of revising its master plan, Bangladesh Railway identified the need to procure 197 locomotives, 1,492 coaches, and 2,202 wagons by 2025.5

7. Inadequate conditions of rolling stock maintenance facilities. The maintenance facilities of Bangladesh Railway have not been improved as required over time. Bangladesh Railway owns four maintenance workshops and 10 maintenance sheds for locomotives, and two maintenance workshops and 14 maintenance depots for coaches and wagons. These facilities are not adequately equipped with the necessary machinery, maintenance parts, and staff, and are unable to attend to the prescribed maintenance cycles of rolling stock. A significant number of special repair needs—owing to frequent breakdowns of timeworn rolling stock—is an added burden to these maintenance facilities, further hampering timely and quality maintenance. While Bangladesh Railway realizes the urgent need for enhancing maintenance facilities, it lacks the institutional knowledge to prepare investment projects for such purpose. 8. Reform needs of the Bangladesh Railway. Sound financial performance is a key to sustainable railway operations, but the performance of Bangladesh Railway has not been encouraging. Its average operating ratio (operating expenses divided by operating revenues) between FY2007 and FY2016 is 214%, showing operating cost is about double the operating revenue. The government has provided sufficient subsidies for Bangladesh Railway to sustain its operations and railway reform has been in progress to foster the Bangladesh Railway as a robust going concern. A major cause of Bangladesh Railway’s unsatisfactory revenue performance has been the historically low level of passenger and freight tariffs, which had been frozen by the government for decades. Increases both in the railway network capacity and in the number of operational rolling stock will generate more revenues through capturing the market demand suppressed by capacity constraints. While the timely consolidation of accurate management information and preparation of precise financial statements are prerequisites for effective business planning, Bangladesh Railway lacks the required tools and resources for this.

9. ADB’s assistance to Bangladesh Railway. ADB has been engaged with Bangladesh Railway to support the government initiatives to develop the railway as a sustainable transport system of the country. Since 2006 and starting with the Railway Sector Investment Program, ADB has provided four loans to the government with the total amount of $2,811 million.6 The three pillars of ADB’s support have been network capacity improvement, operational capacity improvement, and railway reform implementation.

4 Bangladesh Railway. 2017. Information Book 2016. Dhaka. 5 An ADB technical assistance project has supported the master plan revision. (ADB. 2014. Technical Assistance for

the South Asia Subregional Economic Cooperation Railway Connectivity Investment Program. Manila.) 6 ADB. 2006. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing

Facility and Technical Assistance Grant to the People’s Republic of Bangladesh for the Railway Sector Investment Program. Manila.

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10. Network capacity improvement. ADB has provided three loans to invest in network capacity enhancement since 2006. ADB’s Railway Sector Investment Program (footnote 6) financed the double tracking of the 64 km Tongi–Bhairab Bazar section of the Dhaka–Chittagong corridor, and the extension of loop lines and modernization of signaling in the Ishurdi–Darsana section. In 2014, ADB approved the South Asia Subregional Economic Cooperation Railway Connectivity: Akhaura–Laksam Double Track Project to upgrade the 72-km section of the Dhaka–Chittagong corridor to a double track railway line with modern signaling equipment.7 In 2016, ADB approved the South Asia Subregional Economic Cooperation Chittagong–Cox’s Bazar Railway Project Phase 1, to construct the 102-km section of the Chittagong–Cox’s Bazar railway corridor.8 11. Operational capacity improvement. To improve the quality of its rolling stock assets, since 2006, Bangladesh Railway has procured 46 locomotives, 269 coaching vehicles, and 645 freight wagons. This includes the procurement of 150 passenger carriages under the ADB-supported Railway Sector Investment Program (footnote 6). The procurement of 264 passenger carriages, 10 locomotives, and additional maintenance equipment is ongoing under the ADB-supported Railway Rolling Stock Project, approved in 2015. The project completion is expected in 2020 as planned.9 Furthermore, procurement of 70 locomotives and 270 passenger carriages is ongoing under the Bangladesh Railway’s own budget to replace the oldest rolling stock. 12. Railway reform implementation. The Railway Reform Project under ADB’s Railway Sector Investment Program (footnote 6) has supported the improvement of the financial performance of Bangladesh Railway. It contributed to the realization of the passenger and freight tariff adjustment in FY2013, for the first time since 1992, and the establishment of tariff adjustment formula allowing annual tariff adjustments by the Ministry of Railways. The first tariff adjustment based on this formula was made in February 2016, and the continued annual tariff adjustments are expected to gradually raise the operating revenue. The focus of the operating cost reduction is on the maintenance cost, representing 32.16%, and the fuel cost, representing 16.23% of total operating expenses in FY2016. Replacement of timeworn rolling stock and improved maintenance facilities will reduce the unit cost of rolling stock maintenance. The introduction of modern fuel-efficient locomotives will bring down the fuel cost of each train. For the preparation of timely and accurate management information and precise financial statements, the Railway Reform Project supported the development of an enterprise resource planning information technology (ERPIT) system. The railway reform agenda are being implemented consistently to achieve the self-sustainable operations of Bangladesh Railway.10 13. Consistency with ADB’s country partnership strategy. To promote economic diversification and enhance the economy’s long-term growth potential, ADB’s country partnership strategy for Bangladesh, 2016–2020, emphasizes the importance of easing infrastructure constraints by undertaking transformational investments and promoting policy reforms in key sectors such as energy, transport, and urban development as a priority investment area.11 ADB’s 7 ADB. 2014. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People’s

