Report and Recommendation of the President to the Board of Directors

Sri Lanka Project Number: 37269 November 2006

Proposed Loan and Administration of Loan Kingdom of Cambodia: Greater Mekong Subregion: Rehabilitation of the Railway in Cambodia Project

CURRENCY EQUIVALENTS (as of 29 September 2006)

Currency Unit – riel (KR)

KR1.00 = $0.000241607

$1.00 = KR4,138.95

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 P. Broch, Transport Economist, SERD Team members 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

CONTENTS Page

LOAN AND PROJECT SUMMARY ii

MAP 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 19 1. Design and Monitoring Framework 19 2. Sector Analysis 21 3. External Assistance 24 4. Outline of the Station in Poipet and Port Access in Sihanoukville 27 5. Policy Letter from the Government to the Asian Development Bank 28 6. Detailed Cost Estimates 34 7. Implementation Schedule 35 8. Procurement Plan 36 9 Terms of Reference for the Supervision Consultant 38 10. Benefit Monitoring 41 11. Summary Poverty Reduction and Social Strategy 43 12. Summary Resettlement Plan 47 13. Financial Analysis 50 14. Economic Analysis 53

SUPPLEMENTARY APPENDIX (available on request) Summary Initial Environmental Examination

LOAN AND PROJECT SUMMARY Borrower The Kingdom of Cambodia Classification 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

Environment Assessment

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.

Project Description 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.

Rationale 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

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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

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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 long-term 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 The estimated project cost is $73.0 million equivalent, including

taxes and duties of $7.4 million equivalent. Financing Plan ($ million)

Source Total %Asian Development Bank 42.0 57OPEC Fund for International Developmenta 13.0 18Government of Malaysia (grant in kind) 2.8 4Government of Cambodia 15.2 21 Total 73.0 100

aAdministered by ADB. Source: ADB estimates.

Loan Amount and Lending Terms

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 2010. Estimated Project Completion Date

31 December 2009.

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Executing Agency Ministry of Public Works and Transport. Implementation Arrangements

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.

Procurement 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.

Consulting Services 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.

Project Benefits and Beneficiaries

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 income-generating opportunities in export industries, which will become more competitive as a result of reduced transport costs.

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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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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 2.

3. 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 services1 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.. 2006. Restructuring the Railway in Cambodia: Traffic Forecast and Financial Analysis Report. Montreal, Canada. [p. 28].

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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 5.0–5.5% 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 Project4 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., 2006. Restructuring the Railway in Cambodia: Traffic Forecast and Financial Analysis

Report. Montreal, Canada. 3 ADB. 2006. Technical Assistance for the Transport Sector Strategy Study. Manila. 4 ADB. 1992. 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. 2000. 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).

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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 1969-1970. 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 2005. 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 study7), and (ii) to examine the possibilities for establishing commercially viable railway operations (the business opportunity study8). 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. 2002. Technical Assistance to the Kingdom of Cambodia for the Transport Sector Strategy Study. Manila. 7 COWI. 2004. Assessment of Modal Competitiveness and Traffic Potential of a Rehabilitated Railway in Cambodia,

Final Report. Lyngby, Denmark: COWI. 8 Canarail Consultants, Inc. 2004. Consulting Services for the Development of a Public Private Partnership Plan for

Royal Railways of Cambodia, Final Report. Montreal, Canada.

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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 railway9 and for advisory TA to restructure the railway.10

10. 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 2009. 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 cross-border 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. 2005. Technical Assistance to the Kingdom of Cambodia for GMS: Rehabilitation of the Railway in

Cambodia. Manila. 10 ADB. 2005. Technical Assistance to the Kingdom of Cambodia for Restructuring of the Railway in Cambodia.

Manila.

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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.

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(iii) 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).

(iv) 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

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Vietnamese Government’s master plan for railway infrastructure development, 11 with construction planned during 2011–2020 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 2007.

21. The Government approved the strategy and plan for restructuring developed under the restructuring TA on 30 June 2006. 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. 2002. Decision No. 06/2002QD-TTg, approval on January 7 2002, Prime Minister’s

Decision on the Master Plan on the Development of Vietnamese Railway Transport Sector until 2020.

8

obligation shall be provided and compensated. The railway operator will pay a concession fee to the Government for use of the railway’s infrastructure.

(iii) 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.

(iv) 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 2007. 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

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 Amounta

($ million) A. Base Costb

1. Civil Works 52.9 2. Equipmentc 2.8 3. Land Acquisition, Resettlement, and Social Mitigation 3.8 4. Restructuring Costs 0.7 5. Consulting Services 3.4

Subtotal (A) 63.6 B. Contingenciesd 7.9 C. Financing Charges during Implementatione 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.

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Table 2: Project Financing Plan

Source Total

($ million) Percentage of Total

Project Costs Asian Development Bank OPEC Fund for International Development

(administered by the Asian Development Bank) Government of Malaysia (grant in kind) Government of Cambodia Total

42.0

13.0 2.8

15.2 73.0

57

18 4

21 100

Source: Asian Development Bank estimates.

F. Implementation Arrangements

1. 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 high-level 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 2009. 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.

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Project can be completed in accordance with the implementation schedule. The implementation schedule is in Appendix 7.

3. 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 8.

4. 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 9.

5. Anticorruption Policy

33. The Government has agreed that relevant provisions of ADB’s Anticorruption Policy14 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. 1998. Anticorruption Policy. Manila.

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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.

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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 households15 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.

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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 operators16 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 13.

16 Bamboo railway services are provided by means of small, motorized trolleys constructed and operated by small-

scale 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.

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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 2006. 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

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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

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

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.

Haruhiko Kuroda President 20 November 2006

Appendix 1 19

DESIGN AND MONITORING FRAMEWORK

Design Summary

Performance Targets/Indicators

Data Sources/Reporting

Mechanisms Assumptions

and Risks 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.

Economic growth and socioeconomic development Reduced incidence of poverty

Review of economic data in the project area, including gross domestic product, per capita income, and incidence of poverty

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.

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.

Satisfactory restructuring of the railway subsector that facilitates efficient freight transport services completed in the first quarter of 2007. The Government’s coverage of the railway’s operating deficit is eliminated in 2007. The railway captures 80% of the freight market for bulk products between the capital and Sihanoukville and Thailand by 2012. 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 2012.

Railway operator’s physical and financial performance results Road traffic surveys Railway traffic statistics Government accounts

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.

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

Civil works are completed in 2009. 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.

Project reports, railway accounts, and user surveys Reports by the restructuring technical assistance consultants Reports of project supervision consultants Project completion report

Assumption • The railway is restructured

by the end of the first quarter of 2007.

• 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.

20 Appendix 1

Design Summary

Performance Targets/Indicators

Data Sources/Reporting

Mechanisms Assumptions

and Risks Phnom Penh. • The Government of

Thailand does not reestablish the rail connection on time.

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 2009.

3.1 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).

Inputs ADB OFID Government of Malaysia (in kind) Government of Cambodia

$ million 42.0 13.0

2.8

15.2

ADB = Asian Development Bank, OFID = OPEC Fund for International Development.

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 2007.

2. 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.1

4. 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.2

5. 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. 2002. Strengthening the Maintenance Capacity Planning and Maintenance Management Capabilities at the Ministry of Public Works and Transport in Cambodia. Phnom Penh. (TA 3257-CAM, approved in July 2002).

2 ADB. 2004. Technical Assistance to the Kingdom of Cambodia for Enhancing the Resettlement Legal Framework and Institutional Capacity. Manila (TA 4490 CAM).

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 2002. In terms of transport sector development and operation, the draft strategy is likely to emphasize the following objectives and goals:

(i) 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.

(ii) 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.

(iii) 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

Appendix 2 23

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.

(iv) 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.

(v) 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.

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

Start Year

Com-pletion

Year Value

($ million) Road Rehabilitation NR 5 Thailand 1992 1993 6.4 Emergency Repair NR 5 UNDP 1992 1993 0.4 Bridge Reconstruction NRs 5, 6 AusAid 1992 1996 9.0

1199 Road Rehabilitationa NRs 1, 2, 3, 5, 6, 11 ADB 1993 1997 67.7 Road Rehabilitation Various Sida 1993 1997 5.0 Road Reconstruction NR 4 USAID 1994 1996 30.6 Road Reconstruction NRs 6, 7 Japan 1994 1999 109.0 Ferry Rehabilitation NRs 1, 6, 7 Danida 1995 1999 2.5

1503 Airport Improvement Siem Reap ADB 1997 2003 15.0 Bridge Construction NR 7 Japan 1998 2001 53.2

1659 Road Improvement NR 1 ADB 1999 2003 50.51824 Emergency Flood Repaira NRs 1, 2, 5, 6, 7, 11,

21, 41 ADB 2000 2002 65.0

1697 Road Rehabilitation NRs 5, 6, 7 ADB 2000 2003 74.8 Read Improvement NR 6 Japan 2001 2002 10.4 Bridge Reconstruction NR 6 Japan 2001 2002 11.3 Road Improvement NR 7 Japan 2001 2003 15.4 Port Modernization Sihanoukville Japan 2001 2007 — Emergency Flood Repaira NR 11 ADB 2002 2003 14.0 Road Rehabilitation NR 51 Japan 2002 2003 5.0 Road Rehabilitation NR 2 Japan 2002 2003 10.0 Emergency Flood Repaira Various World

Bank 2002 2003 50.0

Road Reconstruction NR 48 Thailand 2002 2004 7.6 Road Rehabilitation NR 3, 6 World

Bank 2002 2004 45.0

Road Rehabilitation NR 51 World Bank

2002 2004 5.0

Road Improvement NR 1 Japan 2003 2005 31.2 Road Reconstruction NR 48 Thailand 2006 2008 —

1945 Road Rehabilitation NRs 5, 6, 56, 68 ADB 2006 2008 60.0 Bridge Construction NR 1 Japan 2007 2009 — Road Maintenance NRs 33, 56, 68, 72 ADB 2008 2011 —

— = 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.

