EAST-WEST ALTERNATIVE CORRIDOR

 

The unique geography of Azerbaijan and Georgia on the border of Europe and Asia enables to employ their national transit resource. In this connection, Azerbaijan, Georgia and Turkey agreed to establish a new transportation corridor Baku-Tbilisi-Kars. However, one could only make it a reality by understanding the significance of financial and transport flows for global economy and fundamentals of evolution and development of global transit corridors.

So, one may see Asia-Pacific region formed southeast of Azerbaijan, which is distinguished by 32% of world's population, 19% of global GDP, 25% of export, and 18% of import. Due to cultural and civilization features of this region it became an encampment site for basic centers of goods production and outflow.

Consumer markets, for some reasons of cultural and historical nature, are located in Western, Eastern and Central Europe as well as Scandinavian countries. Goods flow from world's manufacture centers to the global consumption centers is growing up steadily. The sustainable economic growth in Asia, particularly in China, boosts a 6% average annual increase of international container traffics from Asia to Europe. According to expert reviews by the WTO (World Trade Organization) and UNCTAD (United Nations Conference for Trade and Development), these trends shall persist during the nearest 15-20 years. According to the IMF (International Monetary Fund), the annual cargo turnover between Asia and Europe exceeds $600-700 billion, and forecasts suggest this amount to rise 1.5 times by 2010.

 

 

Preconditions

The annual container turnover between Eastern Asia and Europe exceeds 12 million pieces. The main transport flows from Southeastern Asia countries to Europe are directed via the Suez Canal and container transports make a good share in the cargo flow structure. Container turnover via the Suez Canal totals some 11 million pieces per annum, in terms of weight approximately 220 MT per annum. The cargo turnover grows up by 40MT per annum. It would not be difficult to calculate that it will double to 440MT in four years. There is not much left of the Suez Canal's traffic capacity today. Only opening new transportation corridors one may maintain the growing rates of cargo turnover.

Today the logistics market is facing a demand-outgrowing-supply-type situation which inspires a tough competition in transit market and makes its players invest in cheaper and shorter transportation corridors. It will take 30-40 days and approximately $3,000 to deliver one 20ft container (1 TEU) from Southeastern Asia to Western Europe. The respective delivery of 11 million TEUs via Asia-Europe corridor will cost more than $13 billion. Transit cargo flows is a significant part of transit countries' GNP. So, in Latvia transits makes one-third of GNP. Transit countries acquire direct investments in their infrastructure and become a field of state-of-the-art transportation technique and technology introduction. The national transportation system integration with the global cargo flow gives rise to regional economy and creates conditions for development of internal logistics and external trade, resolution of social issues, opening new workplaces and so.

Trans-Siberian Railroad is the second corridor for cargos delivery from Eastern Asia to Europe. More than 9,000km long double-track electrified railroad runs from Pacific port of Vostochny to Northwestern ports of Russia (St Petersburg). This railroad transports some 5-6% of the cargo flow between Europe and Asia. The complete transit of container cargoes via Russia from port of Vostochny to Finnish border takes less than 13 days. The cost price of 20ft container (1 ТЕU) delivery via Trans-Siberian railroad is $1,600, making this project merely vital. Not speaking of upgrade, the railroad capacity enables to transport up to 10 MT of cargoes per annum, approximately 500,000 ТЕU. The investments attracted will enable to raise container turnover to 1 million ТЕU per annum. Thus, Trans-Siberian railroad significantly shortens cargo delivery time to 11-12 days, which is quite important in light of doubled price for goods shipped from China to Europe over the last 5 years. Too, the Trans-Siberian railroad-based corridor advantage is the common regulatory, economic, customs and administrative space.

On the other hand, some problems still exist. The railroad capacity is insufficient to raise the cargo flow. Russia suggests laying a highway for backup and arranging cargo lifts between custody transfer points, which may greatly increase transit expenses. It calls for incredible expenses to lay a new line. The design of the Trans-Siberian railroad-based corridor will also call for development of logistic center system to provide transparency and control of transport flows alongside the regulatory that governs transit activities, and an upgraded organizational and technical infrastructure.

Due to overloading of two main corridors, against the background of increasing cargo flow between Europe and Asia it comes necessary to find alternative delivery routes and the cheaper and shorter lines.

 

Alternative Choice

In such situation, the concern of international alliances and governments about transits resulted in ТRАСЕCА (Transport Corridor Europe Causcasus Asia) Project that brings together 13 countries. The basic conception of ТRАСЕCА Project is the restoration of the Great Silk Road. Compared to traditional marine transit through the Suez Canal it would cost $2,500 and take 20-22 days to deliver 1 container with cargo, which makes this project a good tool for attraction of investments.

