Second Road Network Development Investment Program (RRP AZE 45389) SECTOR ASSESSMENT (SUMMARY): ROADS A. Sector Road Map 1. Sector Performance, Problems, and Opportunities 1. Sector performance. Transport plays an important role in the economy of Azerbaijan, providing 6% of the gross domestic product; contributes significantly to regional cooperation; and facilitates the development of international trade and transit traffic. Since 2006–2007, the Government of Azerbaijan has used a significant portion of oil revenues to rehabilitate and develop non-oil infrastructure under its ambitious public investment program to strengthen infrastructure and social services needed to realize rapid growth. Consequently, Azerbaijan’s gross domestic product grew by an average of nearly 20% per annum during 2006–2010. Transport is mainly by road and rail. Roads are the dominant mode of freight and passenger transport, carrying 11.33 billion ton-kilometers (km) of freight, or 12% of all freight, and 16.63 billion passenger-km, or 79% of the all passengers, in 2010. From 1995 to 2010, the volume of freight transported by road ballooned by a factor of 20, from 0.53 billion ton-km to 11.33 billion ton-km.1 In the same period, the volume of freight transported by rail grew by 243%, from 2.41 billion ton-km to 8.25 billion ton-km. With continued economic growth in Azerbaijan, the share of roads in total transport is projected to increase, enhancing the road subsector’s importance to the country’s development. 2. Azerbaijan’s current Law on Roads, enacted in December 1999, provides the legal basis for the design, construction, operation, maintenance, and development of roads, as well as laying out legal, technical, economic, and institutional principles of road management. As the law is somewhat outdated, the government initiated its revision under the World Bank-supported Azerbaijan Highway II Project. A draft law entitled Updating of Road Law in Azerbaijan—Law on Roads (Amendment) Law, dated March 2009, contains further provisions on the management and administration roads, the rights and responsibilities of road users, road safety and maintenance, road authorities, and other arrangements for the network. 3. The current functional classification of roads in Azerbaijan is based on the Cabinet of Ministers’ Decree of July 2004. State roads under the Ministry of Transport and AzerRoadServices (ARS) are divided into republican and local roads, with republican roads further divided into international and respublica roads. The classification is thus three-tier: (i) international roads, (ii) respublica roads, and (iii) local roads. The road network in Azerbaijan extends for 25,000 km, including 4,500 km in Nagorno–Karabakh and 2,000 km in the Nakhchivan autonomous area.2 The network’s 7,000 km of state roads includes 1,500 km of M-roads, with the balance of 18,000 km being municipal roads. 4. The road sector is primarily funded from three sources: the road fund, budgetary appropriations of the Ministry of Transport, and external borrowings. The road fund was abolished in 2001 but restored in 2007. It is shared by cities and regions for their road networks and by ARS for state roads. 5. The road fund is used primarily for road maintenance. ARS maintenance units located in various districts maintains main and secondary roads on a force account basis. The maintenance units are inefficient because of their poor economy of scale, weak 1 State Statistical Committee of the Republic of Azerbaijan. 2011. Statistical Yearbook of Azerbaijan. Baku. 2 Nakhchivan is separated from the rest Azerbaijan by Armenia but connected by air transport or road transport through Iran. 2 management, inadequate machinery, and lack of skilled manpower. An estimated $1.54 billion will be required for routine and periodic maintenance of all roads up to 2022. The government is keen to introduce long-term performance-based maintenance contracts for roads. Azerbaijan has introduced regulations to limit axle loads, but inspection, surveillance, and enforcement are insufficient to impose them.3 To make law enforcement more efficient, ADB is funding the installation of vehicle weighing stations at critical points. The number of traffic accidents, fatalities, and injuries has risen at an annual rate of 10% since 2001. However, improvements in road safety and awareness campaigns reduced the rate of accident fatalities per 10,000 vehicles from 14.6% in 2004 to 9.5% in 2010. Two government agencies, the Road Traffic Police Department of the Ministry of Internal Affairs and the ARS of the Ministry of Transport, are responsible for road safety but they work independently. The National Road Safety Commission coordinates road safety activities but has no executive or operational powers. 