Appendix 3 25

Table A3.2: Asian Development Bank Technical Assistance for the Transport Sector in Cambodia

Technical Assistance No. Title

Year Approved

Amount ($)

1866/1996 Transport Rehabilitation Study (Financed by United Nations Development Programme and Swedish International Development Cooperation Agency)

1993 1,319,400

2059 Rural Infrastructure Improvement 1994 98,000 2197 Airports Improvement Project 1994 500,000 2406 Strengthening of the Ministry of Rural Development 1995 1,500,000 2416 Developing a Planning Capability in the Ministry of Public

Works and Transport 1995 800,000

2722 Transport Network Improvement 1996 600,000 2706 Siem Reap Airport Project 1996 15,000,000 3164 Project Preparation and Implementation Assistance to the

Ministry of Public Works and Transport 1999 150,000

3257 Strengthening the Maintenance Planning and Management Capabilities at the Ministry of Public Works and Transport

1999 375,000

3398 Primary Roads Restoration Project (Australia) 1999 — 3414 Capacity Building for Public–Private Partnerships in Transport 2000 150,000 3651 Transport Sector Strategy 2001 850,000 3852 Economic Analysis of the Cambodia Road Improvement

Project 2002 150,000

3854 Environmental Assessment for the Cambodia Road Improvement Project

2002 60,000

3855 Resettlement Study and Social Impact Assessment for the Cambodia Road Improvement Project

2002 150,000

3868 Engineering Design Update for the Greater Mekong Subregion: Cambodia Road Improvement Project

2002 400,000

9048 Mainstreaming Labor-Based Maintenance in the National Road Network (Financed by Japan Fund for Poverty Reduction)

2004 2,000,000

4645 Restructuring of the Railway in Cambodia (France) 2005 1,500,000 6251 Rehabilitation of the Railway in Cambodia (Financed by Japan

Special Fund) 2005 650,000

4691 Preparing the Transport Infrastructure Development and Maintenance Project (Financed by Japan Special Fund)

2005 1,000,000

Source: Asian Development Bank.

26 Appendix 4

Appendix 4 27

OUTLINE OF THE STATION IN POIPET AND PORT ACCESS IN SIHANOUKVILLE

28 Appendix 5

POLICY LETTER FROM THE GOVERNMENT TO THE ASIAN DEVELOPMENT BANK

Appendix 5 29

30 Appendix 5

Appendix 5 31

32 Appendix 5

Appendix 6 33

DETAILED COST ESTIMATES

Table A6.1: Detailed Cost Estimates by Expenditure Category

Item Total Cost

Percentage of

Total Project Cost A. Investment Costsa 1. Civil Works 52.92b 72.5 2 Equipment 2.76c 3.8 3. Land Acquisition, Resettlement, and Social Mitigation 3.80 5.2 4. Restructuring Costs 0.68 0.9 5. Consultants for Supervision and Administration 3.43 4.7 Subtotal (A) 63.59 87.1 B. Contingencies 1. Physicald 6.36 8.7 2. Pricee 1.59 2.2 Subtotal (B) 7.95 10.9 C. Interest during Implementationf 1.46 2.0 Total Project Cost (A + B + C) 73.00 100.0 ADB = Asian Development Bank, OFID = OPEC Fund for International Development. a In mid-2006 prices. b Includes taxes and duties of $7.43 million, inclusive of customs duty (25%) and value-added tax (10%). c Rails committed by the Government of Malaysia as a grant. These rails will be transported free of charge to

the Thai–Cambodia border. Transport costs from the border have been included in the cost estimates. d Computed at 10% of base costs. e Computed at international cost escalation of 2.5% of base costs. f Includes interest and service charges of Asian Development Bank and OPEC Fund for International

Development. Source: Asian Development Bank estimates.

34 Appendix 6

Table A6.2: Detailed Cost Estimates by Financier ($ million)

ADBa OFID Others Government

Item

Total Cost Amount

% of Cost b Amount

% of Cost Amount

% of Cost Amount

% of Cost

A. Investment Costs 1 Civil Works a. Southern Line 25.24 18.93 75.0 6.31 25.0 0.0 0.0 0.0 0.0 b. Northern Line 20.82 15.61 75.0 5.20 25.0 0.0 0.0 0.0 0.0 2 Equipmentc 2.76 0.0 0.0 0.0 0.0 2.76 100.0 0.0 0.0

3 Land Acquisition, Resettlement, and Social Mitigation Costs

3.80 0.0 0.0 0.0 0.0 0.0 0.0 3.80 100.0

4 Restructuring Costs 0.68 0.0 0.0 0.0 0.0 0.0 0.0 0.68 100.0 5 Consultants for Supervision 2.64 2.64 100.0 0.0 0.0 0.0 0.0 0.0 0.0 6 Administration Costs 0.23 0.0 0.0 0.0 0.0 0.0 0.0 0.23 100.0 7 Taxes and Duties 7.43 0.0 0.0 0.0 0.0 0.0 0.0 7.43 100.0 Subtotal (A)c 63.59 37.18 58.5 11.51 18.1 2.76 4.3 12.14 19.1B. Contingencies d 7.95 3.36 42.3 1.49 18.7 0.0 0.0 3.10 39.0C. Financing Charges during Implementation

1.46

1.46

100.0

0.0

0.0

0.0

0.0

0.0

0.0 Total Project Costs (A + B + C) 73.00 42.00 57.5 13.00 17.8 2.76 3.8 15.24 20.9ADB = Asian Development Bank, OFID = OPEC Fund for International Development. a Amount of ADB loan proceeds allocated to the cost category. b The amounts disbursed by ADB for eligible expenditures under a cost category will be subject to the ceiling set by the allocation of loan proceeds for such a

cost category. c Includes $2.76 million worth of rails committed by the Government of Malaysia as a grant. These rails will be transported free of charge to the Thai–

Cambodia border. Transport costs from the border have been included in the cost estimates for civil works on the Northern Line. d Physical contingencies are computed at 10% of base costs and prices contingencies are computed at international cost escalation of 2.5% of base costs. Source: Asian Development Bank estimates.

Appendix 7

35

IMPLEMENTATION SCHEDULE

Appendix 8

36

PROCUREMENT PLAN

Table A8.1: Procurement Plan and Contract Packages

Project Information Country Kingdom of Cambodia Name of Borrower Government of Cambodia Project Name Rehabilitation of the Railway in Cambodia Project Loan or Technical Assistance Reference Project Number: REG 37269-01 Date of Effectiveness Target: 31 January 2007 Amount $55 million Of which committed $55 million Executing Agency Ministry of Public Works and Transport Approval Date of Original Procurement Plan Approval of Most Recent Procurement Plan Publication for Local Advertisements Period Covered by This Plan

Table A8.2: Procurement Thresholds, Goods and Related Services, Works, and Supply and Install

Procurement Methoda Use International Competitive Bidding Works More than $1 million National Competitive Bidding Works Less than $1 million Shopping Less than $100,000 a For international competitive bidding, the Asian Development Bank (ADB) will conduct prior review of all

procurement documents, bid evaluation reports, and contract awards. For national competitive bidding, the first draft English language version of the procurement documents should be submitted for ADB review and approval regardless of the estimated contract amount. ADB-approved national competitive bidding procurement documents should be used as a model for all national competitive bidding procurement financed by ADB and will not be subject to further review unless required under special arrangements. For national competitive bidding, ADB will review the bid evaluation reports and contract awards on a post facto basis.

Table A8.3: Procurement Thresholds and Consultant Services

Procurement Method Use Quality- and Cost-Based Selection More than $200,000 Consultants’ Qualifications Selection Less than $200,000 Least-Cost Selection Less than $100,000

Appendix 8 37

Table A8.4: List of Contract Packages in Excess of $100,000, Goods, Works,

and Consulting Services

Reference Contract

Description

Estimated Cost

($ million) Procurement Method

Expected Date of

Advertisements

Prior Review

Comments Lot 1 Civil works,

Southern Line 30.00 International

competitive bidding with postqualification

Yes Financed by ADB, OFID, and the Government

Lot 2 Civil works, Northern Linea

29.00 International competitive bidding with postqualification

Yes Financed by ADB, OFID, and the Government

CS 1 Consulting services 3.25 Quality- and cost-based selection with simplified technical proposal

Yes Financed by ADB

ADB = Asian Development Bank, OFID = OPEC Fund for International Development. a Excluding the cost of rails provided by the Government of Malaysia as a grant.

Appendix 9

38

TERMS OF REFERENCE FOR THE SUPERVISION CONSULTANT A Background and Objective 1. At the request of the Government, the Asian Development Bank (ADB) has agreed to provide assistance for the rehabilitation and reconstruction of 652 kilometers of railway lines under a project loan that would restore train operation capability at speeds of 50 kilometers per hour. For overall project implementation supervision, the Government wishes to engage a suitably qualified and experienced firm of international consultants with extensive experience in implementing all aspects of railway projects. The consultant will be recruited in accordance with ADB’s Guidelines on the Use of Consultants.

