Central Asia Regional Economic Cooperation Transport Sector

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					Technical Assistance Consultant’s Report




Project Number: 37362 (RETA-6347)
December 2008




REG: Central Asia Regional Economic Cooperation
Transport Sector Strategy Study
(Financed by the Asian Development Bank's TA Funding Program)




Prepared by TERA International Group, Inc.
Beijing, People's Republic of China


For the Asian Development Bank




This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and
ADB and the Government cannot be held liable for its contents.
Transport and Trade Facilitation Strategy
Report

Final Report




December 2008

The views expressed in this paper are the views of the author and do not necessarily reflect the views or
policies of the Asian Development Bank (ADB) or its Board of Directors, or the governments they
represent. ADB does not guarantee the accuracy of the data included in this paper and accepts no
responsibility for any consequences of their use. Terminology used may not necessarily be consistent
with ADB official terms.
                                                                                  i

                             ABBREVIATIONS

ADB      Asian Development Bank
AFG      Afghanistan
AZB      Azerbaijan
BCP      border crossing point
CAREC    Central Asia Regional Economic Cooperation
CCC      Customs Cooperation Committee
DFID     Department for International Development (United Kingdom)
EBRD     European Bank for Reconstruction and Development
EU       European Union
FSU      former Soviet Union
GDP      gross domestic product
GMS      Greater Mekong Subregion
GVC      global value chain
ICAO     International Civil Aviation Organization
JICA     Japan International Cooperation Agency
KAZ      Kazakhstan
KGZ      Kyrgyz Republic
MC       Ministerial Conference (CAREC)
MON      Mongolia
NJC      National Joint Transport and Trade Facilitation Committee
PRC      People’s Republic of China
RJC      Regional Joint Transport and Trade Facilitation Committee
RUS      Russian Federation
SOM      Senior Officials Meeting (CAREC)
TAJ      Tajikistan
TSCC     Transport Sector Coordinating Committee (CAREC)
UNDP     United Nations Development Programme
UN ESCAP United Nations Economic and Social Commission for Asia and the Pacific
UZB      Uzbekistan
WCO      World Customs Organization
WTO      World Trade Organization
XUAR     Xinjiang Uygur Autonomous Region
ii
                                                                                                                                                             iii

