Transit and International Multi-Modal Transport

THE REPUBLIC THE WORLD OF AZERBAIJAN BANK

TRANSPORT SECTOR

SECTOR DEVELOPMENT

REVIEW AND UPDATE

Transit and International Multi-Modal Transport Integrated Border Management Corridor Transport and Trade Information

Baku The Republic of Azerbaijan The World Bank Transport Sector Sector Development Review and Update

July 2004

June 2004 2 The Republic of Azerbaijan The World Bank Transport Sector Sector Development Review and Update

1. INTRODUCTION

Since 1995 the economic growth comprised 8-10% during the last 8 years in Azerbaijan Republic. In this period the investment inflows totaled $17 billion. The Private sector’s share reached 73%. In the past 2 years, the country’s leadership has identified the development of the non-oil sector, including infrastructure, transport, communications and tourism as one of the priorities of economic development.

Legal framework and the country’s Tax Code is being improved.. The development of the transport sector of Azerbaijan is one of the necessary pre-requisites for further structural adjustment of the economy, increased competitiveness of transport services in international markets and the integration of the country into the dynamic international relations system.

Geopolitical position of Azerbaijan leads to a logical requirement of the transport links to be established from Europe to Asia through its territory. Highways and railroads connecting basins of Black and Caspian seas, as well as the shortest pass from Europe to countries of Central Asia, Middle and Far East lie through the territory of Azerbaijan.

As a country holding one of the critical positions in issues of establishing the shortest transport corridors in the euro-asian region, Azerbaijan represents a significant transport junction in the common transport system of Europe-Caucasus-Asia (TRACECA).

2. TRACECA

2.1 History of Establishment.

In September, 1998, the International Conference “TRACECA – Rehabilitation of Historical Silk Route” was held in Baku, which was attended by the Heads of States and Governments of 12 countries, delegations from 32 countries, as well as the representatives from the Commission of European Union and 12 international organizations.

The main outcome of this conference was the signing of “The Main Multilateral Agreement on International Transport for development of Transport Corridor Europe-Caucasus, Asia” (MMA), as well as the Technical Addendum to this Agreement on international railway and highway transport, international maritime shipping, customs procedures and processing of documentation.

The objectives of the Main Agreement (MMA) are the following:

. To support the development of economic relations, transport links and trade in Europe, the region of Black Sea, the Caucasus, the region of Caspian Sea and in Asia; . To ensure an access to the international market of railway and highway transport, and commercial shipping; . To support international cargo transport, passenger transport and the international transport of hydrocarbon products; . To harmonize transport policy, as well as the policy frameworks in the transport area; . To provide for security of transportation and cargo, and protection of environment.

Azerbaijan is a depositary of the Main Multilateral Agreement on development of the transport corridor Europe-Caucasus-Asia (TRACECA).

2.2 Current Situation.

In the current era of integration of economies of countries and cultures of nations, globalization and economic growth, the dependence on transport and trade becomes particularly essential. Participant countries of TRACECA start to witness the increasing demand on transit. Interest in TRACECA has recently been observed in the entire region of Eurasia. It goes without saying that TRACECA is acknowledged as a real revitalization of historical Great Silk Route.

In recent years, especially after signing of the Main Multilateral Agreement, much has been undertaken for the development of the transport infrastructure in the Azerbaijan’s section of the TRACECA corridor. As such, with financing from the European Commission a series of technical and investment projects have been implemented, such as layout of fiber-optic cables along the railways connecting Baku with the railway station Boyuk-Kesik (at the

June 2004 4 The Republic of Azerbaijan The World Bank Transport Sector Sector Development Review and Update border with Georgia) with the length of 503.0 km. The construction and reconstruction works have been carried out in the Container Terminal of the Baku International Sea Port. The first railway bridge Poylu has been constructed over the Kura River. Railway tanks for transportation of the crude oil and oil products have been procured for the Azerbaijan State Railways Company. Navigation equipment has been procured and installed for the Baku Sea Port. To create conditions for increasing the freight transport, Azerbaijan has undertaken a set of actions to improve the technical provisioning of the transport sector, to rehabilitate and construct railwas and highways, bridges, to repair mobile railway carriers, ships, ferries, port installations. A new oil transit terminal Dubendi with the capacity up to 10.0 million ton of oil products per year has been made operational in Baku. A 40.0 kkm long section of the Alat-Gazi-Mohammed highway of transport corridor Europe-Caucasus- Asia has been constructed, which now meets the highest European standards.

These works were carried out in line with TRACECA projects funded from the credits of the World Bank, European Bank of Reconstruction and Development, Kuwait Fund and other financial institutions. In addition, there have been actions taken to create the most favorable conditions for the transportation of special-purpose and humanitarian cargo to central Asia and Afghanistan through the transport corridor TRACECA.