2. The objective of the consulting services is to help implement the Project on a design and build basis, and supervise and monitor compliance with environmental, resettlement, and other project requirements.

B Scope of Services 3. The consultant will provide the following services:

(i) Assist with procurement. The consultant will assist with procurement in accordance with ADB’s Procurement Guidelines (2006) using ADB’s standard procurement documents or other documents satisfactory to ADB. As appropriate, all procurement documents should include the special conditions mentioned in this terms of reference.

(ii) Review the preliminary project design. The design has been be done under the project preparatory technical assistance and includes outline design criteria, technical specifications, and standards and codes of practice for the construction works and materials for approval by the Ministry of Public Works and Transport (MPWT)

(iii) Manage the design, build civil works contracts, and supervise construction. The consultant will be responsible for managing and supervising all aspects of the construction contracts and for facilitating satisfactory completion of the Project, including systematic monitoring of contractors’ progress and of the quality of work. The consultant will also help the MPWT review and examine claims from contractors in relation to time extensions for completion, additional payments, and other matters that may arise from time to time during contract implementation and administer the contracts under ADB conditions of contract for design-build projects, including release of payments and management of performance securities and contractual queries. The duties and responsibilities of the consultant will include the following: (a) Scrutinize and approve contractors’ detailed designs and drawings of

structures and ensure their adequacy and conformance with the design standards approved by the MPWT; prepare bills of quantities based on the design drawings, the MPWT’s technical specifications, and site investigations; and review and update the project cost estimates accordingly.

(b) Certify the quantity and quality of work to enable payments to be made to various agencies engaged in project implementation and help the MPWT with tests, trials, and commissioning.

(c) Establish methods for systematic quality assurance of the contractors’

Appendix 9 39

work that encompasses review and approval of all technical proposals, as well as of all financial, scheduling, and administrative submissions by the contractors.

(d) Perform periodic supervision of site works, encompassing checking construction and installation works to ensure that methods and technologies comply with the approved design and with the MPWT’s approved technical standards. Check and approve the contractors’ work progress on site, manage claims procedures, and prepare payment claims.

(e) Record all aspects of the work covered by the Project, which will be open to inspection by the MPWT. The MPWT will be responsible for all technical and financial matters of the Project and the consultant will obtain the MPWT’s approval in relation to such matters and any changes in the Project that will affect the time and costs of construction.

(f) Ensure financial control over all elements of the Project in order to ensure completion of all works within the Project’s budget. Any significant variations in costs that could result in cost overruns or savings should be brought to the attention of the MPWT in a timely manner;

(g) Ensure opening of the completed sections of the railway after completion for normal train operation following certification of the required operational capability through trials and testing and approval by the MPWT.

(iv) Assist with implementation of mitigation and project monitoring. The consultant will help the Government and the MPWT implement the assurances and requirements agreed to between the Government and ADB in the Loan and Project Agreements, namely: (a) ensuring timely implementation of the mitigation plan for railway staff in accordance with the restructuring plan approved by the Government on 30 June 2006; (b) assisting the MPWT to update the resettlement plan after the contractors’ detailed design, based on a detailed measurement and survey of losses; (c) assisting the MPWT to ensure that women, especially those who belong to female-headed households and ethnic minority groups, participate in all agreed activities to an extent satisfactory to ADB; (d) assisting the MPWT to effectively implement the measures proposed under the Project to mitigate the impacts on bamboo rail transport operators; (e) helping the MPWT to mitigate the Project’s environmental impacts by implementing proper engineering and environmental management measures; and (f) establishing the project performance monitoring and evaluation system, including baseline and target values.

(v) Provide technology transfer and training. The consultant will provide associated MPWT staff with on-the-job training in procedures for engaging consultants, international procurement, project management, and preparation and submission to ADB of a project completion report in accordance with the requirements set forth in the Loan and Project Agreements.

(vi) Report regularly to the MPWT and ADB. The consultant will make satisfactory arrangements for reporting the progress of project implementation by submitting the reports listed in the detailed terms of reference, including an inception report, monthly progress reports, quarterly progress reports, project performance monitoring reports, a completion report, and a final report.

Appendix 9

40

C. Special Conditions 4. The consultant will ensure that appropriate conditions along the following lines are included in the special conditions of contract:

(i) The consultant will ensure coordination between the railway operator and the civil works contractors to enable necessary adjustments in train timetables to facilitate timely and satisfactory completion of the works while trains are running.

(ii) The consultant will ensure that all civil works contracts under the Project incorporate provisions and budgets such that contractors comply with the Government’s and with ADB’s environmental requirements, do not employ child labor and provide safe working conditions for male and female workers, do not provide different wages or benefits to male and female workers doing work of equal value, implement the provisions set forth in the gender action plan, and carry out training programs and awareness campaigns in relation to HIV/AIDS and human trafficking.

(iii) The Government will encourage the contractors to set up facilities in Cambodia for the manufacture of concrete sleepers for the Project within the context of existing laws and regulations applicable to similar activities.

(iv) The consultant will ensure that where involuntary resettlement impacts cannot be avoided, civil works contractors will not be issued a notice of possession of pertinent sections of the railway until resettlement has been satisfactorily completed in all respects.

(v) The consultant will ensure that measures to mitigate flood damage to tracks and bridges along parts of the Southern and Northern lines that occurred during 2006 are implemented within 3 months of the mobilization of civil works contractors to restore railway operations for the transportation of materials and equipment required for the Project.

D. Expertise 5. Approximately 104 person-months of international consultants and 175 person-months of national consultants will be needed to complete the Project. All project time is expected to be spent in the project country. The consultants will have expertise in project management, international procurement and contract administration, railway engineering and civil construction engineering, resettlement, social and environment management administration and monitoring, and project performance monitoring. The following team composition is envisaged:

(i) railway engineer and team leader; (ii) railway track engineer; (iii) civil construction engineer with expertise in bridges, structures, and soils; (iv) resettlement and restructuring impact mitigation specialist; (v) environment specialist; and (vi) performance monitoring specialist.

Appendix 10 41

BENEFIT MONITORING

A. Monitoring Framework 1. Rehabilitation and restructuring of the railway would immediately benefit transport users by providing improved railway transport services, new transport services such as multimodal transport, and new transport routes. In the medium term, the increased modal diversity would (i) provide competition to existing road and sea transport that would help increase their efficiency and reduce fares; (ii) reduce wear and tear on the highways, especially national roads 3, 4, and 5, which run roughly parallel to the railway; and (iii) reduce the incidence of road accidents. In the long term, reduced costs of transport would improve overall economic efficiency and reduce the cost of living, which would promote increased economic activity, leading to additional income and jobs. The monitoring framework and monitoring indicators to measure these benefits are in Table A10.1.

Table A10.1: Monitoring Framework: Indicators and Mechanisms

Timing of Benefits or Outcomes Monitoring Indicators Monitoring Mechanism Immediate

Improved railway transport Railway passenger and freight traffic Effective average train speed

New railway transport services Railway container traffic New railway transport routes Railway traffic to Thailand

Railway statistics

Short Term (1–3 years)

Reduced transport costs

Road transport charges on NRs 3, 4, and 5 Port charges in Sihanoukville Sea transport charges between Bangkok and Cambodia

Shipper surveys Passenger surveys Published port tariff for Sihanoukville

Reduced road maintenance requirements

Share of heavy traffic on NRs 3, 4, and 5 MPWT traffic counts

Improved road safety Share of traffic casualties attributed to NRs 3, 4, and 5 MPWT accident database

Long Term (more than 3 years)

Improved economic efficiency Producer prices as a share of the value of exports

Reduced cost of living Producer or import prices (including Cambodian taxes) as a share of domestic market prices

Producer surveys Price surveys Trade and customs statistics

MPWT = Ministry of Public Works and Transport, NR = national road.

2. Monitoring of long-term benefits will focus on products moved by the railway, which are expected to include fuel, cement, and containerized cargoes (especially textiles and apparel). Monitoring will be implemented by the Ministry of Public Works and Transport (MPWT). To the extent available, baseline values for the indicators are in Table A10.2, and will be further updated by the MPWT, where necessary. The MPWT will measure the indicators for project evaluation at project inception, completion, and annually for 5 years after completion. The MPWT will hire an independent, qualified institute for surveys, analysis, and reporting. The preliminary estimate for the cost of monitoring is $70,000. Reports summarizing the key findings of monitoring will be submitted to the Asian Development Bank.

