TAJIKISTAN'S TRANSPORTATION SECTOR: BY PLANE, TRAIN, OR

UNCLAS SECTION 01 OF 03 DUSHANBE 000698 SIPDIS SENSITIVE SIPDIS STATE FOR SCA/CEN, EUR, EB, S/P NSC FOR MILLARD, MERKEL E.O. 12958: N/A TAGS: PGOV ECON EINV EAID ELTN ETRD AF PK TI SUBJECT: TAJIKISTAN'S TRANSPORTATION SECTOR: BY PLANE, TRAIN, OR AUTOMOBILE REF: A) DUSHANBE 0626 B) KABUL 1629 DUSHANBE 00000698 001.2 OF 003 (U) Sensitive but unclassified. Please handle accordingly. Not for public Internet. ¶1. (U) SUMMARY: Improving Tajikistan's air, rail, and road transportation network supports Secretary Rice's Infrastructure Integration Initiative for Greater Central Asia. Creating a cohesive transportation network passable throughout the year decreases transportation costs and promotes trade through the road (and partial rail) corridor from Kazakhstan to Pakistan. The completion of the American-funded bridge in 2007 connecting Tajikistan to Afghanistan will add additional trade momentum. However, Tajikistan's state-run air sector needs to be de-monopolized, the state-run railway urgently needs management reform and infrastructure upgrades, and maintenance and rehabilitation needs to be increased on roadways to maximize trade opportunities. Ensuring official and non-official trade barriers (such as customs and bribes) do not rise along with increased trade is important. END SUMMARY. STATE-RUN AIR SECTOR MONOPOLY INCHING AHEAD ¶2. (SBU) Tajikistan's air sector is dominated by inefficient state-run Tajikistan State Airlines (TSA),and international connectivity is limited. The vertically-integrated company runs all air traffic control, the four major airports, and has all domestic flights. Service is abysmal, the aircraft fleet consists of dilapidated Soviet-built Tupolevs and Yaks, and flight delays and cancellations are the norm (REFTEL A). Tajik Air does not have a transparent ticketing, pricing or reservation structure and bribes are often paid to ensure a seat on a flight. Air cargo transport is in its infancy. The first non-Russian carrier, Turkish Airlines, entered the market in February with a weekly flight to Istanbul. (Tajik Air also flies internationally to Munich and Istanbul.) International Finance Corporation economist Mathew Scanlon told PolOff on April 6 that he had just heard that Lufthansa and Thai Airways are interested in starting weekly flights. (COMMENT: If true, hallelujah! END COMMENT.) ¶3. (SBU) TSA is a cash cow for company and government officials, and one of the country's top taxpayers. With close to one �A;million passengers a year, cash flow is significant and the debt load is a "reasonable" $19 million, according to European Bank for Reconstruction and Development (EBRD) head Fernand Pillonel. However, thanks to poor accounting and opaque business practices, much of the cash flow cannot be accounted for. For example, as much as a third of the cash value of each air ticket simply disappears. The new limited-use VVIP hall TSA built at Dushanbe International Airport is on the books at a construction cost of $9 million, but experts estimate the hall cost at most $2-3 million. Use of the hall is limited to international delegations. Reported cost per passenger for private use is $235. Much of TSA's profit is carried on the backs of Tajikistan's estimated one million migrant workers who are forced to use TSA for most of their travel. The new Tajik Air Director, General Khokimsho Tilloyev, confirmed to PolOff on 20 March that 90 percent of the airline's passenger load is to Russia. ¶4. (SBU) Progress in modernizing TSA is slowly coming at the urging of the international community. The EBRD is at the forefront of advocating a change, using over $10 million in loans since 1995 for runway rehabilitations, air navigation improvements, and fleet modernization as leverage. The entry of Turkish Airlines into Tajikistan is a major step forward in introducing competition, as are the now daily flights from Russia's Domodedova Airlines. DUSHANBE 00000698 002.2 OF 003 ¶5. (SBU) EBRD has offered TSA a $5 million commercial loan for fleet modernization to include the lease of two new aircraft and training for up to 20 flight crews. However, factions within TSA oppose the loan, perhaps in part due to the international SIPDIS accounting standard requirements, and the government has been slow to implement the proposed fleet modernization. The controversial loan may not produce the intended results, noted Pillonel, but "not doing anything is not an option." Pillonel stressed that moving too fast and collapsing TSA is not in the best interest of the country, and advocated steady pressure to reform and spin off the major components (air control, airline, and airports) prior to any privatization plans. He observed that technical assistance from USTDA could go towards helping TSA create a sensible plan for separating its three enterprises. SIPDIS RAILWAY REFORM CRITICAL FOR TRADE ¶6. (U) Tajik railways are a vital component of Tajikistan's trade. The World Bank estimates 95 percent