The projects and successful efforts of TRACECA member-countries achieved good results in cargo transportation, including transits through the corridor. Transportations through TRACECA exceeded 50MT by the end of 2006. The major item is oil and petroleum products transportations, up 38 times from 1995 and still growing up at the same rate (335,000 ton in 1995 compared to over 13MT by the end of 2006).

Targeting to involve freight forwarders in alternative corridor, Azerbaijan took the initiative and submitted the action plan to the EU within the new European Neighborhood Policy: this plan states priorities of cooperation with the EU, among them the offer to European partners to support the $400-$450 million project of construction of Baku-Tbilisi-Kars railroad.

This haul road shall provide direct railroad communication between Asian countries and Europe through the Southern Caucasus and further through Turkey and Bosporus tunnel to be completed shortly.

 

Pros and Cons

The Baku-Tbilisi-Kars railroad is supported at the governmental level of the involved countries in the given region. President of Azerbaijan Ilham Aliyev, speaking at VIII Summit of Heads of Turkic States in Antalia, expressed his confidence that ‘all difficulties and artificial obstacles on the way of Baku-Tbilisi-Kars railroad project will be overcome.‘

President of Turkey Ahmet Necdet Sezer said ‘Turkey supports Baku-Tbilisi-Kars Project that will lead countries of region to well-being and connect East and West by the shortest road. Turkey is interested in establishing railroad communication with Georgia and Azerbaijan.'

The railroad project has not been favoured by everyone. Today the EU gives it a cool shoulder and advocates the restoration of old railroad Kars-Gyumri-Tbilisi that runs through Armenia. However, this project is not possible for one simple reason: Armenia holds 20 percent of Azerbaijani lands under occupation. The conflict resulted in nearly 1 million Azerbaijanis having become refugees and forced migrants. Azerbaijan is holding positions of having no economic relations between the two countries until Nagorno-Karabakh conflict is settled. Turkey supports Azerbaijan in this opinion.

Baku-Tbilisi-Kars railroad project is supported by the UN and the USA, but the latter does not hurry up to fund it. The Committee on Financial Services with House of Representatives of US Congress has come to unanimous decision prohibiting US-based companies to participate in funding the construction of a railroad between Turkey and Georgia round about Armenia. Analysts consider the US refusal from funding the project not significant. There are more countries and financial institutions to take part in the project. Georgia's government considers Kazakhstan and China potential donors and the talks are currently being held. The countries of the given regian do not consider US position as a final one because the decision was made by the Committee on Financial Services only, not by the Congress as a whole. Moreover, the countries of the region can fund the project on their own.

 

Priority Direction

Concerning Baku-Tbilisi-Kars Project, President of Azerbaijan Ilham Aliyev, President of Georgia Mikheil Saakashvili and Prime-Minister of Turkey Recep Tayyip Erdogan signed (Tbilisi, 7 February 2007) the Tbilisi Declaration on Common Vision for Regional Cooperation. Ministers of Transport of the three countries signed the Convention about New Railway Baku-Tbilisi-Kars. At the governmental level the three countries registered the agreement between Governments of Georgia and Azerbaijan on implementation of new project of Baku-Tbilisi-Kars Railway and financing rehabilitation and repairs of Maradba (on Georgian-Turkish border) - Kartsakhi section of the railroad ".

In late March Azerbaijan and Georgia approved the Agreement on Baku-Tbilisi-Kars Project. Speaking at government sitting on April 13, President of Azerbaijan named Baku-Tbilisi-Kars one of the most significant events of the year 2007.

Recep Tayyip Erdogan believes that through this new project Georgia, Azerbaijan and Turkey demonstrates other countries how the cooperation shall be developed. "I am confident that other projects will follow. Proceeding from that, our regional cooperation is bound to make progress. Through these important projects all the countries shall become a bright example of peace and solidarity. That is our message to the rest of the world", said the head of Turkey's Government.

The construction of new railway Baku-Tbilisi-Kars shall lead Georgia out of the deadlock, said President of Georgia Mikheil Saakashvili. "This is a promising design that lays a foundation for success and represents serious long-term development guarantees for each of us", he went on. "All the countries under this project will benefit. The cargoes will go to seaports. Cargoes will be transported by railroad. If previously Georgia was blocked due to cut off railroads to Russia, it will get out of the deadlock by 2010 and become a part of European railroads system".

"We had several projects in our region. Baku-Tbilisi-Ceyhan was quite a significant project, but this is the first important and useful one for ordinary people in our countries. This is a project making a geopolitical overturn in our region as the strategic line connecting our countries will be linking Asian and European countries as well and forming a solid basis for regional cooperation development", said Mr. Saakashvili. "Actually, an updated version of The Great Silk Road is being created".