Republic of Bangladesh for the South Asia Subregional Economic Cooperation Railway Connectivity: Akhaura–Laksam Double Track Project. Manila.

8 ADB. 2016. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing Facility and Technical Assistance Grant to the People’s Republic of Bangladesh for the South Asia Subregional Economic Cooperation Chittagong-Cox’s Bazar Railway Project, Phase 1. Manila.

9 ADB. 2015. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People’s Republic of Bangladesh for the Railway Rolling Stock Project. Manila.

10 Updated Railway Reform Progress Report (accessible from the list of linked documents in Appendix 2). 11 ADB. 2016. Country Partnership Strategy: Bangladesh, 2016–2020. Manila.

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country operations business plan for Bangladesh, 2017–2019, includes loan projects for the investment on rolling stock and network capacity augmentation as a means to achieve the strategic objective.12 14. Lessons learned. ADB’s previous interventions in Bangladesh Railway have often faced start-up delays in project implementation. The main cause of delays for the rolling stock improvement projects has been in the procurement process of the suppliers. During the preparation of the project, ADB has supported the early preparation of bidding documents with nonrestrictive technical specifications and unambiguous technical evaluation criteria to facilitate the bidding process. Furthermore, with the continued loan assistance for Bangladesh Railway projects since 2006, Bangladesh Railway has gradually gained the institutional knowledge for project implementation. This has enabled the establishment of a project implementation unit staffed with officials experienced in ADB projects. 15. Value added by ADB assistance. ADB assistance in rolling stock will increase the operational capacity of Bangladesh Railway. The rolling stock to be procured under the project will include 40 locomotives equipped with auxiliary power unit (APU), which will be introduced for the first time into the Bangladesh Railway. APU will significantly reduce the diesel fuel consumption of locomotives during idling time. The effect of APU has been proven internationally and, in the case of the Indian Railways in India, a neighboring country of Bangladesh, APU consumed about 85% less diesel fuel per hour than the main engine did during idling time. The fuel cost savings will contribute to the improvement of the financial performance of Bangladesh Railway and the reduction of CO2 emission. The attached TA to be financed by the ACEF (footnote 1) under the CEFPF will further enhance the effects of the new technology by improving the capacity of Bangladesh Railway staff on the energy-efficient rolling stock operations, including the use of APU-equipped locomotives. B. Impact and Outcome

16. The project is aligned with the following impacts: (i) a balanced 3R (rail, river, and road)- based multimodal transport infrastructure system developed (footnote 2), and (ii) greenhouse gas emissions in the power, transport, and industry sectors reduced.13 The project will have the following outcome: operational and energy efficiency of Bangladesh Railway improved.14 C. Outputs

17. Output 1: Modern rolling stock procured. The project will procure 40 broad gauge locomotives, 125 luggage vans for passenger and parcel trains, and 1,000 wagons for freight trains for use in the major corridors of the Bangladesh Railway network.

