The World Bank Trade and Transport Facilitation
Work in Progress
For public discussion
Azerbaijan Policy Note
November 2003
Infrastructure and Energy Service Department
South Caucasus Country Unit
Europe and Central Asia Region
Currency
(exchange rate effective May 21, 2003)
Currency Unit = Manat1,000 AZM = 0.20 US$
US$1.0 = 4,897 AZM
Weights and Measures
Metric System
Abbreviations and Acronyms
ADDY - State Railway Company of Azerbaijan
ASYCUDA - Automated System of Customs Data and Management
AZAL - Azerbaijan Airlines
AZERPRO - Public-Private Committee for Trade and Transport Facilitation-Azerbaijan
CASPAR - Caspian Shipping
CIS-7 - Initiative among 7 countries of the Commonwealth of Independent States
CMR - Road Transport Document
COWI - Consulting company
EBRD - European Bank for Reconstruction and Development
EU - European Union
FDI - Foreign direct investment
FIAS - Foreign Investment Advisory Service
FIATA - Federation Internationale des Associations de Transitaires et Assimiles
FSU - Former Soviet Union
GDP - Gross Domestic Product
GEOPRO - Georgian PRO-Committee for Trade and Transport Facilitation
IFI - International Financial Institutions
IMF - International Monetary Fund
MED - Ministry of Economic Development
MOT - Ministry of Transport
NGOs - Non-Government Organizations
PRO - Public Private Committee on Trade and Transport Facilitation
PWC - PriceWaterHouse Coopers
SCC - State Customs Committee (Azerbaijan)
SME - Small and Medium Enterprise
TEU - Twenty Foot Equivalent Unit
TIR - Transport International Routier
TRACECA - Transport Corridor Europe, Caucasus, Central Asia
TTFSE - Trade and Transport Facilitation in South east Europe
TTFSC - Trade and Transport Facilitation in the South Caucasus
UNCEFACT - United Nations Center for Trade Facilitation and E-Business
UNECE - United Nations Economic Commission for Europe
WCO - World Customs Organization
WTO - World Trade Organization
41
ACKNOWLEDGMENTS
This Policy Note explores impediments to international trade and transport in the South Caucasus, with a particular focus on Azerbaijan. It builds on the sector analysis carried out in the Spring of 2002 and defines a strategy and action plan as a result of the policy dialogue that has taken place over the past two years. Some of the activities identified at that time are now underway.
The Team included Gérald Ollivier (Team Leader), Michel Zarnowiecki (Senior Customs Specialist), Martin Humphreys (Halcrow Consultant), Ulviya Ibrahimova (Economist) and Judith Deane (Country Officer). We would like to thank the Ministry of Economic Development, the Ministry of Transport, the State Customs Committee, the Port of Baku, the Azeri Railway, and all over Government bodies and private sector representatives for their precious inputs. We would like to thank the TRACECA Team for their active contributions and for the systematic sharing of their reports, on which this Policy Note builds.
We are also grateful to Eva Molnar (Sector Manager), Antti Talvitie, Michel Audigé, Lauri Ojala and to the Peer Reviewers, Marc Juhel, Transport and Logistics Advisor (TUDTR) and Christian Petersen (Country Economist, ECSPE), for their valuable comments and contributions.
Disclaimer:
This paper is published to communicate the results of the Bank’s work to the development community with the least possible delay. The typescript of this paper therefore has not been prepared in accordance with the procedures appropriate to formal printed texts and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed here are those of the authors and do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments they represent.
The World Bank can not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply on the part of the World Bank any judgment of the legal status of any territory or the endorsement or acceptance of such boundaries.
© 2003 The International Bank for Reconstruction and Development/The World Bank
TRADE AND TRANSPORT FACILITATION – AZERBAIJAN POLICY NOTE
CONTENTS
Executive Summary 5
Introduction 9
A. Current Situation and Prospects 10
A-1. Overview 10
A-2. Trade Situation 11
A-3. Transport Situation 12
A-4. Prospects 15
B. Broad Impact of Impediments 18
C. Trade and Transport Issues and Recommendations 21
C-1. Legal Framework: Issues and Recommendations 22
C-2. Administrative Capacity: Issues and Recommendations 26
C-3. Procedures: Issues and Recommendations 31
C-4. Infrastructure: Issues and Recommendations 36
D. Strategy, Priorities and Financing 38
D-1. Strategy 39
D-2. Priorities 40
D-3. Financing 40
TRADE AND TRANSPORT FACILITATION - AZERBAIJAN POLICY NOTE
Executive Summary
The regional framework of the CIS-7 Initiative, the Azerbaijan Poverty Reduction and Economic Growth Program, the FIAS Diagnostic Review, the Integrated Non-Oil Trade and Investment Strategy and the recent World Bank Trade and Transport Facilitation sector work in the South Caucasus (TTFSC) all underlined the significance of trade and transit as engines of economic growth for Azerbaijan. These aspects have been on the modernization agenda of Azerbaijan for several years. Border agencies, particularly the State Customs Committee of Azerbaijan, have made significant progress in improving the milieu for traders.