Port duties in the Baku International Sea Port are the lowest compared to other sea ports on the TRACECA corridor and 3-4 times lower than those in the other Caspian ports of Aktau and Turkmenbashi. “Hotline TRACECA” shields have been installed and made operational on route of the corridor in the border control posts of Azerbaijan. Based on the decision of the Cabinet of Ministers of the Republic, a Monitoring Group has been created to ensure control over a smooth transit of humanitarian goods through the corridor.

Also, a National Working Group on trade and transport facilitation and development has been established, which currently performs in parallel the functions of the World Bank AzerPro as well.

Thanks to the work undertaken, the volume of transit through TRACECA corridor has significantly increased recently. In 2003, 34.0 million tons of various goods were transported through the Azerbaijani section of the Eurasian transport corridor by all types of transport means. This is 22.6% more than in the previous year. Of this volume, 45.8% were transited through railways, 29.7% - through highways, and 24.5% - through maritime shipping.

The volume of transportation of oil and oil products through TRACECA route increased substantially. If the oil and oil products transportation was only 335.0 thousand tons in 1995, in 1999, this figure went up to 4.8 million tons, while in 2000 and 2002, it comprised 5.2 million tons and 8.7 million tons respectively. According to the end-2003 numbers, the volume of oil and oil products transport reached 13.0 million tons.

2.3 Issues and Challenges.

However, there are also drawbacks and problems in cargo transportation through TRACECA corridor. The experience on the TRACECA corridor shows that the following are among the deciding factors in resolving the existing problems:  Unification of transit tariffs and duties;  Harmonization of border crossing procedures;  Creation of a common legal framework for transit.

These factors represent the priorities of the TRACECA program. The work under the projects of “A Common Policy on Transit Pricing and Tariffs” and “Harmonization of Border Crossing Procedures” has been completed. Continuation and elaboration of this work in the National Working Groups of the Parties would allow a staged implementation of recommendations and requirements of these projects.

By signing the Main Multilateral Agreement, the participant countries of TRACECA undertook the commitment on improving and development of transit of goods and passengers through the transport corridor Europe-Caucasus-Asia, on increasing and improving the competitiveness of this corridor to strengthen and deepen regional cooperation and integration processes.

The analyses made reveal that there are huge potential opportunities for increased transit, particularly the transit cargo in containers. To develop multimode transit and container logistics in the participant countries of TRACECA, there should be better conditions, which would undoubtedly lead to lifting the existing drawbacks and obstacles and establishing favorable conditions for transit.

This might be evident from the example of humanitarian transit to Afghanistan. Humanitarian goods were delivered successfully through the TRACECA corridor for many times. But, the most exemplary was the truck rally of “Mercedec-Benz” trucks with humanitarian aid to Afghanistan along the TRACECA route, which was accompanied by 47 representatives of mass media from Western and Eastern Europe. Truck column of 24 “Mercedec-Benz” trucks with humanitarian cargo and length of 1.5 km started September 1st, 2003 in Brussels and after passing through the territory of several European countries on September 17th entered to the territory of Azerbaijan. At that time all customs and border procedures were completed in 24 minutes, which was possible as a result of preliminary processing and customs clearance in advance based on the documentation received through e-mail.

Effective use of potential opportunities in the participant countries of TRACECA, will surely make the transport corridor Europe-Caucasus-Asia more competitive, profitable and secure.

It must be noted that political stability and peace are the necessary conditions of economic growth and the development of integration both in the world as a whole, and also in our region. Unfortunately, unresolved regional conflicts in South Caucasus remain as serious impediment. The earliest peaceful resolution of these conflicts and liberation of occupied territories will serve as a firm basis for peace, stability and would warrant overall fruition of the whole region.

2.4 Improvement Measures at the Border Customs.

. Data transmission network of the State Customs Committee was established. . Database of Azerbaijan’s Customs was developed. . Institute of customs brokers was founded and is operational. . Customs Committee conducts training (courses) for brokers based on the application of transport-expeditor enterprises. Those having passed the respective training are awarded with certificates and made eligible for broker activity. . Regional center for training (training and re-training) of customs staff was constructed in Baku in accordance with the highest international standards and made operational. . By the decision of the Cabinet of Ministers, Monitoring Group on humanitarian transit was established. . “ Hotline TRACECA” shields have been installed and made operational on Azerbaijan’s portion of TRACECA corridor in the border control posts of Azerbaijan.. . Automated system of registration and control of law infringements identified by customs authorities of Azerbaijan was developed and made functional. . At entry of data and receipt of output documents, rather a wide specter of classifiers are used, namely:  Directory of Names and Codes of Customs Agencies;  Directory of titles and codes of rules and laws;  Directory of agencies of Azerbaijan Republic;  Directory of article numbers of Code on Administrative Law Infringements;  Directory of Article Numbers of Criminal Code;  Directory of titles and codes of types of violators;  Classifier of level of education;  Directory of names and codes of countries;  Classifier of regions of Azerbaijan;  Classifier of type of occupation of violators;  Classifier of type of submitted documents;  Classifier of types of movement;  Classifier of forms of hiding of goods;