18. Output 2: Investment plans for maintenance facilities of locomotives and diesel electric multiple units developed. The consulting services under the project will prepare investment plans of urgently required maintenance facilities (feasibility studies, detailed designs, cost estimates, and bidding documents). 19. Output 3: Capacity of Bangladesh Railway officials and locomotive drivers on energy-efficient rolling stock operations improved. The project will establish a training program and train Bangladesh Railway’s locomotive drivers on the effective use of new

12 ADB. 2016. Country Operations Business Plan, 2017–2019. Manila. 13 Government of Bangladesh, Ministry of Environment and Forests. 2015. Intended Nationally Determined Contribution

(INDC). Dhaka. 14 The design and monitoring framework is in Appendix 1.

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locomotives. It will also recommend measures to improve the overall energy efficiency of rolling stock operations as a policy direction of Bangladesh Railway. 20. Output 4: Enterprise resource planning information technology system for accrual accounting used and adequately maintained. A team of information technology (IT) engineers will be engaged under the project to (i) provide daily operational support to the users of the ERPIT system, and (ii) operate and maintain the ERPIT system and its infrastructure developed under ADB’s Railway Sector Investment Program (footnote 6). Bangladesh Railway intends to establish an IT cell to operate and maintain the system. The support of IT engineers under the project will continue for 3 years to bridge the gap until a fully staffed IT cell is established in Bangladesh Railway. D. Summary Cost Estimates and Financing Plan

21. The project is estimated to cost $453.37 million (Table 1). 22. Detailed cost estimates by expenditure category and by financier are included in the project administration manual (PAM).15 Rolling stock procurement and consulting services are the major expenditure items under the project.

Table 1: Summary Cost Estimates ($ million)

Item Amounta

A. Base Costb 1. Rolling stock procurement 403.75

2. Consulting services 7.13 Subtotal (A) 410.88

B. Contingenciesc 26.54

C. Financial Charges During Implementationd 15.95

Total (A+B+C) 453.37 a The government will finance taxes and duties of $81.78 million as exemption and/or cash contribution. b In mid-2017 prices as of 30 June 2017. c Physical contingencies computed at 2% for goods. Price contingencies computed at an average of 1.5% on

foreign exchange costs and 6.3% on local currency costs; includes provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate.

d Includes interest and commitment charges. Interest during construction for the ordinary capital resources (OCR) regular loan has been computed at the 5-year US dollar fixed-swap rate plus an effective contractual spread of 0.2% and a maturity premium of 0.1%. Commitment charge for the OCR regular loan is 0.15% per year to be charged on the undisbursed loan amount. Interest during construction for the OCR concessional loan) is computed at 2% per annum.

Source: Asian Development Bank estimates.

23. The government has requested (i) a regular loan of $354 million, and (ii) a concessional loan of $6 million, both from ADB’s ordinary capital resources (OCR) to help finance the project. The regular loan will have a 25-year term, including a grace period of 5 years; straight-line repayment; an annual interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; a commitment charge of 0.15% per year (the interest and other charges during construction to be capitalized in the loan); and such other terms and conditions set forth in the draft regular loan agreement. Based on this, the average loan maturity is 15.25 years, and the maturity premium payable to ADB is 0.10% per annum. The concessional loan will have a 25-year term, including a grace period of 5 years; an interest rate of 2% per year during the grace period and thereafter (the interest charge during construction to be capitalized

15 Project Administration Manual (accessible from the list of linked documents in Appendix 2).

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in the loan); and such other terms and conditions set forth in the concessional loan agreement.

24. The summary financing plan is in Table 2. ADB will finance the expenditures in relation to rolling stock procurement and consulting services. The government will finance the remaining costs, equivalent to $93.42 million.

Table 2: Summary Financing Plan Source Amount ($ million) Share of Total (%)

Asian Development Bank Ordinary capital resources (regular loan)

Ordinary capital resources (concessional loan) 354.00

6.00 78.08

1.32

Government of Bangladesh 93.37 20.60 Total 453.37 100.00

Source: Asian Development Bank estimates.

25. Climate mitigation is estimated to cost $453.37 million. ADB will finance 79.40% of mitigation costs. E. Implementation Arrangements

26. The implementation arrangements are summarized in Table 3 and described in detail in the PAM (footnote 15).

Table 3: Implementation Arrangements Aspects Arrangements

Implementation period February 2018—June 2022

Estimated completion date 30 June 2022 Estimated loan closing date 31 December 2022 Management (i) Executing agency Bangladesh Railway

(ii) Key implementing agency Bangladesh Railway

(iii) Implementation unit The project implementation units consist of one project general manager, three project directors and 21 officers. They are overseen by the Railway Reform Implementation Committee.