This note, as part of the TTFSC sector work, reviews the current situation, with particular respect to trade, transport and potential transit flows. It quantifies the impact of existing impediments on the total cost of available logistic services in Azerbaijan and for other Caucasian countries, at consignment level. It reviews the legal, institutional, procedural, infrastructure and industry impediments and makes recommendations to alleviate those.
The economy of Azerbaijan is highly dominated by its oil and oil-related industries and services. Building on this opportunity, the Government of Azerbaijan is seeking solutions to increase the competitiveness of other sectors through improved business environment and better corporate governance. Many of the non-oil firms are SMEs with low turnover and limited exposure to trade. The non-oil export volumes are very low at about US$200 million in 2001.
The transport and communications sector has experienced some steady growth since 1998, reflecting the sharp increase in oil transit from the Caspian Sea and in imported equipment for the Caspian oil fields. The sector accounted for 15 percent of GDP in 2001, a high percentage reflecting the transit role of Azerbaijan, made possible by its location. The transport sector has just started its reorganization. Policy and legal framework, regulatory functions and operations are still bundled in the state operators in each transport mode apart from road transport. This limits competition and translates in high profit margin in the case of the railways and high shipping cost in the case of the Caspian Shipping company. Transport infrastructure is in considerable need of upgrading, including for the East-West and North-South Corridors, where only partial rehabilitation has started.
Each ton of transit cargo generates between US$20 and US$40 of direct economic activity for the various transport intermediaries in Azerbaijan. Since the transport intermediaries are currently profitable, additional transit would both generate employment opportunities in logistics and cash flow to upgrade infrastructure and invest in new areas. In addition, there are other value-added elements generated or induced by transit traffic than mere transport services, but those are more difficult to precisely assess. It includes various ancillary services, added commercial opportunities, value-added activities like re-labeling, packaging, light processing, consolidation and redistribution to the Central Asian and Caucasus countries. The geographical location of Azerbaijan and particularly of Baku on the Caspian Sea provides a good opportunity to turn the Baku area into a regional logistic center serving the Caspian littoral states and beyond -Uzbekistan and Tajikistan.
Among potential transit cargoes for the TRACECA Corridor, six types stand out: (i) equipment for the oil industry; (ii) humanitarian support and reconstruction material to Afghanistan; (iii) containerized consumer goods to oil exporting countries; (iv) containerized equipment required to sustain SME-led growth in the Caucasus and Central Asia; (v) cotton exports from Uzbekistan and Turkmenistan; and (vi) more oil and gas from the Caspian Sea. All six types offer significant opportunities, but also face competition from alternative corridors.
Transport costs in the Caucasus are relatively competitive when one considers only official monetary tariffs, but relatively high when taking the standpoint of a shipper and integrating all unofficial monetary expenditures and the time required. Transport of a container (TEU) by road from Baku to Bandar Abbas (2,800km/US$1,500) costs only slightly more than the same transport from Baku to Poti (950 km/US$1,300), despite a distance three times longer. Transport of a container (TEU) by road from Baku to Moscow costs US$2,300 for only 2,500 km compared to US$1,500 for 2,800 km from Baku to Bandar Abbas. This is partly due to differences in fuel prices.
The multiple borders transporters have to cross to reach Central Asia through the Caucasus and the number of times cargoes need to be handled with the associated legal and illegal payments and delays explain to some extent the low volume of non-oil transit to date. The impacts of impediments to trade and transport are both direct and indirect. They increase the costs of inputs for domestic production. They limit the ability of Azerbaijan to become a natural center for transit cargo and value-added shipments for the Caucasus and Central Asia. The unofficial payments along the corridor also encourage smuggling, mis-declaration based on personal arrangements, creating unfair competition for firms operating within the legal framework.
