RAIL CROSSROADS

The transport sector is a priority for the development of the non-oil sector in Azerbaijan. To improve the system and its accompanying infrastructure requires the involvement of foreign business in transits across the country's territory; this will help develop the private sector of the national economy.

Forecasts concerning the main directions in the development of the world economy indicate that the main circulation of finance, commodities and information in the 21st century will be concentrated in the USA-Europe-Asia triangle. The trade turnover here currently approaches 3,000 billion dollars per year.

According to experts at the International Monetary Fund, the annual trade turnover between Asia and Europe is 600 billion dollars and, by 2010, it will increase by 50 per cent. The creation of transport corridors capable of linking the economies of the two continents through the communication arteries of the South Caucasus and Central Asia is one possible way of diversifying regional economies.

In this sense, Azerbaijan holds a geographically advantageous situation, being at the intersection of transport routes from the north to the south and from the east to the west.

North-South

The idea of establishing a North-South transport corridor was adopted at a meeting of Russian, Indian and Iranian railway chiefs on 12 September 2000. In 2005 Azerbaijan joined this project, suggesting its territory offered the shortest possible route.

The North-South project has been promoted by Russia for many years, and the Russians intend to take control of most of the cargo flow between the "northern" countries and the states around the Indian Ocean. Specifically, the president of the Russian Railways open joint-stock company, Vladimir Yakunin, said that the use of this corridor in the long-term may lead to the transportation of a further 20 million tons of cargo between Finland and the Indian Ocean.

Initially, the North-South project considered several routes, using different types of transport, say Russian experts. One of them is the Trans-Caspian route through the ports of Astrakhan, Ole and Makhachkala, and by railway through Kazakhstan, Uzbekistan and Turkmenistan with access to Iran's railway network via the Tejen-Sarakhs border checkpoint. But this option was blocked by the Iranian partners who insisted that the economic effectiveness of the Trans-Caspian multi-modal route was impaired by the need for repeated transshipment.

Another route suggested used the western branch of the corridor: Astrakhan-Makhachkala-Samur, then through Azerbaijan and Armenia to Iran through the Culfa border checkpoint. However, the conflict between Azerbaijan and Armenia nullified this option.

The only rational alternative, from an economic point of view, was the construction of an intercontinental bridge through Azerbaijan, especially as Russia and Azerbaijan have stable railway links. The only link missing is a line from Qazvin-Rasht-Astara (Iran) to Astara (Azerbaijan). This option would mean a direct railway route through Azerbaijan with no extra transshipment, and Iranian and Russian experts see it as the most expedient route from an economic point of view. However, the Iranian side has flatly refused to build a new railway on its own and intends to involve Russia in the financing. Russian territory covers 33 per cent of the North-South corridor and, therefore, Russian Railways will reap the greatest rewards.

After lengthy negotiations, the economic argument gained the upper hand. In late March, the heads of the Azerbaijani, Russian and Iranian railway departments met in Tehran to sign a memorandum on the establishment of a consortium to build the Qazvin-Rasht-Astara railway.

The next stage in the negotiations is scheduled for May in Baku. According to Nadir Azmammadov, head of the Azerbaijani State Railway press service, at this meeting the Russians will present a business plan for the construction of the railroad, while the Iranians will brief their Azerbaijani colleagues on a project to build a new 101 metre bridge over the border river. Azmammadov stressed that the project to build the international transport corridor envisages the laying, in Azerbaijan, of 8.4 km of tracks, four station tracks (1,050 metres each), customs and border checkpoints and a fitting station to change wheel pairings.

The Western press, in their comments, believe that the project has little chance of going through Azerbaijan. As their main argument, they cite Washington's attitude towards Russian projects, as well as economic relations between Azerbaijan, the key partner of the United States in the Caspian basin, and Iran. Two factors may serve as a counter-balance here. The first is a decision by European states, which are not so hostile to Iran that they would risk losing the economic benefits of the project. The second factor is related to purely business interests. For example, Azerbaijan is set to receive large revenues from railway links with Iran. This will make it possible to increase the cargo flow with Asian countries, currently restricted to road transport. Moreover, Baku is diversifying its links with Asian markets. Having an alternative - by land or sea - will increase Azerbaijan's chances of attracting transit cargo.