Procurement International competitive bidding 5 contracts $321 million

Consulting services Detailed designs: QCBS 175 person-months $4.1 million ERPIT system O&M: QCBS 216 person-months $1.0 million

Retroactive financing and advance contracting

Retroactive financing and/or advance contracting will be used for goods and consulting services financed. Retroactive financing will be provided to finance expenditures incurred prior to loan effective date, but not earlier than 12 months before signing the loan agreements and not exceeding 20% of the loan amounts.

Disbursement The loan proceeds will be disbursed following ADB's Loan Disbursement Handbook (2017, as amended from time to time) and detailed arrangements agreed between the government and ADB.

ADB = Asian Development Bank; ERPIT system = enterprise resource planning information technology system; O&M = operations and maintenance; QCBS = quality- and cost-based selection. Source: Asian Development Bank.

III. ATTACHED TECHNICAL ASSISTANCE

27. In principle, APU will be kicked in automatically in accordance with preset parameters, but it requires appropriate operation by locomotive drivers to realize its full potential. While there is no precedent use of APU in Bangladesh, an assessment by Indian Railways, for instance,

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indicates that only 43% of potential APU operation hours are utilized due to inadequate operations by locomotive drivers. Because of their lack of confidence in this new unit, it is often observed that locomotive drivers switch off APU to avoid unexpected failures in locomotive operations. The TA will provide training to locomotive drivers to maximize the usage of APU in accordance with the supplier’s operations manual. It will include the support for Bangladesh Railway to establish the training program with the preparations of training materials based on which Bangladesh Railway will be able to train its locomotive drivers after the proposed project; keeping pace with the increase in APU-equipped locomotives in the future. In addition, as a policy direction for Bangladesh Railway’s management, the TA will recommend potential solutions to improve the overall energy efficiency of rolling stock operations.16 28. The TA is estimated to cost $500,000 to be financed on a grant basis by ACEF (footnote 1) under the CEFPF and administered by ADB. The government will provide counterpart support in the form of counterpart staff, office space, and other in-kind contributions. Bangladesh Railway will be the executing agency for the TA, which will be implemented from January 2019 to October 2019 with 22 person-months input (13 international, 9 national). An international firm shall be engaged in accordance with ADB’s Guidelines on the Use of Consultants (2013, as amended from time to time). The quality- and cost-based selection method with a quality: cost ratio of 90:10 and bio-data technical proposals will be used for this recruitment.

IV. DUE DILIGENCE

A. Technical

29. The project will finance the procurement of railway rolling stock in line with international design standards. The technical specifications of the rolling stock have been prepared in conformity with the Bangladesh Railway’s network capacity. Rolling stock supply contracts will include the preparation of operation and maintenance manuals. The detailed designs of locomotive maintenance facilities will be prepared to ensure the early improvement of maintenance facilities for the sustainable maintenance of locomotives procured under the project. B. Economic and Financial

30. Economic analysis. The economic evaluation of the project was conducted in accordance with ADB’s guidelines by comparing lifecycle costs in with- and without- project cases, using a 9% discount rate and the economic internal rate of return (EIRR) as decision criteria.17 The project is expected to deliver significant benefits through savings in fuel, maintenance costs, and travel time resulting from increased reliability and improved operational efficiency, savings in vehicle operating costs from avoided road travel, and reduction in greenhouse gas emissions. The EIRR of the project is estimated at 14.5%. Sensitivity analysis was carried out to investigate the economic viability of the project with the following adverse changes in costs and benefits: (i) capital costs increased by 10%, (ii) benefits reduced by 10%, (iii) capital costs increased by 10% and benefits reduced by 10%, (iv) fuel savings decreased by 20%, (v) travel time savings reduced by 50%, and (vi) CO2 emission reduction excluded from the benefits. In all scenarios, the EIRR of the project remains above 9%, demonstrating the project’s robustness. The most sensitive factor was a 50% reduction in travel time savings, which decreases the EIRR to 11.1%. 31. Financial analysis. The financial analysis of the project was carried out in accordance with ADB’s guidelines. 18 The project is estimated to reduce operating costs and generate

16 Attached Technical Assistance (accessible from the list of linked documents in Appendix 2). 17 ADB. 2017. Guidelines for the Economic Analysis of Projects. Manila. 18 ADB. 2005. Guidelines on the Financial Management and Analysis of Projects. Manila.

