THE TRAIN IS ON ITS WAY

Azerbaijani President Ilham Aliyev issued a decree on 6 July 2010 to approve a state programme for the development of the country's railway system from 2010-2014. The main objectives of the programme are to continue reforms and improve the regulatory framework to create wider opportunities for the commercial activity of railways, to implement measures to update the infrastructure and rolling stock fleet in accordance with current requirements and to provide for transportation of cargo, which will increase following the launch of the Baku-Tbilisi-Kars railway. The programme also provides for the implementation of various other tasks.

The implementation of the programme is to be financed by the Azerbaijan Railways JSC's own funds, internal and external investment, technical assistance and grants, as well as from other legal sources.

 The first external loan for the development of the railways was received from the World Bank (WB) and, therefore, we decided to put a number of questions to Gerald Ollivier, manager of the project to facilitate transit and trade by rail in Azerbaijan and World Bank specialist in the infrastructure of the sustainable development sector. Just before his departure from Azerbaijan on completion of his work in Europe and Central Asia, Mr Ollivier told us what the WB expects from the implementation of this programme and about prospects for the development of Azerbaijani railways.

- Firstly, it would be interesting to know how much investment will be required to upgrade the railway infrastructure in Azerbaijan and to ensure the security and reliability of transportation?

- In the medium term, the government of Azerbaijan is planning to invest about one billion manats in the improvement of the country's railway infrastructure. In our estimation, which coincides with that of the Azerbaijani government, the investment requirement in this sector is about 1.2 billion dollars.

This may seem very large, but it must be viewed in the context of railway revenues. Every year, the Azerbaijani railway earns about 200-250 million manats. 

Of the total investment, 450 million dollars (together with Azerbaijan's share, the project is estimated at 673.8 million dollars) have been allocated by our bank.

All WB loans are considered in the context of the Country Partnership Strategy, which takes into account all a country's needs in other sectors - education, health, road construction etc. For all projects that prove their viability or success, there is always an opportunity to consider the allocation of additional funds. Therefore, if necessary, this issue can be addressed with respect to additional investments for the railway project.

- What are the typical problems of Azerbaijan's railway infrastructure and what limits are there on transportation and its safety?

- At present, the rail infrastructure (rails, locomotives, rolling stock and electrification system) in Azerbaijan is quite outdated. Naturally, this increases operating costs. Today, most of the infrastructure is already at the end of its operational life. In 3-5 years, it will be impossible to use.

Therefore, your government decided to focus on a complete reorganization of the main West-East line, which carries the bulk of traffic, into a wholly new system of rail services, power supplies and rolling stock.

- What reforms are needed to develop the railways in Azerbaijan and is it necessary to fully commercialize them?

- First of all, I should note that full commercialization of the railway is a long-term process, and nowhere in the world has this happened overnight. Our project started recently, but we are already seeing a number of important areas of reform. In February, the Azerbaijan Railways Department was transformed into a closed, joint-stock company. In May, the company was restructured, that is, its divisions were reorganized into departments, which are more suited to commercial activity. Most recently, a total technical inventory of all company assets was completed. Today the company is poised to select a consulting company to help the railway to adopt international standards of financial reporting. In this sense, the company's structure is being redirected towards commercial needs. Instead of individual departments for cars, locomotives and others, departments have been established to deal with cargo and passenger transportation, which are more suited to the needs of commercial activity and are focused on profit. In addition, the use of international standards of financial reporting will help to achieve a better understanding of the financial situation in any division of the company, which will ensure full transparency of its activities.

- How much do you think the company's assets can increase after the completion of the entire process of reforming the railways and the measures stipulated in the state programme?

- Very significantly. At present, 70 per cent of all transportation is carried by the East-West line. If it were not for this project and general activities to modernize the railway, then this route would probably cease to operate in 10 years' time. Even with the level of investment in this area of recent years, reliability on this route would be very low. However, with the investment planned, we can be sure that, within the next 40 years, the country will have a fully functional reliable rail network, which will carry 70 per cent of all goods in Azerbaijan.