Appendix 10

42

Table A10.2: Baseline Data for Benefit Monitoring

Indicator Measure and Unit of Measurement Value

Railway passenger and freight traffic Passenger trips per year (’000s) Freight carried per year (million tons)

48 269

Effective average train speed Average trip speed (km/hour) 17 Railway container traffic Number of TEU carried per year (’000s) 0

Railway traffic to Thailand Passenger trips per year (’000) Freight carried per year (million tons)

0 0

Road transport charges on NR 3, 4 and 5

Phnom Penh–Sihanoukville (about 250 km): • Bus (KR per passenger-km) • Minibus (KR per passenger-km) • Truck (KR per ton-km) Phnom Penh–Battambang (260 km): • Bus (KR per passenger-km) • Minibus (KR per passenger-km) • Truck (KR per ton-km)

64 47 n/a

50 33

110

Port cargo charges in Sihanoukville (excluding the cost of sea transport)

Containers ($ per TEU) Cement ($ per ton) Refined fuel ($ per ton)

— — —

Sea transport charges between Bangkok and Cambodia

Containers ($ per TEU) Cement ($ per ton) Refined fuel ($ per tons

600 — —

Share of heavy trucks on NRs 3, 4, and 5 National Road 3 NR 4 NR 5

— — 6.1%

Share of traffic casualties attributed to NRs 3, 4, and 5

NR 3 NR 4 NR 5

— — —

Producer prices as a share of the value of exports Apparel —

Producer or import prices including Cambodian taxes) as a share of domestic market prices

Cement Diesel Textiles

— — —

— = not available, NR = national road, TEU = twenty-foot equivalent units. Source: Asian Development Bank estimates.

Appendix 11 43

SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY A. Linkages to the Country Poverty Analysis Is the sector identified as a national priority in country poverty analysis?

Yes

No

Is the sector identified as a national priority in country poverty partnership agreement?

Yes

No

Contribution of the sector or subsector to reduce poverty in Cambodia: The total population of Cambodia is approximately 13 million, of whom about one third live in poverty. Much of the country’s infrastructure was destroyed during decades of civil war and conflict, and its socioeconomic indicators are relatively low. Poverty is overwhelmingly rural: 40–45% of people in rural areas are poor, compared with 10–15% in Phnom Penh. The incidence of poverty has declined only modestly in recent years for a number of reasons, including a shortage of sources of growth and exclusion of the poor from the mainstream economy. Improving Cambodia’s basic infrastructure is critical for the country’s economic development, and Cambodia has started a process of infrastructure rehabilitation with support from its development partners. The Government-owned railway is in poor physical condition because of war damage and decades of insufficient maintenance and investment and rail traffic is declining because of the poor condition of the tracks. As a result, the railway is generating operational deficits. The purpose of the Project is to restore efficient rail traffic by rehabilitating the existing railway line, reestablishing Cambodia’s rail connection with Thailand by replacing a section to the border that was destroyed, and restructuring the railway subsector. Rehabilitation of the railway will foster efficient rail freight service. It is expected that the proposed Project will facilitate economic growth by providing a cost-effective and efficient means of transporting goods, as an efficient transport system would increase trade and employment opportunities. The Project will also facilitate subregional trade and economic growth in Cambodia and Thailand. B. Poverty Analysis Targeting Classification: General Intervention

Following the Asian Development Bank’s enhanced Poverty Reduction Strategy (1999), projects classified as general interventions no longer require project-level poverty assessments. The resettlement plan includes compensation, resettlement, and livelihood restoration for households affected by land acquisition and displacement to restore and improve their incomes and living standards. Poverty in the vicinity of the project could give rise to human trafficking, and an established network for human trafficking is known to exist in Poipet and on the Thai side of the border. Migrants into Poipet come primarily from Battambang, Banteay, Kampong Tom, Kandal, Meanchey, Prey Veng, and Siem Reap, and those who cannot find jobs become easy prey for the human traffickers. Thus the Project will include an awareness program on human trafficking and safe migration. The social assessment indicates that the community in the Poipet area has identified drug use as a problem. An HIV/AIDS awareness campaign will address the potential risk of infection during the construction phase for both workers and communities. C. Participation Process Is there a stakeholder analysis? Yes No

During preparation of the proposed Project, meetings were held with various stakeholders, government officials, and member of affected communities. Rapid social appraisal was conducted with affected communities to discuss Project-related resettlement issues. In-depth stakeholder analysis will be conducted with members of affected households, business owners, and government officials during implementation of the resettlement plan. The stakeholders’ workshop will cover issues related to resettlement site selection, compensation, relocation, land acquisition, etc.

Appendix 11

44

Is there a participation strategy? Yes No The resettlement plan will include a number of steps to ensure involvement by affected households, business owners, and government officials in resettlement committees at the district and commune levels. The consultation process for resettlement site selection and land acquisition will include a participatory strategy for active participation by affected households and business owners. Capacity-building programs for affected households will raise their awareness of resettlement issues and compensation so that those affected can negotiate fair compensation for losses of property, assets, businesses, etc. D. Gender Development Strategy to maximize impacts on women: The Project’s gender analysis includes households affected by land acquisition, displacement, loss of business, and railway subsector restructuring. The acquisition of land in Poipet on the Cambodia–Thai border to reconstruct destroyed track will require the displacement of a large number of squatters living on railway land. In addition, land acquisition will be required for the Southern and Northern lines. Squatter households living on railway land, including women, are engaged in various informal sector economic activities. The men are mainly engaged in push cart pulling to transport goods and in providing motorbike transportation for people traveling across the border. Men also work as a wage laborers. The women are engaged in petty trading, running small restaurants and other small enterprises (such as beauty salons, grocery shops, and tailoring establishments), and piece rate work for garment factories and provide a significant portion of their households’ income. As a result, in 90% of squatter households, women control the households’ incomes and expenditures. Half of squatter households belong to poor and vulnerable groups, and their relocation will have a significant impact on their livelihood activities. Poor female-headed households account for 22.3% of affected households. In addition, the restructuring of the railway will affect the job security of the railway’s employees. As part of the restructuring, women railways employees might lose their jobs. Communities in the project sites could face an increased risk of HIV/AIDS because of the influx of construction workers. The trafficking of girls across the border is a recognized issue in Poipet. An HIV/AIDS and human trafficking awareness program for the affected communities will be developed and implemented during project implementation. Construction contracts will include community-based prevention programs for their workers. In the squatter settlements and in the affected communes and villages, separate consultation workshops on resettlement planning related to resettlement sites, compensation, and improvement of livelihoods will be conducted for men and women from affected households. These workshops will emphasize participation by women from female-headed households and ethnic minority groups (Vietnamese and Chinese ethnic groups each account for 0.4% of those affected) to identify specific issues related to women’s income-earning activities that will be affected by relocation and land acquisition. Both men and women from affected households will participate in discussions of the detailed measurement survey of losses, the district resettlement working groups will include district women officials, and the commune-level resettlement committees will include women representatives from affected households. During the inception phase of the Project, a capacity-building program on resettlement activities will be designed for women and men from affected households. Emphasis will be given to including trainees from female-headed households and ethnic minority households. The training will include commune- and district-level women officials and district and commune resettlement committee members. The objective of the training is to provide detailed information about resettlement activities, such as proposed sites, entitlements, livelihood strategies for income restoration or improvement, grievance procedures, etc. The relocation of squatters in the resettlement sites will take into account women’s work in the informal

Appendix 11 45

sector. The compensation plan and livelihood restoration or improvement strategies will ensure that women can maintain their current income-earning activities and access to markets. In relation to relocation, compensation, and livelihood improvement activities, special consideration will be given to poor female-headed households and ethnic minority households. The resettlement plan will include joint registration of land rights in the names of both husbands and wives for replacement land. Women railway staff affected by the railway restructuring will be included in counseling and retraining programs, vocational training, and so on as necessary for securing employment opportunities. Specific attention will be paid to complaints and grievances by women, ethnic minorities, and poor households. The HIV/AIDS and human trafficking awareness program will include women leaders and youth from the affected households from squatter settlements, district women officials, and women health workers. The program will be coordinated with established nongovernment organization programs in the Poipet and Northern and Southern line areas of the Project. In line with the Labor Code (1997), all employment for the Project will conform to Government commitments to gender equity, including the provision of equal pay and benefits for work of equal value. In addition, no child labor or trafficked labor will be used. Monitoring indicators disaggregated by gender and ethnic group will be developed to monitor resettlement activities. Gender sensitization training will be provided for relevant staff from the executing agency, district resettlement working groups, and district women officials and commune leaders. A social development and gender specialist (national consultant) will be recruited for 8 months to prepare a gender action plan to operationalize the gender strategy. The gender specialist will coordinate with the resettlement specialist to prepare the action plan. Has an output been prepared? Yes

No

Appendix 11

46

E. Social Safeguards and Other Social Risks

Item

Significant/ Not Significant/

None Strategy to Address Issues Plan Required

Resettlement

Significant

Not significant

None

A full resettlement plan has been prepared A summary resettlement plan is in Appendix 12.

Full

Short

None Affordability

Significant

Not significant

None

Yes

No

Labor

Significant

Not significant

None

In the construction campsites, labor standards will be maintained and basic facilities will be provided. Employment will be provided for poor households affected by the Project. No trafficked labor or child labor will be used. Restructuring of the railway subsector will affect the job security of railway employees and a social protection program will address their deployment retraining.

Yes

No

Indigenous Peoples

Significant

Not significant

None

The majority of affected households are Khmer. A small number of households are ethnic minority (0.4% Vietnamese and 0.4% Chinese) The ethnic Vietnamese and Chinese live with the Khmer in mixed communities and are integrated in terms of employment, housing, schooling, etc. The social assessment indicates that the Project is not expected to have any specific impact on ethnic minorities that differs from the impact on Khmers. Therefore, the Asian Development Bank’s Policy on Indigenous Peoples (1998) is not triggered and an indigenous peoples development plan is not called for. However, specific activities for ethnic minorities are included in the resettlement plan and the gender strategy.