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revenues by collecting passenger and freight charges through the procurement of new, efficient locomotives and additional vans and wagons. The weighted average cost of capital of the project was estimated at 1.81%. Based on the existing system-wide costs and revenues, and on the assumption that passenger and freight tariffs would increase annually at a real rate of 1.5%, the financial internal rate of return of the project was estimated at 3.2%. Sensitivity analysis underscores the need for continuous annual adjustments of railway tariffs and for achieving the target traffic volumes with the new rolling stock. The analysis also demonstrated that incremental revenues of the project remain higher than incremental operation and maintenance costs, improving the overall operating ratio of Bangladesh Railway over the analysis period. 32. Financial sustainability. As the operating expenses of Bangladesh Railway between FY2007 and FY2016 have been consistently higher than its revenues, the government continues to provide adequate budgetary support to sustain operations and to fully finance the funding gap. In light of the systemic importance of Bangladesh Railway, the continued budgetary support is reasonably expected. The project is considered as financially sustainable. C. Governance

33. Financial management. A financial management assessment concluded that Bangladesh Railway has adequate capacity to undertake the financial management of ADB-financed projects. Bangladesh Railway has prior and ongoing experience in implementing ADB projects. It has knowledge of project financial accounting methods and ADB disbursement procedures. Its staff have participated in workshops on financial management and sharing of good practices organized by ADB. Its capacity is being strengthened by mainstreaming the use of the ERPIT system. The overall project financial management risk is moderate. 34. Procurement and anticorruption. Procurement will be carried out in accordance with ADB’s Procurement Guidelines (2015, as amended from time to time). ADB will review documents and submissions related to procurement in all major milestones prior to proceeding with the procurement process. The assessment of the procurement capacity of Bangladesh Railway has concluded that it has a reasonable capacity to undertake procurement activities under the project. A project implementation unit will be established under Bangladesh Railway and staffed by officials adequately experienced in rolling stock procurement. ADB has engaged a consultant to assist Bangladesh Railway to improve the efficiency of the bidding process. The overall procurement risk is moderate. 35. National procurement regulations have improved through the Public Procurement Act, 2006, and through the related Public Procurement Rules (2008), with subsequent amendments and the establishment of the Central Procurement Technical Unit under the Implementation Monitoring and Evaluation Division of the Ministry of Planning. In October 2012, a National Integrity Strategy (NIS) was approved and a National Integrity Advisory Committee was formed, chaired by the Prime Minister, to oversee the anticorruption activities and implement the strategy. NIS includes a road map for strengthening both the state and non-state accountability institutions to fight corruption and improve governance. Under NIS, all line ministries and key watchdog institutions have formed ethics committees and appointed focal points to implement corruption-prevention programs and actions. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government and Bangladesh Railway. The specific policy requirements and supplementary measures are described in the PAM (footnote 15).

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D. Poverty, Social, and Gender

36. The most important project beneficiaries are the train users, both passengers of all ticketed classes and freight transportation users. Although not directly targeting the poor, the project will support their mobility needs, since the railway remains an affordable, comfortable, and reliable mode of transport. Women will particularly benefit from the project as prominent railway users. Since 2014, ADB has engaged with Bangladesh Railway in proactively integrating gender equality and social inclusion elements in two ADB-financed projects.19 As part of the policy dialogue, opportunities to further engage with Bangladesh Railway on organizational aspects of gender mainstreaming will be explored, with the aim of instituting gender-related business processes and practices. E. Safeguards

37. In compliance with ADB’s Safeguard Policy Statement (2009), the project’s safeguard categories are as follows.20 38. Environment (category C). The project mainly involves the procurement of railway rolling stock that will operate on existing railway lines. The preparation of the design of the maintenance facilities will include conducting environmental assessments. This has already been included in the terms of reference of the consulting services. A review of environmental implications as required for environment category C projects has been carried out and its findings show that there will be no adverse environmental impacts during project implementation. After the completion of the project, a net benefit in CO2 emission reductions is expected from the shift of passengers and freight from road to rail and the use of more energy-efficient locomotives equipped with APU. 39. Involuntary resettlement (category C). The project mainly involves the procurement of railway rolling stock. The preparation of the design of the maintenance facilities will include conducting the due diligence of involuntary resettlement impacts. This has been included in the terms of reference of the consulting services. 40. Indigenous peoples (category C). The project mainly involves the procurement of railway rolling stock, and the preparation of the design of the maintenance facilities will include conducting due diligence of indigenous peoples impacts. This has been included in the terms of reference of the consulting services. F. Summary of Risk Assessment and Risk Management Plan