The North-South corridor is younger and the railway network in this area can function without significant investments for many years. However, we may assume that in 10 years' time, the upgrading of this corridor will also require additional investment. In my opinion, and based on reports by consultants from the US, Korea and other countries, it is clear that the East-West corridor needs substantial investment. This decision is based on a very strict analysis of costs and benefits, and we are confident that it will serve Azerbaijan for a long time.

- Are there preliminary dates for the transformation of the JSC Azerbaijan Railways into a holding company?

- The date of transformation has not been specified yet. I think that the next year will see very serious discussions on how to do this, and when. This issue is less fundamental than ensuring that the reformed railway structure operates transparently and effectively. In the world there are very different models for transforming a railway. But in all cases, it must be based on local circumstances, environment and particularities of transportation. The model used in Azerbaijan is close to the Lithuanian model, which is recognized by the European Union as a successful model for reforming a railway. The whole process of reform took seven years in Lithuania.

- Is it necessary to privatize the railway and what is the practice in the rest of the world? How effective is its operation as private property - or is it appropriate to leave it in state ownership?

- Privatization has not always brought the benefits expected from it. So, you have to take a very careful approach to this matter. First, you need to make sure that this is the right decision and that the company is mature enough to accept it. In the context of Azerbaijan, I am sure, shipping, passenger transport and the infrastructure should be considered separately. In terms of geopolitics, I think that even in the future, the infrastructure should remain in state ownership. In some countries, the infrastructure has also been privatized, but in most countries, on a whole, it remains in state ownership, and here, taking into account the particularities of the region, it is unlikely that the infrastructure could be privatized.

Passenger transportation is traditionally considered a loss-maker and, in this case, it is unlikely that an operator will be interested in operating passenger transportation. Freight services are more open to such a mechanism. But to do so, you must have a suitable infrastructure in the first place. From an institutional point of view, it is necessary to accurately determine the cost of access to the network, i.e. how much a private operator must pay to be able to use the network. To this end, it is necessary to determine the exact costs of the railway itself, namely the cost of operating the network. I would not be surprised if it happened but, in any case, it will take a very long time before all of these mechanisms are established.

- What is the probability that after the reforms, changes will be made to the tariff policy?

- I think that it may be necessary to partially review the tariffs on cargo transportation in order to achieve profitability. The rise should be based on transport costs data and, only after determining the exact cost of transportation, can you make corresponding changes to cover these costs. The situation here is similar to pipelines, i.e. it is clear how much money has been put into the pipeline and you know how much it costs to maintain it - and on this basis, you determine the tariff, for example, for the transit of petroleum products.

It is also necessary to provide full clarity and certainty regarding the cost of passenger transportation, and then decide what part of these expenses will be paid by the state and what by passengers.

All these calculations can be made after the full application of a new accounting system.

- Is the World Bank ready to assist the government of Azerbaijan in developing a strategy to enhance the profitability and quality of passenger transportation?

- This study is part of our project but, of course, it is too early to say anything about it yet.

- The state programme provides for the completion of construction of the Baku-Boyuk Kasik railway, covered by the WB project, by 2013. How realistic is this deadline?

- I would say that this schedule is a little tough, but so far everything is going according to plan.

- To what extent will the speed of trains increase?

- For passenger transportation - up to 100 km/h and for cargo transportation - 80 km/h. There is a big difference between theoretical and actual speed limits. At present, 60 per cent of the railway from the east to the west has a speed limit. The time taken to transport cargo from Baku to the Boyuk Kasik station is 24 hours today and, after the project, it will be 12 hours. Passenger trains have priority, because they pass first, so their speed will be even higher.

- And finally, what would you recommend for the development of the transport sector in Azerbaijan as a whole?

- I think that the transformation process will require greater attention to the relationship between different types of transport and they will benefit from investment, both in commercial and economic terms. Inside the city, attention should be given to the fact that people's movement is organized by all types of transport, including, where possible, by tramway or railway, not only by road.