AZERBAIJAN PLANS A MAJOR OVERHAUL OF THE RAILWAY SYSTEM

UNCLAS BAKU 000348 SIPDIS DEPT FOR EUR/CARC DEPT PASS TO TDA FOR STEIN ANKARA FOR FCS COMMERCE FOR 4231 ITA/MAC/ORUE FOR DSTARKS COMMERCE FOR 3004 ITA/FCS/ ADVOCACY FOR ACHAMS-EDDINE SENSITIVE SIPDIS E.O. 12598: N/A TAGS: ECON ELTN BEXP BTIO IR RU AJ SUBJECT: AZERBAIJAN PLANS A MAJOR OVERHAUL OF THE RAILWAY SYSTEM SENSITIVE BUT UNCLASSIFIED; NOT FOR INTERNET DISTRIBUTION ¶1. (U) SUMMARY: The Government of Azerbaijan plans a five-year, USD 1.5 billion overhaul of the state railway system, expected to be launched by the end of the year. The plan envisions a major reorganization of the railway agency, as well as new construction, reconstruction, and procurement efforts to bring the railway system, which had seen no public investments since 1985, up to modern standards. The Ministry of Transportation believes specific opportunities exist for U.S. companies in upgrading the electrification, signaling and communications systems, and overhauling of diesel locomotives. END SUMMARY ¶2. (U) In an April 4 meeting, Deputy Minister of Transportation Musa Panahov provided an overview of Azerbaijan's five-year, USD 1.5 billion planned overhaul of the state railway system. Panahov noted that final costs for the project could be higher, as the USD 1.5 billion estimate is based on 2007 figures. Panahov said the Ministry had submitted the plan to the Presidential Apparat for approval, and believes the project will be launched by the end of this year. He added that the railway modernization plans tie into other transportation infrastructure reforms, including the relocation of Baku's commercial port to the settlement of Alat, roughly 45 minutes south of Baku. ¶2. (U) Panahov stressed that the GOAJ plans a complete overhaul of the railway system, which had not received any public investment since 1985. The project includes a complete overhaul of the system's software and hardware, with plans to: build new railroad tracks, build new electrical, signaling, and communications systems, buy new electrical locomotives and overhaul the outdated diesel ones, and buy new passenger wagons. The Government also plans to outsource non-operational services, such as healthcare, electrical power generation and management, security, cleaning services and others. ¶3. (U) The project also includes reform of the railway administration, with plans to incorporate the State Railroad Agency with the Government as the initial primary shareholder. The current management of the State Railways admitted earlier this year that the railways can function effectively with just ten thousand people, instead of the current staff of twenty seven thousand. However, laying off such a large number of people off has difficult social implications, and the Government does not want to rush with downsizing. ¶4. (U) Deputy Minister Panahov believes specific opportunities exist for U.S. companies in upgrading the electrification, signaling and communications systems and overhauling of diesel locomotives. Panahov was aware of GE's locomotive project in Kazakhstan but said he did not believe a similar project would be feasible in Azerbaijan, as GE does not produce electric locomotives. ¶5. (U) The GOAJ is looking to international financial institutions and private banks to finance the project. Panahov confirmed press reports that the he World Bank had approved a 450 million USD loan to finance a part of the project; the GOAJ is in talks with the European Bank of Reconstruction and Development, the Asian Development Bank, the Islamic Development Bank, BNP Paribas and Societe General to finance other areas of the program. ¶6. (SBU) Azerbaijan's railway upgrades are taking place in the context of other regional initiatives. Panahov noted that construction of the Baku-Tbilisi-Kars (BTK) railroad already had begun and that similar upgrades would take place in Georgia as part of the BTK program. Panahov said the GOAJ seeks a partner in southeastern Europe (Bulgaria, Hungary, or Romania) that could lend political support to the project and help expand it further to Europe. The Government believes that political and commercial support from a European country could trigger a bigger commitment from Central Asian countries to help turn BTK into a truly cross-continent project. Panahov commented that, although Russia and Iran are encouraging Azerbaijan to expand its north-south transportation links, the GOAJ believes that east-west transportation links are more important and is focusing its efforts in that direction. DERSE