41. Significant risks and mitigating measures are summarized in Table 4 and described in detail in the risk assessment and risk management plan.21

19 South Asia Subregional Economic Cooperation Railway Connectivity: Akhaura–Laksam Double Track Project

(footnote 7) and South Asia Subregional Economic Cooperation Chittagong-Cox’s Bazar Railway Project, Phase 1 (footnote 8) are categorized as effective gender mainstreaming. The gender action plans of these projects include making the stations friendly to elderly people, women, children, and people with disabilities; promoting rail crossing safety awareness campaigns to communities along the corridor, focusing on pedestrians, drivers, parents, schoolchildren, and professional drivers; including personal safety and/or anti-sexual harassment protocol in stations; running a public, preventive awareness-raising campaign on sexually transmitted diseases and human trafficking; and taking proactive measures to support the rehabilitation of affected women.

20 ADB. Safeguard Categories. https://www.adb.org/site/safeguards/safeguard-categories. 21 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

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Table 4: Summary of Risks and Mitigating Measures Risks Mitigation Measures

Inadequate maintenance due to lack of financial sustainability

The government has consistently provided sufficient budget to cover the operational expenses of Bangladesh Railway. Railway reform is ongoing to improve Bangladesh Railway’s operational efficiency, maintenance capacity, and financial performance.

Project implementation delay Advance actions are being taken, with the objective of awarding the goods and all consulting services contracts within 1 year of loan approval. The goods will be manufactured abroad and shipped to Bangladesh for commissioning, minimizing the risk of delay during manufacturing.

Significant loss in traffic demand due to unexpected economic downturn

The government has prudent macroeconomic policies.

Non-participation of eligible international suppliers and consultants due to increased security threats in Bangladesh

The government has tightened its security measures and the security situation is improving.

Source: Asian Development Bank.

V. ASSURANCES

42. The government and Bangladesh Railway have assured ADB that implementation of the project shall conform to all applicable ADB policies, including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the PAM (footnote 15) and loan documents. 43. The government and Bangladesh Railway have agreed with ADB on certain covenants for the project, which are set forth in the draft loan agreements.

VI. RECOMMENDATION

44. I am satisfied that the proposed loans would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve

(i) the loan of $354,000,000 to the People’s Republic of Bangladesh for the Railway Rolling Stock Operations Improvement Project, from ADB’s ordinary capital resources, in regular terms, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; for a term of 25 years, including a grace period of 5 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 loan of $6,000,000 to the People’s Republic of Bangladesh for the Railway Rolling Stock Operations Improvement Project, from ADB’s ordinary capital resources, in concessional terms, with an interest charge at the rate of 2% per year during the grace period and 2% per year thereafter; for a term of 25 years, including a grace period of 5 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.

Takehiko Nakao President

30 January 2018

Appendix 1 11

DESIGN AND MONITORING FRAMEWORK Impacts the Project is Aligned with A balanced 3R (rail, river, and road)-based multimodal transport infrastructure system developed (Seventh Five-Year Plan, FY2016—FY2020)a Greenhouse gas emission in the power, transport, and industry sectors reduced (Intended Nationally-Determined Contribution)b

Results Chain

Performance Indicators with Targets

and Baselines

Data Sources and Reporting Mechanisms

Risks

Outcome Operational and energy efficiency of Bangladesh Railway improved

By 2022: a. Vehicle-kilometers per coaching vehicle-day on line increased by 10% (2016 baseline: 469 for broad gauge passenger carriages, 194 for broad gauge other coaching vehicles, 262 for meter gauge passenger carriages, 89 for meter gauge other coaching vehicles) b. Vehicle-kilometers per freight wagon-day on line increased by 10% (2016 baseline: 58.7 for broad gauge freight wagons, 10.1 for meter gauge freight wagons) c. Passenger-kilometers increased by 10% (2016 baseline: 9,167 million) d. Ton-kilometers increased by 10% (2016 baseline: 675 million) e. Operating ratio without public service obligation improved by 15% (2016 baseline: 246%) f. Fuel consumption of APU-equipped diesel locomotives reduced by 10% (2016 baseline: 350 liters per locomotive per day without APU)

a–e. Annual Information Book issued by Bangladesh Railway f. Project progress and completion reports by Bangladesh Railway