 Classifier of methods of identification;  Classifier of technical means of customs control;  Classifier of transport vehicles;  Classifier of withheld (currency, goods) and non-payment of customs taxes;  Directory of classes of goods conforming to category of prohibited or of limited import or export;  Directory of titles and codes of goods from Trade Nomenclature of Foreign economic activity, in accordance with classes of prohibited goods or those with limited import or export;  Directory of names and codes of units of measure;  Directory of names, codes and exchange rates of currencies in manats;  Directory of names and codes of deposits of individuals’ funds;  Directory of names and codes of approved resolutions on the case;  Directory of titles of decisions on article 425 of the Part I of the Code on Administrative Law infringements;  Directory of titles of decisions on article 23 of the Code on Administrative Law Infringements;  Directory of titles of decisions on article 436 of the Code on Administrative Law Infringements;  Directory of titles of decisions on article 412 of the Code on Administrative Law Infringements;  Classifier of citizenship;

3. GENERAL OVERVIEW OF TRANSPORT SECTOR

Azerbaijan Republic has inherited a transport sector that includes railway, highway, maritime, aviation and pipeline transport.

3.1 Railway Transport

Azerbaijan railway transport carries out high volume of cargo and passenger transport, and possesses a wide network of railway routes in the country. The length of main routes are 2 932 кm, while the exploitation length is 2 117 кm, of which 815 кm is two-lane routes.

Of total exploitation length of route 60% or 1272 km are electrified, 40% or 845 кm operate on thermal carrier. About 60% of the length of the railway routes or 1 126 кm are equipped with auto block, 479 кm – with centralized dispatcher, while the rest are equipped with semi-automatic blocking equipment. The railways has 176 stations, 2 of which , Bilajari and Shirvan are the big automated sorting stations, 12 stations have container courts with necessary mechanisms and machines, 3 stations–Keshle, Ganja and Khirdalan performs operations with high cargo containers.

Azerbaijan’s railway has sufficient quantity of locomotives with 234 electric locomotives and 278 train and mobile thermal carriers. The average term of service of electric locomotives exceeds 34 years, for thermal carriers it is–25 years, thus, most of them are in need of capital repair. Reconstruction of Baku Locomotive Depot allowed to arrange there for capital repairing of the electric locomotives and electric engines. In Bilajari and Imishli Locomotive Depots the capital repair of thermal carriers has already started.

There are 25 thousand of various types of cars and 4 thousand containers in the car park of the railways. The capital repair of cars, platforms and semi-cars was organized in the car depot of Ganja. Capital repair of refrigerator cars are carried out in depot of Alat. Capital repair of cistern tanks is done in the car depot of Shirvan. Capital repair of containers is organized in the specialized container depot of Keshla. These measures will rehabilitate significantly the park of cars, containers and ensure that requirements on transit of goods are sustainably met. There are 769 passenger cars in the railways, of which 473 are in exploitation, and the rest are in reserves. There are passenger train routes carried out in the direction of Baku-Moscow, Baku-Kiev, Baku-Rostow, Baku-Kharkew, Baku-Astrakhan, Baku-Tbilisi.

Starting from 1997, there is a sustainable trend on increasing volume of carriers. One of the key factors leading to such increase was oil marine terminal and station in Dubendi in 1998 based on agreement between Azerbaijan Republic and Republic of Kazakhstan. Thanks to this terminal base (Dubendi), about 9 million tons of crude oil is transported to Batumi with eventual delivery to European countries.

3.2 Highway Transport

The highway tran sport in the republic is mainly privatized. It is mainly joint-stock companies and private sector (firms and individuals) who are dealing with passenger and cargo transport. In the period from 1998 to 2002, about 35 thousand cargo trucks and 5 thousand passenger buses came to (or passed through as a transit to other countries) Azerbaijan from foreign countries on average, of which 10.5 thousand cargo trucks and 1.4 thousand passenger buses went through the TRACECA transport corridor.

International transport of cargo to Azerbaijan Republic and transit through its territory to other countries is carried out by autocarriers of 40 countries of Europe and Asia, of which the largest volumes belong to autocarriers from Islamic Republic of Iran – on average 20 thousand units a year, Republic of Turkey - 8 thousand units, Russian Federation – 3.5 thousand units. Azerbaijan Republic has a passenger bus connection with cities of Russian Federation, Georgia, Turkey, and Islamic Republic of Iran.

The total length highways of general utility in the Republic comprise 24981 кm, including 6882 кm of republican importance and 18099 кm of domestic importance. Of this 191 km conform to requirements of the 4-lane highways of autotransport. Total density of highways in the Republic is 288 кm/1000кm².

The highway network is securely linked to all cities, district centers, metropolitan counties, air and sea ports, railway stations, reservations, sanatoriums and places of rest of population, as well as border crossing points with neighboring countries.