Yes

No

Other Risks and/or Vulnerabilities

Significant

Not significant

None

The displacement of squatters could increase impoverishment if resettlement activities are delayed and/or not implemented effectively. Vested interested groups in the squatter settlement could affect effective implementation of the compensation plan. Ongoing monitoring of resettlement activities for the squatters will be emphasized during implementation. The capacity building program and resettlement awareness-raising workshop would minimize some of the risks.

Yes

No

Appendix 12 47

SUMMARY RESETTLEMENT PLAN

A. Scope of Land Acquisition and Resettlement 1. To minimize the impacts of resettlement, the corridor of impact1 established for the rehabilitation of the entire railway line is 3.5 meters on either side of the track centerline.2 In addition, the area required for the station in Poipet has been reduced from 6 hectares to 3 hectares. 2. About 2,629 people will be affected by the railway rehabilitation as follows: (i) 965 households whose structures will be affected, of which 822 households will be severely affected and 143 households will be marginally affected and all of whom may be physically displaced because of impacts on their houses and/or shops; (ii) 1,660 households who will experience minor impacts from the loss of secondary structures (wells, fences, etc.) and trees, and whose main place of residence or business will not be affected; (iii) 3 privately-owned permanent businesses structures and one public owned building will be disrupted because of impacts on structures and may require relocation.

3. In addition, bamboo rail transport operators will lose their source of livelihood once the railway lines have been rehabilitated. Currently 189 operators are operating along the entire line.

B. Policy Framework, Principles, and Entitlements 4. The legal and policy framework for compensation and resettlement under the Project is defined by the relevant laws and regulations of the Government of Cambodia and the Asian Development Bank’s (ADB’s) policies on Involuntary Resettlement (1995), Indigenous Peoples (1998), Gender and Development (2006), Accountability Mechanism (2003), and Public Communications (2005). In the case of discrepancies between the Government’s laws, regulations, and procedures and ADB's policies and requirements, ADB's policies and requirements will prevail.

5. As none of the affected persons identified within the railway corridor of impact and living inside railway stations have legal documents to indicate rights to occupancy, the Government views them as illegal settlers or squatters, and they cannot be compensated for the land they are currently occupying. However, their lack of legal status does not bar them from receiving project entitlements, and the Project will ensure that all affected persons, irrespective of their tenure status, will be assisted to restore or improve their preproject socioeconomic conditions.

1. Income Restoration and Resettlement Strategy

6. The relocation of people away from the railway would affect their incomes if they have to move away from their current sources of livelihood, thus relocation will be minimized. Affected persons that have to relocate will participate in identifying and selecting options with Government assistance (i) to reorganize themselves within the remaining right-of-way so that they can continue their businesses or employment for at least the next 5 years; (ii) to move outside the right-of-way to either group or individual relocation sites close to (5 kilometers or less) their current locations so that their incomes will not be affected; or (iii) to receive cash

1 This is the area within the right-of-way that will be permanently cleared for the Project. 2 Government Order No. 6, dated 27 September 1999, sets the right-of-way for railway lines to 20 meters each side

of the centerline of the track in densely populated areas, 30 meters each side of the centerline outside cities, and 100 meters each side of the centerline for mountainous areas where there are rock falls or tall forests.

Appendix 12

48

assistance for the loss of land use and make their own arrangements for relocation. Community meetings held in June 2006 indicate that a number of affected persons are open to being relocated off-site for an opportunity to own land of their own. Possible suitable replacement sites (privately-owned open land) were identified during the planning process. These sites will be further explored and finalized during project planning in consultation with the affected persons. Bamboo rail transport operators will have to give up their operations upon the commencement of railway civil works, but will be helped to develop other means of transport for making comparable incomes. Thus income levels will generally be maintained or restored.

2. Participation, Disclosure, and Grievance Redress

7. Consultations, public meetings, and village discussions with affected persons and local officials were carried out during the resettlement planning process. These activities will continue during updating of the Resettlement Plan and implementation and will follow the Project’s participatory approach. A public information booklet has been finalized and translated into Khmer and will be distributed to affected persons and posted in commune offices before the ADB Staff Review Committee meeting. The Ministry of Public Works and Transport (MPWT) will be responsible for disclosing the draft and final resettlement plans to the affected persons. ADB will include the draft and final resettlement plans on its resettlement web site. A grievance mechanism has been designed to ensure that affected persons’ concerns and grievances are addressed and resolved in a timely and satisfactory manner. Affected persons will be made fully aware of their rights verbally and in writing during consultation. ADB’s Accountability Mechanism (2003) Policy field guide has been translated into Khmer and will be distributed to affected persons together with the public information booklet.

3. Ethnic Minorities and Gender Strategy

8. The Project does not expect to have specific impacts on ethnic minority groups and does not require the preparation of an ethnic minority development plan. However, the resettlement plan and the gender strategy do include specific actions to mitigate adverse impacts and enhance the ability of the few ethnic minorities (Chinese and Vietnamese) and other vulnerable groups to benefit from the project interventions. A gender strategy is included in the resettlement plan to enhance opportunities for women’s participation in all aspects of the Project, from planning to implementation; participate in the decision-making process; and take advantage of new employment and income-generating opportunities. The project supervision consultants and the independent monitoring organization will ensure that they or members of their teams have experience in preparing and implementing gender and development programs in Cambodia, the necessary gender perspective and experience to deal with vulnerable groups, and female staff.

C. Institutional Arrangements and Implementation Schedule 9. The MPWT, under the guidance of the Interministerial Resettlement Committee of the Ministry of Economy and Finance, will be responsible for updating, implementing, and internal monitoring of resettlement activities in accordance with ADB’s policies and requirements. Consultants will be engaged for the purposes of both supervision and capacity building to ensure the effective updating and implementation of resettlement activities. The project supervision consultants will consist of one international resettlement specialist, one national resettlement specialist, and one national gender specialist.

10. The resettlement plan will be updated on a section-by-section basis following detailed design. It will be disclosed to affected persons prior to submission to ADB for review and

Appendix 12 49

approval. In instances where no land acquisition and resettlement is called for, the civil works contractors will be issued a notice of possession of sites only after the project implementation team, together with the Project’s resettlement consultants, has confirmed that the area will not cause any resettlement impacts and that the land is free of any encumbrances, disputes, or controversies. Where resettlement impacts cannot be avoided, civil works contractors will be issued a notice of possession only after (i) the compensation payment and relocation to new sites have been satisfactorily completed in that particular section of railway, (ii) the agreed rehabilitation assistance is in place, and (iii) the particular section is free from all encumbrances. Land acquisition, compensation, and relocation of affected persons cannot commence until ADB has approved the updated resettlement plan. To ensure that temporary impacts during construction will be minimized if they cannot be avoided, the civil works contracts will have the following requirements: (i) the contractor will pay rent for any land required for construction working space, (ii) the contractor will employ unused land for working space to the extent possible to avoid disruptions to households and business establishments and the use of residential land will not require any impacts on houses and structures and will not disrupt households’ access, and (iii) the land that has been used temporarily will be restored to its preproject condition or improved.

1. Monitoring

11. The MPWT will be responsible for internal monitoring of resettlement activities. Progress reports will be submitted to ADB on a quarterly basis. An independent monitoring agency will be identified, recruited, and mobilized before the commencement of any resettlement activities, including the detailed measurement survey of losses. The agency will be required to submit periodic reports on the progress of implementation and make any necessary recommendations regarding issues identified.

2. Cost Estimates

12. On-site relocation is estimated to cost $2.8 million and off-site relocation is estimated to cost $3.8 million. This includes compensation and allowances to affected persons, development of resettlement sites, income restoration programs, operational and administration expenses, internal and external monitoring, and contingencies. The costs are estimates and may change upon completion of the detailed measurement survey to determine actual impacts. The Government will ensure timely provision of counterpart funds for resettlement and will meet any unforeseen obligations in excess of the resettlement plan budget estimates to satisfy resettlement objectives.

Appendix 13

50

FINANCIAL ANALYSIS

1. The financial statements for the Project were prepared in current terms for a period of 30 years. Rehabilitation of the railways will be completed in December 2009. The foreign and domestic inflation rates are assumed to be 2% and 4%, respectively, during the projection period. 2. Railway traffic was forecast within the context of a medium economic growth scenario of 3.5% per year from 2006 to 2020 and 5.0% per year from 2020. The forecasting methodology included a review of historical patterns of container and freight traffic (particularly of cement and petroleum products), with distinctions made between the Northern and Southern lines, and a review of competition from improving road conditions (such as completion of the rehabilitation of National Road 5). 3. Some of the enabling conditions for increased rail traffic are assumed as follows: (i) the rehabilitation of both the Northern and Southern lines and the reconstruction of the Poipet destroyed link are completed in 2009; (ii) a commercial public–private partnership railway operator will be in position to offer reliable and efficient services; (iii) the new cement factory in Kampot province will start operations in 2009 at the latest, initiating local cement production to be distributed in the domestic market, and thereby modifying the transportation pattern of cement in Cambodia; and (iv) the cross-border agreement between Thailand and Cambodia is signed and in effect when the railway in Cambodia is reconnected to that in Thailand. 4. The underlying assumptions considered in relation to the development of new freight rates are (i) when trucking and railway services are in competition, total transport costs using railway services should be 20% cheaper (i.e., rail tariff rates are 80% of the alternative cost of using roads); and (ii) freight rates along the Northern Line should be close to the rates charged by the State Railway of Thailand. Table A13.1 presents projected freight rates.