of total external tonnage and about 50 percent of seasonal workers travel to Russia by rail. Aluminum is carried by train to ports in Georgia and Estonia, and cotton mainly goes to the Port of Riga in Latvia. Annual tonnage is approximately 12 million, according to the Railway Department chief specialist Ishon Hujai Rustam. In addition, until the Anzob pass is completed next year, rail provides the primary means for northern Tajikistan to trade with the southern region during winter. There is a total of 950 kilometers (km) of railroad in Tajikistan. The main components are the northern route connecting with Uzbekistan, the central route that loops from Uzbekistan back into Tajikistan up to Dushanbe, and a domestic southern route that goes from Dushanbe to Kulob. Rail transit tariff disputes between Uzbekistan and Tajikistan often add to the cost of transport, and a World Bank study indicates state-run Tajik Rail charges transit fees favoring large businesses over smaller entrepreneurs. As Tajikistan's links with Afghanistan and Pakistan grow, a rail link south would make sense, especially with respect to cotton shipments, since the textile factories in Pakistan are much closer than the port of Riga. ¶7. (U) Tajik Rail is in urgent need of reform and requires substantial investment for rehabilitation and modernization. The World Bank notes Tajik Rail has seen almost no reform since the country's independence, and there is little transparency in its operations. International financial institutions have not funded much for railroad rehabilitation, although the Asian Development Bank (ADB) did assist in electrifying part of the railway in the northern region. During a March 16 meeting with PolOff, Rustam described the poor state of the railroad system in which most of the railway cars are reaching their expiration date and at least 20 percent of the railway infrastructure needs rehabilitation. The Ministry of Transport is pushing to get the railway from Dushanbe to Qhurgon-Teppa rebuilt, because it is unusable due to lack of maintenance, and is looking for donors to extend the railroad from Kolkhozobod to the border with Afghanistan at Nizhniy Pyanzh. There is no railroad between Dushanbe and the northern capital Khujand. BOOM IN ROAD, TUNNEL, BRIDGE BUILDING ¶8. (U) The Ministry of Transportation's goal of providing year-round transportation routes throughout the country by building roads, tunnels and bridges is close to becoming reality. Financed by a surge in donor grants and credits, the country could be connected year round by the end of the decade between to all of its neighboring countries: -- The Chinese reportedly agreed this month to finance the $269 million rehabilitation of the Dushanbe-Khujand-Buston motorway DUSHANBE 00000698 003.2 OF 003 to the Uzbek border using some of a economic credit in the Shanghai Cooperation Organization. This project also includes building a tunnel through the Sharistan mountain pass and links with the $40 million Anzob tunnel, making this road year-round when complete. The tunnel is 75 percent financed by Iran. --In 2004 the Murghab-Kalma road connecting to the Chinese border in remote eastern Tajikistan was completed with Chinese funding. --The Chinese-funded $18 million Shar-Shar tunnel on the road east, and on the way to President Rahmaon's hometown, is expected to be complete in 2008. --The ADB approved at the end of 2005 additional funding to rehabilitate a 90 km section of the main road from Dushanbe to the Kyrgyz border, which is part of the Central Asian Highway connecting Kazakhstan, Tajikistan, Uzbekistan, Afghanistan, and China. -- The ADB also has funded road rehabilitation in Tajikistan's southern Khatlon region. --The U.S.-funded $30 million bridge at Nizhniy Pyanzh is scheduled to open summer 2007. This will be an extremely important step toward promoting trade between Tajikistan and Afghanistan (REFTEL B),especially if the Japanese-financed upgrade to the final road segment between Kolkhozobod and Nizhniy Pyanzh is completed in 2007, although current information suggests the Japanese are falling behind on this project. ¶9. (U) COMMENT: If they build it will trade come? The surge in much-needed infrastructure upgrades is a strong incentive to increase trading, but this depends on what the official and unofficial transport costs become. Tajikistan's biggest trade barrier is itself, because bribes are a substantial addition to moving goods, and corruption hampers competitive export-orientated business development. Road, bridge, and tunnel maintenance also will be important to truck transport. Transport by air cargo likely will not be developed without air-sector reform. All of these projects are critical for Tajikistan to have a viable economy that can support its surging population of young people. In the end, trade becomes a security issue, because having hundreds of thousands of youths unemployed in Central Asia is a sure way to breed discontent and instability. END COMMENT. HOAGLAND