Main highways, through which international transport flow with cargo and passenger goes are highway Baku-Alat-Ganja-Kazakh-border of the Republic of Georgia (Azerbaijani section of TRACECA corridor) with the length of 503 km and border of Russia-Baku- Astara-border of Islamic Republic of Iran (Azerbaijani section of corridor “North-South”) with the length of 521 km.

3.3 Marine Transport

State Caspian Shipping of Azerbaijan Republic is the large shipping company in the Caspian basin. This is a multi-sectorial transport organization, which includes transport, technical and support-service ships, shipyard production amalgamation “Kaspmorsudoremont”, training, trade, supply and expeditor-agency organizations.

The main activity is transport of cargo, mainly of oil and oil products. Shipping regions are Caspian, Black, Mediterranean and Marmara Seas. The main production base of shipping company is the transport fleet of 70 ships, of which 34 tankers (including 1 water-carrier), 26 universal dry cargo ships, 2 Ro-ro type and 8 marine railway cargo-passenger ferries, with total deadweight of 316.0 thousand tons. The average deadweight of one ship is 4 768 tons.

Strategy and priority in the development of shipping are aimed at optimal use of opportunities of Eurasian Transport Corridor.

Baku International Sea Port (BISP) operates continuously during the year. BISP consists of 4 main terminals, such as Terminal of Main Cargo, Woods Terminal, Absheron Oil Terminal. Terminal of Main Cargo can process all kinds of bulk, loose and general cargo, as well as 20 and 40-feet containers. Total bearing capacity of the terminal is the following:

- bearing capacity of quay 4 mln tons/year - open-air storage 2 mln tons/year - warehouse 300 thsnd tons/year - direct cargo processing 2 mln tons/year

- Terminal has 7 quays, with the depth of quay equal to 7 metres. - 1 quay can receive ships of type “Ro-ro”. - Territory of open-air storage occupies 33 thousand sq.m. - Territory of closed storage consists of 5 storage premises with total square of 10,600 sq.m.

The cargo processing equipment of the terminal consists of:

- 18 portal cranes with bearing capacity from 6 to 40 tons; - 8 lift-trucks with bearing capacity from 1,5 to 10 tons; - 100 units of 20-feet trailers “Morflot”; - terminal tractors SISU; - various special cargo processing equipment; - mobile locomotives; automobile and train weights.

The infrastructure of the park with highways and railways deadlocks of 8 km long can serve any type of multi-mode cargo works.

Terminal is guarded by military security and police, there are also marine firefighting team and port system of marine firefighting located in the terminal. Customs point located nearby enables the customs clearance procedures. Tariffs on cargo processing and for storage of goods may be agreed upon and approved on a mutually beneficial basis.

Port tariffs at the Baku International Sea Port are the lowest compared to other sea ports along the TRACECA corridor and 3-4 times lower than those in other Caspian ports of Aktau and Turkmenbashi.

Apsheron Oil Terminal is located in the Apsheron peninsula in the distance of 47 km from the downtown Baku. Processing of crude oil and liquid oil products is carried out in 4 quays with the depth of water of 9.6 m and capacity of 25 million tons per year, and with direct access to SOCAR pipeline and tankers of CASPAR and Russia.

3.4 Further Transport Sector Statistics

In 2003, the transport’s share in GDP comprised 7.3% or 2544.3 billion mantas, which is higher than 2002 figure by 7.4%. As stated by Azerbaijan StatCom, the GDP volume went up in 2003 by 11.2% compared to 2002 and comprised 35053.4 billion manats. The share of industry in GDP was 37.8% or 13251.9 billon manats, which is 4.3% more than in 2002; in communications – 2.2% or 788.6 billion manats, which is 28.0% more than 2002; in construction – 12.1% or 4250.4 billion mantas, which is 61.0%more than in 2002; in agriculture – 13.1% or 4605.3 billion mantas, which is 5.6% more than in 2002.

In January-November, 2003, 85.6% of total exports of Azerbaijan was the products of fuel- energy sector: during this period, 7,458,859.2 tons of crude oil (in the amount of $1,473,737.3 thousand) and 145,306.4 tons of fire mazut (in the amount of $22,072.6 thousand) and etc. were exported.

In January-March of 2004, transport’s share in GDP of Azerbaijan comprised 8.4% or 673.7 billion. Mantas, which is more than a figure in the analogous period in 2003 by 5.7%. In January-March 2004, Azerbaijan’s GDP volume increased by 10.6% compared to January-March 2003 and comprised 8048.8 billion. manats. Industry’s share in GDP was 42.7% or 3433.2 billion. manats, which is higher than the same period of 2003 by 4.7%; in communications –2.9% or 238.1 billion. manats, which is higher than the same period of 2003 by 35.6%; in construction – 11.8 % or 949.1 billion. manats, which is higher than the same period of 2003 by 57.0%; in agriculture – 2.0% or 164.6 billion. manats, which is higher than the same period of 2003 by 3.5% .