Table A13.1: Projected Freight Rates

Cargo

Royal Railways of Cambodia Existing Rates

($/ton-km)

State Railway of Thailand Existing Rates

($/ton-km)

Railway Operating Company Projected

Rates ($/ton-km)

Cement 0.016 0.022 0.022 Diesel 0.026 0.031 0.032 Containers 0.029 0.032

Source: Canarail Consultants, Inc. 2006. Restructuring the Railway in Cambodia: Traffic Forecast and Financial Analysis Report. Montreal, Canada. 5. Twenty-one percent of the Project’s costs will be funded by the Government of Cambodia, 4% by a grant for rails (in kind) from the Government of Malaysia, and the balance of 75% through concessionary foreign-denominated loans from the Asian Development Bank and the OPEC Fund for International Development. The Asian Development Bank 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 OPEC Fund for International Development loan will be repayable over a 20-year maturity tenor, including a 5-year grace period, a fixed interest rate of 1.0%, and a 1.0% fixed service charge. 6. All financial analysis calculations are in real terms, based on mid-2006 prices, and cover the period 2007–2036. Capital costs include all incremental capital expenditures related to the

Appendix 13 51

rehabilitation of the railway, but exclude price contingencies and interest during construction. The analysis and financial projections were carried out on an incremental consolidated basis. 7. The estimated weighted average cost of capital (WACC) for the Project, after taxes in real terms, was calculated using the respective weighted cost of funds. The cost of debt has been adjusted to reflect the impact of the corporate profit tax of 20%. The nominal cost of funding is converted to the real cost by applying domestic and international average inflation rates for local currency and foreign currency funding, respectively. 8. The analysis shows that the Project is financially viable. The real after-tax financial internal rate of return (FIRR) is 10.2 %. The FIRR compares favorably to the real after-tax WACC of 4.1%. The estimated net present value of the net cash flows using the WACC as the hurdle rate is $65.7 million. Sensitivity analysis shows that the Project remains robust when run-on scenarios, such as a 1-year delay in commencing operations, a 10% increase in investment costs, and a 10% increase in operating costs, are applied. The FIRR calculation was most sensitive to a 10% increase in operating costs, which resulted in an estimated FIRR of 6.5%. Even if the foregoing sensitivity scenarios are all combined, the FIRR remains at 5.4%, remaining above the WACC of 4.1%. The FIRR and net present value calculations (base case) are shown in Table A13.2 and a summary of sensitivity scenario impacts is in Table A13.3.

Appendix 13

52

Table A13.2: Financial Internal Rate of Return ($ ’000)

Year Receipts Operating Payments Investment Net Cash Flow

1 4,080 3,274 10,392 (9,586) 2 4,523 3,583 34,640 (33,700) 3 7,331 6,053 24,248 (22,970) 4 15,947 11,572 4,375 5 19,670 14,260 5,410 6 22,639 17,149 5,490 7 26,334 20,170 6,164 8 29,641 23,041 6,600 9 33,145 26,001 7,144 10 35,630 27,755 7,875 11 38,341 30,295 8,046 12 41,098 33,203 7,895 13 43,911 34,971 8,940 14 46,638 37,586 9,052 15 48,821 37,586 11,235 16 48,821 37,586 11,235 17 48,821 37,586 11,235 18 48,821 37,586 11,235 19 48,821 37,586 11,235 20 48,821 37,586 11,235 21 48,821 37,586 11,235 22 48,821 37,586 11,235 23 48,821 37,586 11,235 24 48,821 37,586 11,235 25 48,821 37,586 11,235 26 48,821 37,586 11,235 27 48,821 37,586 11,235 28 48,821 37,586 11,235 29 48,821 37,586 11,235 30 48,821 37,586 11,235 Financial Internal Rate of Return 10.2% ( ) = negative value. Source: Asian Development Bank estimates.

Table A13.3: Sensitivity Analysis of the Financial Internal Rate of Return and Net Present

Value

Scenario

Financial Internal Rate of Return

(%) Net Present Value

($’000) Base Case 10.2 65,653 10% Increase in Capital Costs 9.3 59,311 1-Year Delay 9.7 58,642 10% Increase in Operating Costs 6.5 22,446 Combination of Above Scenarios 5.4 12,014

Source: Asian Development Bank estimates.

Appendix 14 53

ECONOMIC ANALYSIS A. Objectives and Scope 1. The economic analysis establishes the net benefits flowing from the Project by comparing cost and benefits with and without rehabilitation of the existing railway network and restoration of the railway connection with Thailand. The analysis is based on the demand forecast and economic analysis developed by the project preparatory technical assistance (footnote 9) and assumes that the railway is restructured. The Project has three main components: rehabilitation of the Southern Line between Phnom Penh and Sihanoukville, rehabilitation of the currently operating section of the Northern Line between Phnom Penh and Sisophon, and reconstruction of the currently nonoperating destroyed link of the Northern Line between Sisophon and Poipet on the border with Thailand. The two sections of the Northern Line are treated as one in the economic analysis, as neither would be viable without the other.

2. Shadow prices have been applied at border prices1 for all tradable items, such as rolling stock, track, construction materials, and maintenance equipment, and at resource cost for nontradable items, such as labor. All prices are fixed at their 2006 levels. The without project case against which the Project’s benefits and costs are measured is defined as the no investment case and involves the gradual rundown of the railway’s infrastructure and the imposition of increasingly more severe speed restrictions. This would lead to an accelerated diversion of traffic to road transport and to the eventual inoperability of the railway. Specifically, it is forecast that freight services on the Northern Line would cease by 2015 and on the Southern Line by 2020. The remaining passenger service is expected to decline much more rapidly, given that railway passenger volumes have been falling at an average rate of nearly 27% per year since 1998. Accordingly, it is assumed that without the Project, passenger services would cease by the end of 2010.

B. Traffic Demand Forecast 3. The forecasts for future railway traffic are in Table A14.1, which provides independent forecasts for principal freight types and for passengers distributed by railway line. Two alternative growth scenarios are considered: the without project case, for which negative growth is expected, reflecting progressive deterioration of the railway, and the with project case, which assumes moderate (3.5—5.0%) economic growth. The with project scenario assumes that future economic growth in Cambodia will be at a level comparable to that experienced in recent years. The with project traffic forecasts take into account (i) container traffic diverting to the railway from road and sea transport; and (ii) changes in the transport patterns for cement when three new cement plants in Kampot province (one planned and two under construction) become operational, which is expected to occur in 2008 or 2009.

1 Consisting of cargo value, insurance during transport, and cost of freight transport to the Cambodian border,

referred to as the cargo, insurance, and freight price.

Appendix 14

54

Table A14.1 Traffic Forecast , Selected Years (million ton-km or passenger-km)

Construction Period Benefit Period Railway Line and Case

Type of Traffic

Cur-rent 2006 2007 2008 2009 2010 2015 2020 2030

Cement 10.8 9.2 6.7 4.9 1.5 1.5 0.9 0.0 Petroleum 18.5 19.2 20.0 20.8 19.7 23.9 32.7 0.0 Containers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total freight 29.3 28.5 26.7 25.7 21.2 25.4 33.6 0.0

Southern Line without Project

Passengers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Cementa 10.8 41.6 165.4 316.4 393.4 541.5 699.1 874.2 Petroleum 18.5 19.2 25.3 39.6 50.4 63.2 98.2 119.5 Containers 0 0 0 0 52.9 133.2 155.7 244.5 Total freight 29.3 60.8 190.7 355.9 496.7 737.9 953.0 1238.2

Southern Line with Project

Passengers 0 0 0 0 6.2 21.3 37.3 97.6 Cement 88.3 83.4 74.4 63.7 51.1 0.0 0.0 0.0 Petroleum 2.8 2.9 3.1 3.2 3.3 3.5 0.0 0.0 Containers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total freight 91.2 86.4 77.4 66.9 54.4 3.5 0.0 0.0

Northern Line without Project

Passengers 3.5 2.3 1.4 0.8 0.5 0.0 0.0 0.0 Cement 88.3 75.84 9.96 2.14 1.97 2.28 14.82 51.18 Petroleum 2.8 2.9 3.1 3.2 8.4 11.6 15.9 19.4 Containers 0.0 0.0 0.0 0.0 72.2 115.5 184.8 301.0 Total freight 91.2 78.7 13.1 5.3 82.6 129.4 215.5 371.6

Northern Line with Project

Passengers 3.5 2.3 1.4 0.8 12.1 55.4 92.2 236.0 a Also includes coal, gypsum, and other imported inputs for cement production that are transported by rail. Source: JARTS, Nippon Koei Co. Ltd, Engconsult Ltd. 2006. GMS Rehabilitation of the Railway in Cambodia, Supplementary Report. Phnom Penh.

C. Economic Costs 4. The financial project investment cost estimate includes import duties (at a rate of 25% for cement and structural steel) and value-added tax at the rate of 10%. Wages are considered to be market determined, and so do not require shadow price adjustment. Similarly, the costs of resettlement and compensation are assumed to represent fair market value and are not shadow price adjusted. Based on the split between materials and labor costs in the detailed construction cost estimate, weighted shadow pricing factors have been estimated for each project component as follows: the Southern Line, 0.77; the Northern Line not including the destroyed link, 0.85; and the destroyed link, 0.79. The resulting economic project investment costs are in Table A14.2.