The Government, particularly the State Customs Committee (SCC), has made visible progress over the past three years in improving the trading environment. A number of additional measures, launched through a Presidential Decree in September 2002, will alleviate several of the issues identified in early 2002. It includes notably the introduction of a bonded warehouse system, of WTO-compliant valuation and of a guarantee system for goods under a suspense regime not covered by a TIR Carnet, and provision for the creation of free customs zone. The SCC modernization strategy is partly based on recommendations prepared by PriceWaterHouseCoopers.
While several of the transport excess costs to Azerbaijan can be attributed to the high cost to reach its borders, the survey of users in Azerbaijan identified some of the excess costs linked to Azerbaijan itself. Azerbaijani SMEs are affected by remaining weaknesses in its legal framework and limited public access to applicable border agency rules. While the overall fiscal performance of the SCC is relatively good, capturing additional transit traffic will require an integrated management of border crossing points with a single window for all border agency transactions.
The priority recommendations identified are the following: (i) the introduction of systematic targeting, selectivity and advance processing of information through further software enhancement in the SCC system and the integration of other border agency systems (estimated cost: US$0.5 million for software and technical assistance plus US$2 million for hardware in the first phase); (ii) the stimulation of competition among corridors by regularly publishing transit time and costs for alternative transport modes (US$45 k); (iii) immediate measures to reduce personal interactions between Customs and users during clearance and eventual requests for unjustified additional fees (estimated cost: US$150 k); (iv) the strengthened dialogue with the private sector; (v) definition of a comprehensive transport sector reorganization strategy to stimulate competition (US$150 k) and the preparation of a transport investment needs assessment (US$150 k); (vi) publication of a joint booklet/website with Georgia describing applicable procedures and rules for import, export and transit cargo (US$50 k); (vii) strengthening of the SCC transit management functions (US$300k); (viii) the creation of a proper legal framework for Special Economic Zones and Bonded Warehouses (US$50 k); and, (ix) the harmonization of taxes and tariffs related to trade and transport with neighboring countries, after conducting a study building on the TRACECA findings (US$50k).
These priority recommendations and the other recommendations listed at the end of the document (Table 4) would enable the implementation of the proposed TTFSC strategy for Azerbaijan:
1. Reduce logistical costs to contribute to increasing competitiveness of Small and Medium Enterprises (SMEs) locally and internationally. To accomplish this goal: (i) stimulate competition among existing alternative corridors, using performance measurements; (ii) emphasize facilitation of legitimate trade in the mission of border agencies by eliminating any unnecessary or duplicative requirement, consolidating border controls under the responsibility of the SCC, completing the border agency computerization throughout the territory, and measuring performance from a user perspective, with special attention to the needs of SMEs in terms of small loads; and, (iii) develop an integrated transport policy encompassing the broad transport sector, and aiming particularly at facilitating the development of multi-modal logistical services. These activities should take place in close consultation with the private sector. They would build on the recent nomination of a Transport Minister and the establishment of the Transport Ministry. The reduced logistical cost will lower the cost of intermediary inputs for SMEs, increasing their competitiveness first on the local market and progressively enabling them to export.
2. Create a level playing field for all companies in Azerbaijan and increase revenue collection. To accomplish this goal, define and implement a series of organizational measures, in addition to the ones directly targeted at trade facilitation and long term development of border agencies, to directly combat potential unofficial payments. This would include inter-alia improved transparency of requirements, the progressive harmonization of trade and transport practices and charges with neighboring countries, reduced personal interactions between users and border officials during transactions, and the introduction of post clearance checks and mobile enforcement units.
3. Attract additional transit traffic and maximize the economic impact of transit activities, in partnership with Georgia and Central Asian countries. To accomplish this goal, (i) develop a no-hassle, price competitive, high-quality integrated transit system through Azerbaijan and Georgia, coordinated by an integrated transit system in Georgia and the State Customs Committee (SCC) in Azerbaijan; (ii) upgrade transport infrastructure after carrying out a detailed transport investment needs assessment for both local and international traffic. The transport investment needs assessment would cover all transport modes and serve as a basis to maximize the use of Oil Fund resources and to attract IFI lending. This would enable Azerbaijan to derive more economic activity from its position as a natural center for the Caucasus and Central Asia for transit cargo, consolidation of shipments and potentially value added activities.