Table 1. Main Transport Sector Indicators

% January – March, 2004 to January – March, 2003 Transport of Cargo (thousand tons) TOTAL (including): 26,306.4 108.5 Railway transport 4,890.9 109.4 Marine transport 3,177.8 111.3 Air transport 14.4 160.0 Pipelines total (including) 4,569.9 103.1 Oil pipelines 2,791.7 104.0 Gas pipelines 1,778.2 101.7 Road transport 13,653.4 109.4 of which by individuals 10,677.2 109.8 Cargo Turnover (million ton/km) TOTAL (including): 5,426.0 106.7 Railway transport 1,740.0 99.8 Marine transport 1,495.7 109.2 Air transport 58.1 163.2 Pipelines total (including) 467.3 101.7 Oil pipelines 158.7 102.9 Gas pipelines 308.6 101.1 Road transport 1,664.9 112.6 of which by individuals 1,598.3 112.9 Passenger Transportation (in thousands) TOTAL (including) 226,546.3 103.2 Railway transport 1,164.4 114.4 Marine transport 3.6 120.0 Air transport 226.0 144.2 Tram ------Trolley 399.5 65.2 Metro 34,010.0 110.4 Bus 185,201.0 102.1 of which by individuals 125,611.8 101.6 Taxi 5,541.5 102.5 of which by individuals 4,319.5 102.3

4. TRANSIT CORRIDFOR. APPLICABLE TARIFFS

4.1 Regular Tariffs

CASPIAN SEA I. Ferry transit Baku – Aktau Per line meter of loaded car $35.0 Per line meter of empty car $30.0 Baku – Тurкmеnbashi Per line meter of car $30.0 II. Transit of oil in tankers Aktau – Baku Per 1 ton of oil $6.0 – $6.5 Turkmenbashi – Baku Per 1 ton of oil $7.0 – $7.5 Baku – Ports of Iran Per 1 ton of oil $10.0 – $12.0 BLACK SEA III. Ferry Transit Konstance (Romania) – Batumi Per 1 line meter of car $36.5 – $44.0 Konstance – Derinje (Turkey) Per 1 line meter of car $18.25 – $22.0

4.2 Special Rates (with 50% discount in accordance with MMA) on Transit through Railways of Azerbaijan and Georgia of Oil, Oil Products and General Cargo For 2004 (in US Dollars per 1 ton)

Through Georgia Oil Oil Products Gen. Cargo Ghardhabani – Batumi (342 km) 6.0 8.0 - Poti – Ghardhabani (360 кm) - - 8.64

Through Azerbaijan Oil Oil Products Gen. Cargo Baku-dock – Boyuk-Kesik (503 km) 5.5 6.78 9.8

4.3 Special Rates on Transit of 20 ton Containers (in US Dollars per 1 Container)

Through Georgia

Poti – Ghardhabani (360 кm ) 100.0

Through Azerbaijan

Baku-dock – B/Кesik (503 кm) 213.0

4.4 Tariffs For Permits on International Transit through the Territory of Azerbaijan Republic by Foreign Road Transport Carriers

Entry to country or transit Amount of duty (in US dollars) By auto carriers from countries having the 100.0 bilateral Agreement By auto carriers from countries lacking the 150.0 bilateral Agreement Return shipment from Azerbaijan 100.0

Transit to/from third countries (one way) 600.0

Entry without car 350.0

Notes: 1. At border, permits are obtained by auto-carriers lacking the transit permit (received in accordance with the bilateral agreements). 2. For Iranian auto-carriers the amount of duty for permit is $160. 3. Duty is not levied for the transit of empty trucks.

4.5 Road Tax, levied based on provisions of the Tax Code of Azerbaijan Republic (in US dollars)

For entry For each to the from 2 tо More than day from Type of Transport Means Republic 7 days 30 days 40 8 to 30 (for the 20% % days 30% first day) Passengers vehicle 15 - - - Bus up to 12 seats 30 6 9 12 Bus from 13 to 30 seats 40 8 12 16 Bus more than 30 seats 50 10 15 20 Trucks and trailers b/c to 10 tons 40 8 12 16 Trucks and trailers b/c from 10 to 24 tons 70 14 21 28 Trucks and trailers b/c more than 24 tons 100 20 30 40

Notes: 1. An additional tax is levied from the truck carrying hazardous cargo, depending on the degree of hazard in cargo. 2. Such simplified (relatively) scheme of road tax is in effect since 2002 in accordance with the “Law on introducing amendments to the Tax Code of Azerbaijan Republic” #620, dated December 26th, 2001.

5. MAIN DIRECTIONS OF DEVELOPMENT OF TRANSPORT AND TRADE

Forecast analysis of main directions of development of the world economy indicate that main financial, trade and information flows in the XXI century will be accumulated in the triangle of USA-Europe-Asia.