Appendix 14 55

Table A14.2 Economic Project Investment Costs

($ million)

Item Southern Line Northern Line Total Project Civil Works 22.7 19.3 42.1 Consulting Services and Administration 1.6 1.3 2.9 Environmental Mitigation 0.1 0.1 0.2 Resettlement and Compensation 0.5 3.3 3.8 Restructuring 0.3 0.3 0.5 Total 25.2 24.3 49.5 Source: JARTS, Nippon Koei Co. Ltd, Engconsult Ltd. 2006. GMS Rehabilitation of the Railway in Cambodia, Supplementary Report. Phnom Penh.

5. In the with project case, continued operation of the railway and growing future traffic require future investment in additional locomotives and wagons. The estimated economic prices of acquiring and maintaining rolling stock are shown in Table A17.3. Investments requirements for locomotives and rolling stock are estimated explicitly by forecasting fleet requirements from forecast traffic volumes. Independent forecasts were prepared for the Southern and Northern lines based on the assumed annual traffic capability per wagon, which reflects the payload of the equipment and its average cycle times on the respective railway lines. Improved management practices are assumed to improve future equipment utilization rates compared with the current situation. Existing operable rolling stock has been deducted from gross fleet requirements to arrive at net investment requirements. The acquisition of locomotives and wagons is phased in line with traffic growth. Asset lives are assumed to be 25 years for locomotives and 20 years for wagons.

Table A14.3: Acquisition and Annual Maintenance Costs

for Locomotives and Rolling Stock (economic cost in $/unit)

Item Cargo, Insurance, and Freight

Border Price Annual Maintenance Costs Locomotive 1,000,000 24,000 Passenger Coach 350,000 7,000 Container Flat Wagon 40,000 800 Cement Hopper 40,000 800 Petroleum Tanker Wagon 60,000 1,200 Source: JARTS, Nippon Koei Co. Ltd, Engconsult Ltd. 2006. GMS Rehabilitation of the Railway in Cambodia, Supplementary Report. Phnom Penh.

6. Variable railway operating and maintenance costs encompass train crews, fuel, rolling stock maintenance, track maintenance, and station staffing. The economic price of diesel fuel is estimated using the price for Brent crude as of 3 May 2006 ($75.68 per barrel or $566.47 per ton), with the addition of refining and transportation costs of $78 per ton, giving a border price of $644.46 per ton or $0.542 per liter. Track maintenance costs consist of materials, which have been shadow price adjusted to reflect border prices, and labor costs, which are assumed to be market determined. The resulting economic cost estimates are in Table A14.4. Average maintenance cost fall over the forecast period, when traffic is increasing, indicating that only some maintenance costs are related to traffic levels.

Appendix 14

56

Table A14.4 Variable Railway Operating and Maintenance Costs ($ per ton-km or per passenger-km)

Operational Costs Maintenance Costs

Line Traffic and Main Direction of Traffic

Current Future Current 2010–2015

2015–2020

2020–2030

Cement Kampot-Phnom Penha NIS 0.0071 NIS 0.0023 0.0023 0.0023Containers Poipet-Phnom Penh NIS 0.0086 NIS 0.0042 0.0013 0.0013Containers Sihanoukville-Phnom Penh NIS 0.0220 NIS 0.0027 0.0023 0.0018Petroleum Sihanoukville-Phnom Penh 0.0180 0.0068 0.0044 0.0039 0.0035 0.0030

South

Passengers Phnom Penh-Sihanoukvilleb NIS 0.0131 NIS 0.0036 0.0012 0.0006Cement Poipet-Battambang NIS 0.0066 NIS 0.0012 0.0012 0.0012Cement Poipet-Phnom Penhc 0.0132 0.0069 0.0024 0.0035 0.0033 NIS Petroleum Phnom Penh-Battambang NIS 0.0072 NIS 0.0053 0.0039 0.0036

North

Passengers Phnom Penh-Poipetb,c 0.0360 0.0101 0.0108 0.0020 0.0011 0.0011NIS = not in service. a The proposed cement factory is located in Kampot province. b Traffic in both directions is nearly balanced. c Currently, traffic is to and from Sisophon, where the destroyed link of the Northern Line to Poipet begins. Source: JARTS, Nippon Koei Co. Ltd, Engconsult Ltd. 2006. GMS Rehabilitation of the Railway in Cambodia, Supplementary Report. Phnom Penh.

D. Benefits 7. Transport cost savings resulting from the diversion of traffic to the railway are calculated as the long-term marginal costs of transport by road and by sea, as applicable, including the depreciation costs of vehicles and vessels. The calculated unit costs of road and sea transport for relevant routes and types of traffic are shown in Table A14.5. Road vehicle cost estimates are based on a recent survey of motor vehicle dealers in Phnom Penh conducted by the Japan International Cooperation Agency as part of its feasibility study for the Second Mekong Bridge Project. Including fuel savings, the net savings in road and sea transport costs account for about 91% of measured total project benefits.

Appendix 14 57

Table A14.5: Long-Term Marginal Operating Costs for Road and Sea Transport, Excluding Fuel Costs

Costs

Traffic and Main Directiona Road Sea Passengers: Phnom Penh to Battambang ($ per passenger-km) 0.0147 Cement: Sisophon to Phnom Penh ($ per ton-km) 0.0147

Existing Railway Traffic Petroleum: Sihanoukville to Phnom Penh ($ per ton-km) 0.0176

Containers: Sihanoukville to Phnom Penh ($ per ton-km) 0.0252 Containers: Laem Chabang to Phnom Penh ($ per ton-km) 0.0067 Cement: Kampot to Phnom Penh ($ per ton-km) 0.0201 Cement: Thailand to Battambang ($ per ton-km) 0.0138 Cement: Sisophon to Phnom Penh ($ per ton-km) 0.0147 Petroleum: Sihanoukville to Phnom Penh ($ per ton-km) 0.0176 Petroleum: Phnom Penh to Battambang ($ per ton-km) 0.0173

Future Traffic Diverted from Road and Sea

Passengers: Phnom Penh to Poipet ($ per passenger-km) 0.0104 Source: JARTS, Nippon Koei Co. Ltd, Engconsult Ltd. 2006. GMS Rehabilitation of the Railway in Cambodia, Supplementary Report. Phnom Penh.

8. Other benefits arising from the diversion of heavy traffic from road to rail that have been evaluated are (i) reduced fuel consumption, because railway traffic is more fuel-efficient than road traffic, resulting in savings in carbon dioxide emissions (the value of reduced emissions has been estimated from the prevailing price of carbon certificates in the world market and the benefits from Project-related emissions savings account for about 3% of total project benefits); (ii) reduced costs of future road maintenance, which account for about 4% of total project benefits; and (iii) reduced incidence of road accidents, 2 which accounts for about 3% of total project benefits. Offsetting increases in railway accident costs resulting from increased railway traffic are considered negligible and were not estimated.

9. Savings in travel times and inventory costs are ignored for the following reasons: (i) current railway users would experience a significant improvement in speed, but their share of total transport is marginal, and the corresponding savings are therefore negligible; (ii) new railway users switching from road transport would not experience an improvement in speed, because the rehabilitated railway will offer travel speeds that are generally slower, or at best equal to, road speeds; and (iii) existing road users who continue to use road transport following rehabilitation of the railway will not experience a major improvement in speed, because road traffic generally is light in Cambodia, thus a reduction in road traffic resulting from a diversion of traffic to the railway will have little or no impact on average road travel speeds.

E. Results 10. Summary results of the economic analysis are in Table A14.6. Two cases are considered: with and without future passenger services. The estimated economic internal rate of return (EIRR) for the Project is 25.8% without passenger services and slightly lower, 24.9%, with passenger services. These results reflect that passenger services are economically viable on the Northern Line only. The EIRR for the Southern Line is higher than total project returns while the EIRR for the Northern Line is lower but still well above the Asian Development Bank’s cutoff rate of 12%. The detailed economic cash flow calculations are in Table A14.7.

2 Based on a road safety database developed by Handicap International in cooperation with the Ministry of Public

Works and Transport.

Appendix 14

58

Table A14.6: Project EIRRs with and without Passenger Traffic (%)

Case

Southern Line EIRR

Northern Line EIRR

Total Project EIRR

Project with Passenger Traffic 29.7 15.1 24.9 Project without Passenger Traffic 31.1 14.9 25.8 EIRR = economic internal rate of return. Source: JARTS, Nippon Koei Co. Ltd, Engconsult Ltd. 2006. GMS Rehabilitation of the Railway in Cambodia, Supplementary Report. Phnom Penh.