The "Great Silk Road" on wheels

If the practical future of the North-South railway corridor project still appears unclear, the West-East route is on the way to becoming fully operational. The idea of restoring the historical Great Silk Road, a track "beaten" between Europe and Asia through Azerbaijan for centuries, was put into practice many years ago.

However, the absence of a full-scale railway corridor in the infrastructure of the Great Silk Road significantly limits the usefulness of the corridor. The presence of maritime ports with a developed modern infrastructure on both sides of the Caspian, as well as railroads to connect the two continents, would improve the situation and turn the Caspian region, with its access to the South Caucasus, into a key transport hub of transcontinental importance.

In this regard, the construction of a new international maritime port near Baku and the implementation of the Baku-Tbilisi-Kars (BTK) railway project, with access to Central European markets through Turkish territory, play a strategic role.

At present, Azerbaijan, Turkey and Georgia, who signed the relevant agreement a year ago, are in the process of implementing the BTK project.

The construction of the Georgian sector of the railway was the focus of the latest session of the Azerbaijani-Georgian working group held in Tbilisi in late March. The two sides held consultations and detailed discussions on a number of working issues. Among them we should probably highlight the building of a train station in Akhalkalaki near the Turkish-Georgian border.

The Georgian part of the project has been "split" into several independent projects. One of them proposes the reconstruction of existing railways and another the building of a completely new line where there was no railway before. This will be a line from Akhalkalaki to the Turkish border, to be built by the Azerbaijani company Azerinsaatservis, following a tender process held at the end of last year. This line will be 33 km long and will have one tunnel.

Another project is designed to build a modern fitting station to replace the wheels used on our wide track by those suited to the narrower track. The station is being built in Turkey to European standards.

Some in the local media say that the document on the Akhalkalaki station, submitted earlier by the Georgian side, contained inflated prices. Thus the Azerbaijani Ministry of Transport thinks it expedient to carry out new design work, postpone some work to the second stage and exclude some components from the project.

It is planned to complete construction work in Georgia and Turkey in 2009, at which point a direct line from Baku to Europe will have been created. According to calculations, the BTK railway will transport 3 million tons of cargo in its first year, and 5 million tons in the following three years. It is planned that in 2015 the new route will transport up to 15 million tons of cargo per year.

Who pays, gentlemen?

Now let's talk about the financial aspects of the above-mentioned railway projects. The Azerbaijani government has drawn up a state programme to develop its railways from 2008-2012, which provides for the complex modernization of both infrastructure and trains. Negotiations are underway with foreign creditors for the implementation of this programme. There is information that the government has already found investors to reconstruct lines from the northern to the southern border of Azerbaijan (North-South transport corridor).

The European Bank for Reconstruction and Development (EBRD) and the Asian Development Bank (ADB) are also ready to finance this work. Each bank will allocate 500 million dollars. At the same time, the EBRD intends to work with the European Investment Bank (EIB), which has just begun working with Azerbaijan.

At present, proposals from potential investors have been submitted to the relevant ministries and departments for consideration. This will not be the first agreement of its kind, since the railways sector occupies a strategic position in the country's transport system. The total cost of the state programme to develop the railways is 1.2 billion manats (more than 1.5 billion dollars). A number of international financial institutions have already expressed their intention to take part in reconstruction work. For example, the World Bank has already expressed its desire to finance a sector of the West-East railway corridor (as part of the trade and transport development project) and is ready to allocate 450 million dollars. The Japan Bank for International Cooperation (JBIC) is ready to allocate about 260 million dollars this year to finance power supplies to the railway from Baku to the Georgian border. The government may discuss with the World Bank the possibility of redirecting part of its credit to other purposes. In order to rehabilitate the East-West route, 240 km of rail lines will be repaired and 50 new locomotives will be bought.

Meanwhile, the German Development Bank (KfW) has already made up its mind to participate in the implementation of this state programme. The bank intends to finance the updating of the trains belonging to the Azerbaijani State Railway Department. At the same time, KfW has not yet put a limit on the credit to be made available, expressing its readiness to secure all the necessary procurements.

It is clear that the implementation of programmes to create profitable railway corridors through Azerbaijan is attracting international financial institutions and this may be seen as a guarantee for the implementation of such projects. The ability of the Azerbaijani government to finance independently important parts of this programme, which officials in Baku have repeatedly mentioned, brings forward the implementation of the South Caucasus transport hub project.