FROM CHINA TO EUROPE BY RAIL

The construction of the Baku-Tbilisi-Kars (BTK) railway is on the home stretch. It is expected that the commercial operation of the transport corridor - the shortest and most cost-effective land route between Europe and Asia - will begin in early 2013. In order to expedite the construction of the steel track, at the start of July this year, Baku hosted a meeting of the BTK Coordination Council where representatives of Georgian and Azerbaijani transport agencies signed a new loan agreement for the reconstruction of the Tbilisi-Akhalkalaki section of the railway.

New problems and new loan

"This year the construction of the Baku-Tbilisi-Kars railway will be expedited, and its commissioning will create a new highly profitable land route between Europe and Asia. At the same time, the implementation of a capital-intensive project to upgrade the routes and rolling stock of the Azerbaijan Railways (BR) will begin this year. These projects require large investments, and the state attracts them in order to create in the future a modern and strong transport infrastructure that will make it possible to make full use of the benefits of Azerbaijan's geographic location at the crossroads of the East and the West," President Ilham Aliyev said in a recent speech.

The direct construction of the Baku-Tbilisi-Kars railway corridor began in mid-2008 and was conducted with varying success at several sites in Georgia and Turkey. However, due to a number of reasons, the project participants were forced to postpone the commissioning of the steel line. Originally, it was planned that BTK would be built by the end of 2010, but this date was postponed to 2011, and last year, 2012 was named as the final date. The Georgian side was blamed for delays in the construction of this strategically important route: partly because of political instability in 2008, which negatively affected the use of the allocated funds, while technical problems emerged later. But the most serious problem was the need to change the route of a 25-km section from Akhalkalaki to the Turkish border. In particular, it appeared that a 2.6-km section on the Georgian-Turkish border was erroneously projected in an avalanche site. Geological investigations revealed that this area is included in the landslide zone and is not suitable for the construction of the railway, so it was decided to turn the track towards a foothill 4-km tunnel. A new project had to be drawn up for the tunnel, which, of course, took extra time, while its construction required extra funds. Another obstacle was the total uselessness of a 160-km stretch of the railway from Akhalkalaki to Marabda. As a result, it was decided not to reconstruct this part of the road, as was planned, but to completely rebuild it. Finally, earlier this year it was revealed that the noticeable delay in the timing of the construction was also due to the overall rise in the cost of the project following the increase in world prices for construction and raw materials, the revaluation of the current status of Georgia's railway infrastructure, as well as the difficult terrain. In addition to the above goals, additional funds were required for construction and rehabilitation work at the Tetritskaro-Akhalkalaki railway section, the construction of a station in Akhalkalaki and of a point for transferring trains from the broad gauge existing in the CIS to the European standard, as well as for the creation of other rail infrastructure facilities. It is possible that additional funds will be needed in the future to buy fast cars and locomotives from the Spanish company Talgo. They are supposed to operate on the Baku-Tbilisi-Istanbul route in the event of final approval by the Azerbaijani and Georgian sides.

These problems together could seriously hamper the process of building the steel track, and most importantly, noticeably delay its date of commissioning. But it was impossible to delay the construction of the Baku-Tbilisi-Kars railway, because its members are planning to start the transit of cargo through Azerbaijan and Turkey to Europe in early 2013.

So in May of this year, changes were made to the agreement between the governments of Azerbaijan and Georgia with respect to work to finance, design, build, reconstruct and rehabilitate the Marabda-Turkish border (Kartsakhi) railway sector, under which our country provided Georgia with a second loan of $ 575 million with a maturity of 25 years at a rate of five per cent. Thus, together with the first $ 200-million loan issued three years ago, the share of our country in this project increased to $ 775 million.

According to the 1 July 2011 credit agreement, the loan, as was the case with the previous loan, was issued by the State Oil Fund of Azerbaijan, but this time the beneficiary is not the government of Georgia, but the Kartsakhi-Marabda company. Thus, this loan is not a state debt and will be repaid from the revenues of the project after the commissioning of the railway. Regardless of interest, the Georgian side will also pay a commission of 0.5 per cent (50 basis points), but no more than 20,000 Georgian lari.

Expenses will be paid back

Despite the rise in the cost of the project, the parties expect a relatively quick return on costs. It is expected that at the initial stage, the BTK corridor will transport up to 1 million passengers and 6.5 million tons of cargo annually. Subsequently, the volume of traffic will increase to 17 million tons of containerized, bulked and other types of cargo from Asia to Europe. And in the next two years, Turkey will complete the Marmaris project, which implies the construction of a tunnel under the Bosporus, which will accelerate and facilitate the through rail link with Europe.

After the commissioning of the BTK international railway, our country alone, according to conservative estimates, will increase the cargo turnover by 6-7 million tons per year. To ensure the smooth passage of significantly high volumes of cargo, it is necessary to increase the capacity of the country's steel tracks in the westerly direction. For this purpose, Azerbaijani President Ilham Aliyev last July approved the Ministry of Transport's State Programme for the Development of the Azerbaijani Railways for 2010-2014. The project envisages the reconstruction of railways on the 500-km Baku-Boyuk Kasik (the border with Georgia) railway, first of all, its 317-km section. This will make it possible to achieve one of the main objectives - to increase the average speed of trains to 140 km per hour in passenger traffic and 80-100 km per hour in cargo transportation. It is also planned to take a number of measures to modernize the energy systems of the railroad and upgrade the locomotive fleet, and in order to improve the alarm and communications systems, Yalama-Balacari, Horadiz-Imisli-Baku and Osmanli-Astara fibre optic lines will be laid and a system of automatic control of cargo and passenger traffic will be set up.

However, if the original total budget of the four-year modernization project was estimated at $ 795 million and covered only one section in the direction of the Georgian border, then taking into account the reconstruction of the repair facilities and the creation of other infrastructure, it grew to 1.2 billion. Today, the total cost of modernizing Azerbaijan Railways is estimated at more than $ 2 billion.

With regard to international assistance to the project, to this day a loan agreement for $ 450 million has been signed with the World Bank. An agreement has been reached to borrow 215 million euros from Czech EximBank. It is possible that the creditors of Azerbaijan Railway will be joined by the Asian Development Bank, which previously considered allocating $ 200 million.

At the same time, due to the doubling of the budget, the remaining funding for such a large scale programme to modernize the Azerbaijan Railways is still an open question. Initially, it was planned that two-thirds of the share would fall to international financial institutions, while the remaining third would be provided by the government. In particular, for the effective involvement of international donors, in 2011 it was planned to carry out institutional reforms in rail transport based on market economy principles. This process has already begun. So, in July 2009, Azerbaijan State Railways was transformed into JSC Azerbaijan Railways. And recently, the State Committee for Securities registered the issue prospectus of ordinary registered uncertified shares at JSC Azerbaijan Railways, totalling $ 599 million manats. This is, as it were, the first step towards the capitalization of the joint stock company, and it is possible that Azerbaijan Railways will re-emit securities to support the modernization project in the future.

In any case, investments will be effective, because in the long-run, they will contribute to the success of the Baku-Tbilisi-Kars railway. And its financial profitability, given the projected volume of cargo, causes no doubt.