In this context, the most important task for the participant countries is to realize their own geopolitical and economic capabilities through development of transport network of international transport corridor Europe-Caucasus-Asia, which was officially recognized by leading international organizations (ESCATO UN and others) as one of the natural transit bridges between Europe and Asia.

To-date, trade turnover between Asia and Europe already exceeds $2 trillion, while transport costs comprise $200 billion. As one of the examples, comparative data on trends in growth of the trade among some countries of Asia, USA and European Union.

Table 2. Indicators of foreign trade among some countries of Asia with the USA and EU (in billion US Dollars)

US EU 1986 1996 1986 1996 Imp. Exp. Imp. Exp. Imp. Exp. Imp. Exp. Japan 28.9 80.4 74.4 104.9 17.8 36.7 50.8 62.1 China 4.7 2.6 18.0 26.0 9.1 4.4 23.0 21.0 Indonesia 1.5 2.9 5.2 7.0 2.2 1.4 9.5 7.6 Malaysia 2.0 2.3 13.0 16.0 1.9 2.1 14.0 11.0 South 6.5 13.9 33.3 21.7 3.9 5.2 23.7 16.3 Korea Total: 43.6 101.1 143 175.6 35.6 49.8 120.0 118 Trade 144.7 319.5 85.4 237.9 Turnover Growth 2.2 times 2.8 times

The table suggests that existing main trade triangle is a reality and TRACECA countries indeed are positioned on the main road connecting Europe with Asia.

Considering the geographical location of TRACECA countries in the context of, on the one hand, development of trade relations between Europe and Asia, and on the other hand, the fact that main producers are located in Asia, while main consumer are in Europe, the birth of cargo flows of possibly the biggest countries owning cargo, one can make practically a errorless conclusion – delivery of goods to Europe through transport corridor TRACECA (East-West) looks much more appealing than alternative routes. It suffices to note that the distance through a main transoceanic route from Yokohama to biggest western European

June 2004 17 The Republic of Azerbaijan The World Bank Transport Sector Sector Development Review and Update ports (Rotterdam, Hamburg, Antwerp and others) are more than twice as long as TRACECA route.

To date, participant countries of TRACECA transport corridor, possess wide-spread transport network and sea ports of international importance oriented at the rest of the world and having a good pass-through within own territories, mainly thanks to assistance of the European union’s program. This means that for the development of transit, TRACECA countries do not need to create new internal corridors or additional transport links to neighboring countries. Also, it must be stressed that these countries do not need to attract large investments currently for the development of already existing transport corridor and its networks. TRACECA transport corridor exists and is functioning.

A lot of experience accumulated in arranging large volume of transit carriers of various categories. After the signing in Baku on September 9th, 1998 of “The main multilateral agreement on the development of international transport through corridor Europe- Caucasus-Asia”, the legal base are being created for organization of international transit on a more qualitative level. Also, critically important is another factor: transport networks of TRACECA pass through countries that are abundant with natural resources and energy reserves, which are prospective in terms of exploitation. These regions have not yet lost high-qualified human resources. The development of transit in these countries will undoubtedly continue to promote growth of output and employment in the regions. Whatever the political or economic changes take place, chosen, developed and strengthened in practice TRACECA transport corridor remains as a long-term stabilizing factor creating favorable investment climate and positively affecting on globalization of intergartion processes.

Taking into account intensive development of telecommunications and information processes in the XXI century, which immediately presumes the development of e-trade through worldwide web Internet, it should be noted that in this context the role of the transport increases dramatically. However, there is another factor as well: due to the growth of electronic sales, a problem of speed and service of delivery of ordered goods to the addressees will emerge. Most probably the air, automobile and railway transport would meet the high-speed technology of delivery of goods. In this respect, a lot of factors have to be analyzed: speed and security in delivering goods, a distance that cargo carrier has to complete, type of transport. It is necessary to stress here that the transit factor would become more important in the market of transport services, namely new shorter routes for transport means, a proper level of service for transit, and attractive and competitive tariff, i.e. “a commercial triangle” commonly recognized in transit flows (Time-Service-Tariff). Nevertheless, water transport will keep its position in prospective transoceanic routes. Moreover, it must be noted that some shipping transnational companies already embarked on research and negotiations with shipyards on construction of container ships of new generation (10 000-12 000 and more).

Creation and development of any transport corridor (route) envisages not only the efforts of each country’s transporters. The transit flow in the international transport corridor is organized and functioning in the multi-factor system of coordinates.

European Union is the main donor of TRACECA program. Particularly, since 1993/4 to date, it allocated more than €110 million for realization of 53 technical and investment projects. The main goal of this program is to deepen regional and inter-regional cooperation among countries that signed the Main Agreement and create conditions for optimal integration of TRACECA transport corridor in traneuropean transport networks (TEN’s).