Significant loss in traffic demand due to unexpected economic downturn

Outputs

1. Modern rolling stock procured

By 2021 for all outputs: 1a. 40 broad gauge locomotives procured (2016 baseline: Not applicable) 1b. 75 meter gauge and 50 broad gauge luggage vans procured (2016 baseline: Not applicable) 1c. 400 meter gauge and 300 broad gauge bogie covered wagons procured (2016 baseline: Not applicable) 1d. 180 meter gauge and 120 broad gauge bogie open wagons procured (2016 baseline: Not applicable)

1a–d. Project progress report and completion report by Bangladesh Railway

Non-participation of eligible international suppliers and consultants due to increased security threats in Bangladesh

12 Appendix 1

2. Investment plans for maintenance facilities of locomotives and diesel electric multiple units developed

2a. Detailed designs of four maintenance facilities for locomotives and diesel electric multiple units completed. (2016 baseline: Not applicable)

2a. Development project proposal by Bangladesh Railway

3. Capacity of Bangladesh Railway officials and locomotive drivers on energy-efficient rolling stock operations improved

3a. Training program on APU operations established (2016 baseline: Not applicable) 3b. 100 Bangladesh Railway locomotive drivers trained on APU operations (2016 baseline: 0) 3c. Recommendations for further energy efficiency improvement of rolling stock operations accepted by Bangladesh Railway management (2016 baseline: Not applicable)

3a–c. Final report by the technical assistance consultant

4. ERPIT system for accrual accounting used and adequately maintained

4a. Accrual-based financial statements using the ERPIT system are disclosed annually (2016 baseline: Not applicable)

4a. Bangladesh Railway annual reports

Key Activities with Milestones 1. Modern rolling stock procured 1.1 Award all five supply contracts by August 2018 1.2 Complete procurement of new rolling stock by August 2021

2. Investment plans for maintenance facilities of locomotives and diesel electric multiple units developed 2.1 Award the consulting services contract by September 2018 2.2 Complete detailed designs by March 2020 3. Capacity of Bangladesh Railway officials and locomotive drivers on energy-efficient rolling stock operations improved 3.1 Award the technical assistance consulting services contract by December 2018 3.2 Submit recommendations on further energy efficiency improvement rolling stock operations to the management of Bangladesh Railway by June 2019 3.3 Complete training of Bangladesh Railway officials and locomotive drivers on energy-efficient rolling stock operations by October 2019 4. ERPIT system for accrual accounting is used and adequately maintained 4.1 Award the consulting services contract by June 2018 4.2 Disclose accrual-based financial statements of Bangladesh Railway for FY2019 by November 2019 Inputs ADB: $354,000,000 (OCR regular loan), $6,000,000 (OCR concessional loan) Government of Bangladesh: $93,370,000 Asian Clean Energy Fund under the Clean Energy Financing Partnership Facility: $500,000 Assumptions for Partner Financing Not applicable APU = auxiliary power unit, ERPIT = enterprise resource planning information technology. a Government of Bangladesh, Planning Commission. 2015. Seventh Five-Year Plan FY2016–FY2020. Dhaka. b Government of Bangladesh, Ministry of Environment and Forests. 2015. Intended Nationally Determined Contribution

(INDC). Dhaka. Source: Asian Development Bank.

Appendix 2 13

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=50312-003-3

1. Loan Agreement: Ordinary Operations

2. Loan Agreement: Ordinary Operations (Concessional)

3. Sector Assessment (Summary): Transport (Rail Transport [Nonurban])

4. Project Administration Manual

5. Contribution to the ADB Results Framework

6. Development Coordination

7. Financial Analysis

8. Economic Analysis

9. Country Economic Indicators

10. Summary Poverty Reduction and Social Strategy

11. Risk Assessment and Risk Management Plan

12. Attached Technical Assistance Report

Supplementary Documents

13. Updated Railway Reform Progress Report

14. Environment Review Report