Appendix 14 59

Table A14.7: Economic Cash Flows for the Project with Passenger Traffic, 2006–2030 ($ million)

------------------------------------ Railway Costs ------------------------------------ ------------------- Road, Environmental, and User Benefits -------------------

Year

Civil Works

and Miti-gation

Rolling Stock

Track Main-

tenance

Equip-ment Main-

tenance

Opera-tions Costs

Total Costs

Vehicle Opera-

ting Cost Savings

Carbon Dioxide Savings

Accident Savings

Road Main-

tenance Savings

Total Benefits

Net Benefits

2007 9.1 16.2 0.6 0.3 0.4 26.6 2.1 0.0 0.1 0.1 2.3 -24.3 2008 24.3 3.8 0.6 0.8 0.8 30.2 6.8 0.2 0.3 0.4 7.6 -22.6 2009 16.0 18.7 0.6 1.6 1.3 38.2 13.5 0.3 0.5 0.7 15.1 -23.1 2010 0.0 3.5 1.5 2.3 3.7 11.0 22.2 0.6 0.7 1.0 24.6 13.6 2011 0.0 7.3 1.5 2.5 4.3 15.7 25.1 0.7 0.8 1.1 27.6 12.0 2012 0.0 2.1 1.5 2.8 5.0 11.3 27.9 0.8 0.9 1.2 30.7 19.4 2013 0.0 2.2 2.2 3.0 5.7 13.0 30.7 0.8 0.9 1.2 33.7 20.7 2014 0.0 4.3 2.2 3.2 6.3 16.0 33.5 0.9 1.0 1.3 36.8 20.8 2015 0.0 1.8 2.2 3.4 7.0 14.3 36.4 1.0 1.1 1.4 39.8 25.5 2016 0.0 1.8 2.2 3.6 7.5 15.1 40.3 1.1 1.2 1.5 44.0 28.9 2017 0.0 2.2 2.9 3.8 8.0 16.8 42.9 1.2 1.2 1.6 46.9 30.1 2018 0.0 3.2 2.9 4.0 8.5 18.6 45.6 1.2 1.3 1.7 49.8 31.2 2019 0.0 10.5 2.9 4.2 9.1 26.7 48.4 1.3 1.4 1.8 52.9 26.2 2020 0.0 3.5 2.9 4.5 9.7 20.5 51.2 1.4 1.5 1.9 56.0 35.5 2021 0.0 5.9 2.9 4.8 10.3 23.9 54.9 1.4 1.6 1.9 59.9 36.0 2022 0.0 2.5 2.9 4.9 10.9 21.2 57.2 1.5 1.6 2.0 62.4 41.2 2023 0.0 1.4 2.9 5.1 11.5 20.9 59.6 1.6 1.7 2.1 64.9 44.0 2024 0.0 2.4 2.9 5.3 12.1 22.6 61.9 1.6 1.8 2.1 67.4 44.8 2025 0.0 1.5 2.9 5.4 12.7 22.6 64.2 1.7 1.8 2.2 69.9 47.4 2026 0.0 1.4 2.9 5.6 13.3 23.2 66.6 1.7 1.9 2.3 72.5 49.2 2027 0.0 1.5 2.9 5.7 14.0 24.1 68.9 1.8 2.0 2.3 75.0 50.9 2028 0.0 5.9 2.9 5.9 14.6 29.3 71.2 1.8 2.0 2.4 77.5 48.2 2029 0.0 24.0 2.9 6.0 15.2 48.2 73.6 1.9 2.1 2.4 80.0 31.8 2030 0.0 0.0 24.3 51.7 131.6 207.6 632.6 16.3 18.1 20.8 687.8 480.1

NPV 38.9 51.4 14.9 24.5 49.8 179.6 268.3 7.1 8.1 10.3 293.8 114.1 Net present value ($ million) 114.1 Economic internal rate of return (%) 24.9% Source: JARTS, Nippon Koei Co. Ltd, Engconsult Ltd. 2006. GMS Rehabilitation of the Railway in Cambodia, Supplementary Report. Phnom Penh.

60 Appendix 14

F. Sensitivity Tests 11. The sensitivity of the Project’s EIRR to assumptions and forecasts was assessed by varying selected sensitivity parameters to reasonable alternative values and by calculating their switching values, which is the percentage change of the variable that makes the project just viable. The sensitivity test parameters were chosen to reflect the identified uncertainties in the project: (i) possible failure to reconnect with the railway in Thailand; (ii) forecast demand for railway transport, especially the schedule for bringing the planned new cement factories in Kampot Province into operation; (iii) the efficiency of the future railway operator; (iv) the future price for oil which has been volatile in recent years and (v) possible higher Project implementation cost if yet unidentified weaknesses in the existing railway infrastructure are identified during detailed design. The results are in Table A14.7

Table A14.8: Sensitivity Tests

Item

Sensitivity EIRR (%)

Switching Value (% change)

Project Investment Cost increased by 20% 23.0 311% Project completion delayed by one year 24.3

Investment

Project completion delayed by two years 22.9 9-10 years

Operating cost increased by 50% 20.2 128% Brent Crude prices reduced to $50 per barrel (-30%) 20.5 -83%

Railway Operations Cost

Operations with Thailand not reestablished 19.7 — Transport benefits reduced by 15% 20.7 -43% Benefits

Traffic demand reduced by 20% 21.0 -47% — = not applicable; EIRR = economic internal rate of return. Source: Asian Development Bank and JARTS, Nippon Koei Co. Ltd, Engconsult Ltd. 2006. GMS Rehabilitation of the Railway in Cambodia, Supplementary Report. Phnom Penh.

12. The Project has been subjected to risk analysis involving all the variables tested in the sensitivity analysis. The risk analysis shows about 96% probability that the project will achieve an EIRR of 12% or more.

13. Measures to avoid or limit loss of potential economic benefits are integral to the project design and the implementation schedule: (i) restructuring of the railway and introduction of a commercial, private sector railway operator to ensure efficiency in operation and minimize the risk of not realizing economic benefits that are commercially viable; (ii) introduction of explicit Government subsidies for public service obligation passenger traffic to enable realization of economically viable but commercially unviable passenger traffic; (iii) scheduling of project implementation to ensure that sections with high economic and financial potential are rehabilitated first and (iv) assurances by the Government that negotiations with Thailand concerning reestablishing the railway border crossing and reconnecting to the railway in Thailand have started and are expected to be concluded prior to loan effectiveness.

G. Distribution of Project Benefits 14. One third of Cambodians fall below the poverty line and 90% of the poor live in rural areas. The flow of project benefits to the poor includes (i) direct benefits from reduced personal transport costs, (ii) indirect benefits from lower costs of transport for staple commodities, and (iii) induced economic activity that could create additional income generation and employment opportunities.

Appendix 14 61

The bulk of benefits to the poor would be reductions in the costs of transporting people and staple commodities, which has a direct impact on the cost of living, and increased trade that would contribute to faster economic growth, which is a strong catalyst for overall poverty reduction.

H. Subsidy Requirements for Passenger Services 15. The economic analysis shows that passenger railway services are economically viable but, as discussed later, maintaining passenger services in the future will require a significant subsidy from the Government.

16. Between 1998 and 2005, the number of passengers carried by rail declined at an average rate of about 27% per year. The decline was fastest on the Southern Line, where passenger services effectively ceased in late 2003, and shortly thereafter, the frequency of passenger trains on the Northern Line was reduced to one train in each direction per week. By 2005, the number of passengers carried had declined to 48,000. The bulk of remaining passenger trips are on the section between Phnom Penh and Pursat, where the railway serves small communities that are remote from the primary road system. The fall in passenger trips coincides with (i) progressive improvement of national roads 3, 4, and 5, which run roughly parallel to the railway; (ii) rapid development of frequent, reliable, and increasingly comfortable public transport services that range from relatively expensive air-conditioned buses to relatively cheap minibuses; and (iii) progressively reduced travel speeds and service levels on the railway. The railway’s loss of passengers has occurred even though railway fares are considerably cheaper than competing minibus services, which suggests that travel time and frequency of service may be more important than price in influencing passengers’ modal choice.

17. The subsidy requirements for maintaining railway passenger traffic in the future have been analyzed under the following key assumptions: (i) future passenger services will provide a minimum of one train departure per day in each direction on both lines; (ii) departure frequency will increase when future passenger demand justifies it; and (iii) railway passenger fares will be competitive with road transport. The results are shown in Table A14.9 and indicate that ticket revenues from competitively priced passenger traffic could cover about 50% of operating and capital costs attributable to passenger traffic, resulting in an annual revenue shortfall of $0.6 million in the first year of operation, increasing to $3.1 million in 2030. Projected deficits accelerate after 2020, when increasing passenger demand leads to increased train frequencies, first on the Northern Line and later on the Southern Line.

62 Appendix 14

Table A14.9: Projected Revenues and Expenses from Table A14.9: Railway Passenger Operations

(Market Prices, Selected Years)

Line Item 2010 2015 2020 2025 2030 Passengers (’000) 47.0 120.0 205.0 356.0 507.0 Passenger-km (millions) 6.2 21.3 37.3 67.5 97.6 Revenues ($ million) 0.1 0.2 0.4 0.7 1.0 Expenditures ($ million) 0.3 0.4 0.7 1.1 1.8

Southern

Deficit ($ million) 0.2 0.2 0.3 0.4 0.8 Passengers (’000) 92.0 296.0 456.0 769.0 1,081.0 Passenger-km (millions) 12.1 55.4 92.2 164.1 236.0 Revenues ($ million) 0.1 0.6 0.9 1.6 2.2 Expenditures ($ million) 0.5 1.3 1.7 3.2 4.5

Northern

Deficit ($ million) 0.4 0.7 0.8 1.6 2.3 Passengers (’000) 140.0 416.0 661.0 1,125.0 1,588.0 Passenger-km (millions) 18.3 76.7 129.5 231.6 333.7 Revenues ($ million) 0.2 0.8 1.3 2.3 3.2 Expenditures ($ million) 0.8 1.8 2.4 4.3 6.3

Total

Deficit ($ million) 0.6 1.0 1.1 2.0 3.1 Source: JARTS, Nippon Koei Co. Ltd, Engconsult Ltd. 2006. GMS Rehabilitation of the Railway in Cambodia, Supplementary Report. Phnom Penh.