Railway Rehabilitation Project and Railway Modernization Project [Loans 1631/1773]

Before preparing projects for Central Asia or the Caucasus, ADB should determine if restricting procurement to ADB-member countries will significantly raise the cost of goods and services over unrestricted procurement. For the two railway projects, the least-cost source of rails was nonmember countries, and limiting procurement to ADB member countries raised the cost of rails by more than 150%. Uzbekistan and other countries of Central Asia or the Caucasus still have significant economic ties to other countries of the former Soviet Union, and projects can benefit from being able to procure from former Soviet countries. The membership restriction also affects ADB. First, it puts ADB at a competitive disadvantage relative to other development partners, like the World Bank and the European Bank for Reconstruction and Development (EBRD), which can finance procurement from all former Soviet countries. Second, ADB should use its involvement in projects to promote competitive bidding and other good procurement practices; restricting procurement to ADB-member countries is a less efficient model of procurement for ADB to present to its developing member countries (although ADB charter requires it), and so such restrictions limit ADB’s development effectiveness. As long as ADB’s guidelines restricts procurement to member countries, when ADB determines that project costs are significantly lower in nonmember countries, ADB should advise the borrower on how to request an exemption from the membership requirement from ADB’s Board of Directors.