The project will enable to deliver cargoes to Turkey and further to the Caspian and Black Sea region from Northern Europe, Russia and Kazakhstan via Azerbaijan and Georgia. Analysts expectt up to 5 to 8 MT of cargoes to be run through this route in the outlook.

 

Financial Factor

The issue of funding the Baku-Tbilisi-Kars project has been resolved so far. The project is being implemented and all talks of its economic expedience and attempts of external pressure remained in past.

Foreign Minister of Turkey Abdullah Gul said ‘in case Marmarai Project (hauling railroad under the Bosporus Strait) is linked in the East to designed railroad and marine way between Baku and Aktau (Kazakhstan) and further to China, the BTK will become a part of ever-shortest railroad communication between Asia and Europe.'

Turkey has already allotted funds for this project in 2007 budget and is commencing the construction. The country is willing to commence actual operations within its territory. Mobilization and provisional operations in Turkey have already been completed. The construction will commence this year provided that Georgia will commence its part of work within its territory.

Azerbaijan is allotting half of funds to implement Baku-Tbilisi-Kars project granting a $200 million credit to Georgia for a period of 25 years at 1% annual interest rate. The credit shall be repaid from railroad operation revenues. Recently SOCAR's management signed the order on allocation of funds in amount of 50 million manat ($58 million) for Baku-Tbilisi-Kars Project.

In general, the budget for project is $422 million, and $600 million including associated infrastructure.

Asian Development Bank announced that it is ready to allot funds for construction of Kars-Akhalkalaki section. Officials of the Ministry of Transport of Azerbaijan also reported Japanese financial institutions ready to fund the railroad construction.

This transportation corridor will be mainly running cargoes from Kazakhstan, China and Russia. Kazakhstan agreed to deliver not less than 10MT of cargoes per annum through this route, quite the same as Trans-Siberian railroad's traffic capacity allows today.

 

Technical Issue

The feasibility study (FS) of Baku-Tbilisi-Kars Railway drew up by Yuksel Domonik of Turkey, which spent $1 million for this work. According to the FS, the project budget amounted to $400-450 million. The railway length is 98km, approximately 68km in Turkey and 30km in Georgia. Some reconstruction is required at Akhalkalaki-Tbilisi section. It is suggested to make major repairs of existing 180km long section Akhalkalaki-Marabda in order to raise traffic capacity to 15 MT of cargoes per annum.

According to provisional calculations, 2-3 MT of cargoes will be transported the first year of the project operation, and later 5-8 MT per annum. Azerbaijan has already approved this FS.  Irakli Ezugbaya, Director General of Georgian Railroads LLC said in Tbilisi that Georgia is having some misunderstanding regarding transportation forecasts in FS.

There are plenty of operations under the project. The Georgian phase suggests through construction operations in mountainous areas; a wheel replacement facility will be erected on Georgian-Turkish border due to the narrower wheel tracks used in Europe.

The project participants are still to approve the location of terminal in Georgia, railroad conduit replacement in Georgia, cargoes transportation, as well as project funding and involving investors, creditors and railroads of the concerned countries. It is also suggested to setup a joint venture (JSC, consortium) to jointly install and operate the said railroad.

It is suggested to commence construction operations in Georgia during 2Q2007 and complete the project in the coming two or three years. Government of Georgia will assume the obligation on construction of the railroad and acquisition of lands.

Georgia is going to establish a limited liability company to be responsible for maintenance of Georgian section of the railroad and return of the credit from revenues. "We want to establish a limited liability company as we do not want to burden Georgian Railroads LLC with such a big credit", said Giorgi Arveladze, Minister of Economic Development of Georgia.   

 

Transportation without

Transshipment

There is a ‘transshipment' term in logistics. The process of transshipment when cargoes are loaded-offloaded from one type of transport to another is complicating the transportation of cargoes, resulting in extra expenses and loss of time. Today cargoes are run to Europe via Azerbaijan and Georgia, and further transshipped through the Black Sea.

Baku-Tbilisi-Kars Project implementation shall enable cargo transportation without transshipment: for example, having loaded cargo in Baku, one may offload it at European railroad terminals, which is an advantage in time and expenses alike. Taking into account that railroad transportations are much cheaper than motor transport, it becomes possible to deliver big amounts of cargoes, even aforesaid containers from China can be delivered from Southeastern Asia to Europe through Azerbaijan, Georgia and Turkey.

Moreover, as we have mentioned before, great amounts of cargoes are run by sea from China's seaports to UK. This type of transportation is cheap but most unstable and dangerous. Shippers bear huge costs for cargo insurance.

In case the onshore transportation route is created alongside removal of transshipment, huge amounts of cargoes will surely be transported via Azerbaijan, Georgia and Turkey. The first train is expected to be launched along Baku-Tbilisi-Kars route in May 2010. This railroad will actually connect London to Beijing.