It is necessary to stress the position of the US, which in accordance with the directive of the former US president, B. Clinton on strengthening interaction with the countries of Transcaucasus and Central Asia, the president’s administration is actively promoting the idea of creation of a new Eurasian transport corridor (TRACECA) since 1999, which would connect these countries with the West.

Establishment of such corridor is necessary to protect the new independent states of the region from domination of any one country over the communications and transport flows on the one hand, and on the other hand, to ensure guaranteed continuous access of Caspian and near-Caspian energy resources to international market.

After a historical summit of signing of “Main Multilateral Agreement on international transport through the development of corridor Europe-Caucasus-Asia” on September 9th in Baku, Intergovernmental Commission of TRACECA and its executive bodies – Permanent Secretariat of IGC TRACECA and the respective representations in the countries- signatories of the MMA were established, i.e. interregional program of European Commission TRACECA was institutionalized.

The issues of Eurasian transit of cargo through TRACECA transport networks must be considered in light of the availability of cargo base at the ends of the route, i.e in the Asian region and Western Europe from the perspective of political economy, as well as from the position of countries creating cargo in relation to TRACECA countries’ desire to strengthen their positions as transit States, i.e economic (competition) and geopolitical perspectives.

In this regard it would be worthwhile to take into account how China, the biggest producer of goods in the world, India, Iran, the geostrategic location of which are well known in light of the existing transit bridge Europe-Asia-Europe, and most important ly Russia, with it main and reliable Trans-Siberian railway route, are planning to enter XXI century.

The main container traffic in the direction Europe-Asia-Europe in the nearest future will in any way be focused on transoceanic route. Cargo shippers in Southeastern Asia – China, Japan, Korea will focus on shipment of containers by sea and in this context, TRACECA countries face a challenge of providing the best conditions to cargo owners, which will require from carriers to reduce dramatically the time of delivery, increase the level of

June 2004 19 The Republic of Azerbaijan The World Bank Transport Sector Sector Development Review and Update service and appropriate legislative framework for multi-profile (multi-mode process of international transit carriers.

This is going to be reflected especially in the conditions of development of electronic trade. The successful outcome could be where projected 3-5% Eurasian trade, and respectively, container carriers in future would be focused on transport networks of TRACECA countries. The price of this is about $3-$4 billion a year.

From the position of different countries with regard to the development of transit through corridor Europe-Caucasus-Asia (TRACECA), it is also useful to note the following.

Judging by challenges faced by “end points” of the transit route – EU and China, the their policies have started to be coordinated recently. European Commission is working on creation of trans-european networks and is seeking an access to China with assistance of TRACECA program. Meanwhile, China, by pursuing a balanced policy, works actively on the development of Trans-chinese railways route with eventual connection with transport corridor Europe-Caucasus-Asia (TRACECA).

It must also be stressed that the main political and economic factors playing practically a deciding role in regional drawing of participant countries of TRACECA in the era of integration processes of mobilization in the modern world are the following:

. Maintain the stable economic growth of GDP in the range of 8-10% per annum. . The growth of investments to economy, since the reinvestment and inflow of foreign investments is extremely low and do not meet the needs of these countries. . Halting capital outflow from the countries, since the lack of it do not allow them to pursue a focused investment policy. . Strengthening of technological sphere. . Uniform, coordinated policy of state structures of TRACECA countries in harmonization of legislative framework for functioning of international transport corridor Europe-Caucasus-Asia (TRACECA).

To fulfill such a large-scale task as the attraction of additional (4-6%) of trade flows to transport networks of TRACECA, a substantial modernization of transport complexes, as well as in relation to the transit carriers, harmonization of national legislations with the international conventions will be required in future.

Estimated volume of investments for TRACECA countries to gradually implement such modernization, approximately exceeds $50 billion. For comparison, China has spent on such issues more than $30 billion during the last decade.

It is evident that in better circumstances, TRACECA countries may receive not more than one billion dollars for these purposes from international financial organizations in the near

June 2004 20 The Republic of Azerbaijan The World Bank Transport Sector Sector Development Review and Update future. The rest should come from cargo owners, which are interested also in transit of cargo through the territory of these countries. In China, the proceeds of the international credit organizations directed at the development of trade and transport infrastructure is about one-fourth of the required resources, the rest are the direct investments of the cargo owners, who are seeking ways to increase the volumes of the transport of goods.

Hence, TRACECA countries should be in position through investments to transit to cope with their internal challenges of reconstruction of transport system.