6. The Ministry of Transport was established in 2003 to assume responsibility for transport sector policy, regulations, and administration. The national road network was managed by the ministry’s Road Transport Services Department, which was transformed in 2007 into ARS, a semi-autonomous open joint-stock company under the ministry that is responsible for the road network excluding Nakhchivan.4 The objectives of this change were to improve road sector management and enhance efficiency by increasing the road agency’s authority and the freedom and flexibility of its operations. ARS manages roads from its head office in Baku and 63 district maintenance units distributed around Azerbaijan. Several capacity-building initiatives since 2006-07 have aimed to develop and strengthen the capacity of the ARS staff in planning, road design, financial management, procurement, and road safety, but ARS requires further assistance to strengthen its institutional capacity. 7. Problems. The key problems in the road sector are poor road condition, program delivery, road maintenance, and quality of construction. Domestic and international connectivity is key to sustainable development in Azerbaijan. That 70% of the country’s transport network is in poor condition causes high transport costs, long delivery times, and traffic accidents. There are three main reasons. First, funding for maintenance, equal to 1% of the gross domestic product, is inadequate, allowing a large part of the road network to deteriorate rapidly to an unmaintainable state. Many roads must be reconstructed or rehabilitated to be made maintainable. Second, weak enforcement of axle load regulations mean that prevalent overloading causes rapid pavement deterioration. Axle-load control is urgently needed to prevent the further deterioration of the road network. Third, transport safety is an acute problem. The current fatality rate is about 10 times that of Europe, causing grievous economic and human losses. The main causes of traffic accidents are the poor condition of the road network, weak enforcement of safety regulations, driving while intoxicated, and inadequate driver education. More effort to improve road safety is clearly required. Cross-border and transit transport remains inefficient. Surveys showed that 80% of firms experienced delays of 1−3 days while crossing the borders of Azerbaijan.5 The major causes are poor road conditions, inadequate cross-border facilities, and cross-border procedures not harmonized with neighboring countries. These factors impede poverty reduction and growth outside the oil sector. The development of the transport network requires new investments, improved maintenance, improved road safety measures and standards, and ―soft‖ investments to facilitate cross-border trade and transit traffic. 3 An axle load study carried out in 2009 under the Asian Development Bank-supported East–West Highway Project found 31% of vehicles overloaded. 4 Nakhchivan has its own road agency, Nakhavtoyol. 5 World Bank. 2002. Trade and Transport Facilitation in South Caucasus: Azerbaijan. Washington, DC. 3 8. Opportunities. The development of sectors other than oil is crucial for Azerbaijan. The government has identified transport network development as a high priority over the medium term. Specifically, the government aims to (i) establish legal and regulatory frameworks; (ii) develop and effectively maintain infrastructure, completing the reconstruction of east–west and north–south routes; (iii) improve road safety; (iv) facilitate cross-border and transit traffic;6 (v) improve transport services; and (vi) strengthen institutional capacity. 2. Government’s Sector Strategy 9. The government has set improving road transport infrastructure as a priority under the State Program on Poverty Reduction and Economic Development, 2008–2015.7 The State Program Regarding Updating and Development of Highways of the Republic of Azerbaijan, 2006–2015 have been prepared. To implement these programs, the Ministry of Transport has prepared a transport policy paper and a subsequent transport sector development strategy with ADB assistance, which paved the way for developing a sector road map. The government prepared the Road Network Development Program (RNDP) for 2006–2015. The program covers the reconstruction and rehabilitation of 9,500 km of roads at an estimated cost of $5.3 billion (in 2006 prices), comprising 3,578 km of republican roads and 5,928 km of local roads, with 2,230 km of republican roads and 2,268 km of local roads covered in 2006–2009 and 1,348 km of republican roads and 3,660 km of local roads covered in 2006–2015. The RNDP is ambitious; despite the government’s best efforts, implementation has been slow.8 The government has updated the RNDP to an estimated