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Report No.35649-TJReport No. 35649-TJ TajikistanTajikistan in Sector Transport Air the of Review Tajikistan Review of the Air Transport Sector in Tajikistan A Policy Note Public Disclosure Authorized Public Disclosure Authorized June 30, 2006 Poverty Reduction and Economic Management Unit Europe and Central Asia Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of the World Bank Public Disclosure Authorized Public Disclosure Authorized ACKNOWLEDGEMENTS This Air Transport Review for Tajikistan is based on the findings of several missions to Tajikistan and Europe between April 2005 and November 2005. Many elements of the study have already entered the policy dialogue between the Bank and the Government of Tajikistan. This report is intended to facilitate further progress in this dialogue and to allow broader dissemination within the country and donor community. The principal authors of the report are Andrks Ricover and Sudhee Sen Gupta. Additional comment and guidance was provided by Sudharshan Canagarajah, Jakob von Weizsaecker, Jariya Hoffman, Utkir Umarov, Cevdet Denizer, Mehmet Gokay and Firuz Kataev. Administrative support provided by Damika Somasundaram and Zakj a Nekaien- Nowrouz. The team wishes to thank the Government of Tajikistan for very constructive discussions during and after the various missions, as well as comments provided on the final draft of the report. The team is particularly grateful for the inputs provided by Matlubkhon Davlatov, State Adviser to the President on Economic Policy, Abdukholicov't-h Abdulaziz Sharipov, Adviser to the President of the Republic of Tajikistan on Economic Policy, Ibrohim Jobirov, Head of Department of Civil Aviation, Hokimsho Tilloev, Director General of State Unitary Aviation Enterprise "Tojikiston", Rustam Bozorov, Transport Specialist Natural Monopoly Unit Antimonopoly Agency, and their staff. The generous financial support for this study by the Swiss State Secretariat for Economic Affairs (seco) is gratefully acknowledged. The team is also grateful for helpful comments and guidance from the peer reviewers, Ellis Juan and Tomis Serebrisky. Finally, the report benefited enormously from the active participation and advice of Charles E. Schlumberger, Principal Air Transport Specialist of the World Bank. 3 4 TABLE OF CONTENTS EXECUTIVE SUMMARY .............................................................................................. 7 1. BACKGROUND .................................................................................................. 11 2. THE PRESENT SITUATION .......................................................................... 13 A . THE MARKET ................................................................................................................ 13 B . INSTITUTIONAL FRAMEWORK ................................................................................ 24 C. AIRPORT INFRASTRUCTURE.................................................................................... 28 D. AIR TRAFFIC CONTROL ............................................................................................. 32 E. FINANCIAL SUMMARY OF TSA ................................................................................ 32 F. EFFORTS UNDER WAY BY THE EBRD..................................................................... 34 3. GOVERNMENT’S PROPOSED POLICY REFORM ....................................... 37 A . RATIONALE OF THE REFORM .................................................................................. 37 B. GOVERNMENT’S PLAN FOR LIBERAZATION........................................................ 39 4 . GOVERNMENT’S PROPOSED IMPLEMENTATION FRAMEWORK....... 43 A . INSTITUTIONAL REFORM.......................................................................................... 43 B . AIRPORT REFORM ....................................................................................................... 45 C. AIR TRAFFIC CONTROL REFORM............................................................................ 46 D. AIRLINE REFORM........................................................................................................ 46 5 . CONCLUSIONS AND NEXT STEPS .................................................................. 50 A . CONCLUSIONS ............................................................................................................. 50 B . ACTION PLAN............................................................................................................... 51 C. SCHEDULE OF IMPLEMENTATION OF RECOMMENDATIONS .......................... 53 5 EXECUTIVE SUMMARY Introduction 1. In a remote and land locked country with limited natural resources and a small population, development and growth are dependent on trade and commercial contact with the outside world. This makes access to Tajikistan a critical need for its development. The communication and its associated trade and commercial contact could be improved significantly, if the air transport sector in Tajikistan were appropriately configured. Tajikistan is also one of the poorest countries in the world and the poorest country in the former Soviet Union. One of its major sources of income is the earnings of migrant workers who go mainly to Russia in search of work (above 20% of the GDP).Migrant labor is dependant on the country's air transport sector. Background 2. Despite the relatively high volume of passengers, air transport to and from Tajikistan remains expensive by regional comparison. Air ticket prices for the main route between Moscow and Dushanbe are around 1/3 more expensive than tickets on comparable routes to other destinations in Central Asia. Furthermore, ticket distribution systems and ticket availability is poor. The burden of excessive prices and poor ticket availability imposed on a typical migration worker could at times represent an estimated 7 percent of his annual net income. Tajik State Air Company (TSA), the national flag carrier, was the only national airline operating international flights, connected only with a few destinations outside Russia. In fact, Dushanbe used to be the only capital in the region that was not served by a quality international airline acceptable to international business and leisure travelers. The access to Dushanbe is still hampered by the inability of international travelers to purchase or reserve tickets through any of the global distribution (GDS) systems to fly TSA. These factors tend to undermine Tajikistan's ability to attract foreign investment and affluent tourists. The current aviation policy is still restrictive in terms of market access (number and types of routes that could be operated), in terms of market capture (the maximum capacity allowed, given by number of frequencies and the type of aircraft that could be used) and in terms of market competition (number of carriers per route). For example, the Dushanbe-Moscow route is limited to only one carrier per party (single designation) and to a limited number of frequencies per week. Although some markets seem to be 7 unrestricted, technical regulations can sometimes be manipulated to restrict the access to specific markets. Control on air fares by the Anti-Monopoly Agency can restrict flexibility to seasonal opportunities while at the same time not provide an effective protection to consumers against abusive pricing. Issues being addressed by Government 3. The root cause for the situation described above was a restrictive aviation policy that limited competition to a minimum, combined with a poor institutional structure of the air transport sector in Tajikistan. The situation was characterized by two different features: i. Inappropriate institutional framework: The Department of Civil Aviation (DCA) centralized the functions of policy making, technical regulation and accident investigation and created conflicts of interest where the function of regulation is affected by policy-making, instead of being performed by a neutral body. ii. Anti-competitive structures: TSA operated the airline, the airport and the provision of air traffic control services. Under this situation, it is unlikely that the airport can deal in an even handed manner with other airlines wishing to land in Tajikistan even if the air service agreements were changed to provide the necessary landing rights. Without an arms length relationship with the national airline, the airport is likely to find every opportunity to dissuade or discourage competition for the national airline, like for instance not providing the ground handling equipment for competing types of aircraft, or manipulating the fuel supply. TSA also benefits from discriminatory practices applied to competing carriers, with respect to fees and charges for the use of infrastructure. TSA are not charged for any of the services, which are in addition the most expensive in the region for other carriers. Ultimately, the cross subsidization provides the airline with significant competitive advantages as it is not only not being charged for the use of the infrastructure, and thus receives a defacto subsidy. Government3 reform Policy 4. The Government strategy for reform is be based on three lines of action: i. Gradual liberalization of the air traffic rights. Tajikistan will look at eliminating the entry barriers to foreign carriers by defining a policy of liberalization, while assuring that the environment also favors free market access, competition and no control on air fares.