For attraction of such large-scale investments, it is necessary to have legislative approval of such forms of investment as concession, and a “build-operate-transfer” system, which has been widely used in past decade. Such mechanism was widely applied in India, Malaysia, Turkey, Egypt, Nepal for attraction of investments to big infrastructure projects with long- lasting period of cost recovery. In accordance with this scheme, investors and government conclude a contract, which obligates the investor to build a turnkey infrastructure facility (port, container terminal, airport, bridge, toll road, etc.) and carry out the exploitation of the facility for 20-30 years. At the end of the exploitation period, government has a right to buy a controlling share of stocks from an investor on a mutually beneficial basis, set forth at the moment of signing of agreement. Working on such project, government of India was able to attract more than $20 billion, while Turkey attracted $16 billion. Several countries were able to resolve a number of parallel investment problems through application of such mechanism. As such, Turkey could resolve a problem of repatriation of capital previously taken out of the country, by investing it in the construction of infrastructure facilities without identifying sources of capital, while reasoning on the fact that it wouldn’t be possible to take the built container terminal out of the country. As a result, more than $10 billion came back to the country without any special tension from the law-enforcement bodies.

History of TRACECA countries confirms that to resolve the problem of large-scale rehabilitation of infrastructure only from the internal financial resources is extremely difficult.

While reviewing the problems of modernization of infrastructure of these countries as a whole, and not only the problem of one transport sector or several linked sectors in one given country, it is necessary to identify the following strategic tasks for the development of TRACECA program in the next four years (2004-2008):

1. To include the realization of transit program in the national priorities of the countries which signed and ratified “Main Multilateral Agreement”. To develop coordinated state ideology with appropriate legislative provision and using as examples, the achievements of countries such as Netherlands, CEE countries, etc. Meanwhile, it is necessary to account of e-trade system developing intensively, which is an important factor in the change of the world trade structure and its transport provision. on the basis of work done by transport ministries and agencies On the basis of work done by transport ministries and

agencies, to develop a coordinated program of development of international transport corridor, TRACECA and its transport networks, taking into account the fact that these have to serve the internal needs of the countries as well.

2. To reduce a tax burden, firstly VAT and customs duties, on projects of transport infrastructure development of strategic importance for country from the point of taxation. To introduce new modern forms of attraction of investments tested and applied by many countries (concession, “build-operate-transfer”).

3. To use the most of the international grants and loans for the development and reconstruction of transport and communication infrastructure.

4. Take measures of reasonable protectionism with respect to transport companies, ship owners, ports, railways and other facilities of transport infrastructure engaged in transit carriers.

5. To develop international cooperation in the area of transit, first of all with countries leaning to the option of transit through TRACECA due to their geopolitical position. In this context, of deciding importance will be the coordinated support of MFAs of TRACECA countries in resolving the international problems, associated with the development of transport cooperation, purposeful diplomatic steps for the resolution of unresolved problem matters, which are critical in terms of transit perspectives (the soonest resolution of conflicts in Nagorno Karabakh, Abkhasia, South Osetia, and Pridnestrovye).

6. An active PR campaign will be required to facilitate coordination of efforts of government and commercial structures of TRACECA countries in the area of transit development.

Hence, based on the above-mentioned, it is possible to state that trabsit plays an important strategic role in the economies of participant countries of the TRACECA program of European Union. It is also evident that there are all pre-conditions for substantial increase by 2-3 times of this type of service to the world community.

This is a task of state and national scale and is directly linked with the change in structural policy and economic strategy of countries, which signed “Main multilateral agreement about international transport on development of corridor Europe-Caucasus-Asia”.

In light of interregional contours, a pragmatic approach and rational resolution of this task will significantly influence the geopolitical activity of these countries and will have a chance to become one of the factors stimulating the development of not only the transport complex and the economy of these countries, but also a globalization of on-going regional and interregional integration processes to achieve a long-term political stability.

Main aspects of trade and transport facilitation

. Automated customs processing with minimal data request.

. Remote declaration filling and simplified clearance procedures.

. Advance processing prior to arrival, inspection after processing and audits.

. ” Fast-tracking” processing (accelerated procedures) for authorized entrepreneurs, selected based on risk assessment.

. Processing based on a “One Stop Shop” principle through coordination of activities of State services to avoid multiple inspections of the same goods.

. Standard time limit for customs processing.

. Cooperation between customs services and trade agencies, such as carriers, transport operators, expeditors, chambers of commerce and banks.

. Transparency of customs norms and procedures.

Table 3. Trade turnover of member countries of the Main Multilateral Agreement on the development of TRACECA with EC and the rest of the world. (in million euros)

With the rest of the world With EU years 1993 1995 2001 1993 1995 2001 Armenia 300 800 1400 55 101 400 Azerbaijan 1390 928 4177 69 171 1443 Bulgaria 5782 8144 13629 2500 3887 7501 Georgia 400 400 1700 131 122 600 Kazakhstan 2393 6914 20157 999 806 4562 Kyrgyz Rep. 700 700 1000 16 87 120 Moldova 951 1213 2334 92 242 530 Romania 9800 14000 30100 4300 7200 21800 T ajikistan 800 1200 1500 200 150 130 T urkmenistan 1000 2400 3000 300 300 500 Ukraine 6900 26700 34800 2600 3700 9700 Uzbekistan 1400 4400 4800 600 900 1200 Total 31816 67799 118597 11862 17666 48486

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