                                                        TABLE OF CONTENTS

SECTION 1:          INTRODUCTION.................................................................................................................... 1
 1.1      OVERALL VISION ............................................................................................................................ 1
 1.2      THE ECONOMIC AND SOCIAL POLICY CONTEXT ....................................................................... 1
 1.3      CONFRONTING THE TRADE AND TRANSPORT CHALLENGES ................................................ 3
 1.4      A BROAD WELL-FOUNDED APPROACH ...................................................................................... 5
SECTION 2:          CAREC TRANSPORT AND TRADE FACILITATION STRATEGY 2008-2017 ..................... 7
 2.1      ORIGINS AND OVERARCHING GOALS ......................................................................................... 7
 2.2      IMPACTS AND OUTCOMES ............................................................................................................ 7
 2.3      COMPETITIVE TRANSPORT AND TRADE CORRIDORS ............................................................ 10
    2.3.1        Focused Development ............................................................................................. 10
    2.3.2        Corridor Performance Parameters ........................................................................... 10
    2.3.3        Competition and Efficient Use of Funds ................................................................... 11
    2.3.4        Technology .............................................................................................................. 11
 2.4      EFFICIENT TRANSPORT AND TRADE ACROSS BORDERS ..................................................... 12
    2.4.1        Accelerating Progress.............................................................................................. 12
    2.4.2        Border Crossing Points and Procedures .................................................................. 12
    2.4.3        Harmonized Technical Regulations .......................................................................... 13
    2.4.4        Institutional Coordination ......................................................................................... 13
 2.5      SUSTAINABLE, SAFE AND USER-FRIENDLY TRANSPORT AND TRADE NETWORKS .......... 13
 2.6      WIDESPREAD BENEFITS ............................................................................................................. 14
SECTION 3:          IMPLEMENTATION OF THE STRATEGY ........................................................................... 15
 3.1      RATIONALE ................................................................................................................................... 15
 3.2      LINKAGES TO REGIONAL AND GLOBAL TRADE ...................................................................... 15
    3.2.1        Major Transit Directions ........................................................................................... 15
    3.2.2        Corridor Characteristics ........................................................................................... 16
    3.2.3        The Six Major CAREC Corridors.............................................................................. 19
    3.2.4        Project Development Rationale ............................................................................... 23
    3.2.5        Summary of the Corridors ........................................................................................ 24
    3.2.6        The Dynamics of Corridors ...................................................................................... 24
 3.3      SEAMLESS CROSS BORDER OPERATIONS .............................................................................. 27
    3.3.1        Corridor Continuity ................................................................................................... 27
    3.3.2        Institutional Interfaces .............................................................................................. 28
    3.3.3        International Conventions, Regional Agreements and Regulations .......................... 29
    3.3.4        Customs Cooperation .............................................................................................. 29
    3.3.5        Border-Crossing Point Improvements ...................................................................... 30
    3.3.6        Rail Operations ........................................................................................................ 31
    3.3.7        Financing of Construction and Transport Equipment................................................ 31
 3.4      AIR AND MARITIME TRANSPORT ............................................................................................... 32
 3.5      TECHNOLOGY AND GLOBAL LOGISTIC CHAINS ...................................................................... 34
 3.6      SAFEGUARDS ............................................................................................................................... 34
 3.7      IDENTIFICATION OF PROJECTS ................................................................................................. 34
SECTION 4:          IMPLEMENTATION ARRANGEMENTS.............................................................................. 37
 4.1  INTRODUCTION............................................................................................................................. 37
 4.2  REALIZATION: THE ROLE OF GOVERNMENTS, MULTILATERAL INSTITUTIONS, AND THE
 PRIVATE SECTOR .................................................................................................................................... 37
 4.3  PERFORMANCE MEASUREMENT AND MONITORING .............................................................. 39
    4.3.1 Performance Indicators............................................................................................ 40
    4.3.2 Performance Monitoring Methods ............................................................................ 42
    4.3.3 Some Considerations in Developing Performance Indicators and the Performance
    Monitoring Survey Questionnaire.......................................................................................... 44
    4.3.4 Performance Monitoring Mechanism and Institutional Arrangements ....................... 45
SECTION 5:          CONCLUDING REMARKS—BUILDING A BETTER FUTURE .......................................... 47
iv



APPENDICES
1. CAREC PROGRAM AND EVOLUTION OF THE STRATEGY
2. EXTERNAL ASSISTANCE TO THE TRANSPORT AND TRADE FACILITATION SECTOR
3. CHALLENGES AND OPPORTUNITIES
4. STRATEGIC FOCUS AREAS
5. CAREC CORRIDORS
6. IMPLEMENTATION ACTION PLAN FOR THE STRATEGY
                                                                                                            1




                                   SECTION 1: INTRODUCTION

1.     This report presents a 10-year Transport and Trade Facilitation Strategy (the Strategy),
based on detailed assessments of past and future economic development and trade flows, and
challenges and opportunities confronting transport and trade development in the Central Asia
Regional Economic Cooperation (CAREC) region.1 It defines the main components of the Strategy,
and summarizes the actions and steps to implementation necessary to achieve the targeted
outcomes. Detailed assessments and discussions are included in the Appendices.

1.1       OVERALL VISION

2.      It has now been a decade since the launch in 1997 of the CAREC Program. CAREC is a
vibrant development partnership of cooperating Central Asian republics: Afghanistan, Azerbaijan,
People’s Republic of China (PRC with focus on Xinjiang Uygur Autonomous Region [XUAR]), 2
Kazakhstan, Kyrgyz Republic, Mongolia, Tajikistan, and Uzbekistan and six multilateral institutions
including the Asian Development Bank (ADB), World Bank, International Monetary Fund (IMF),
European Bank for Reconstruction and Development (EBRD), Islamic Development Bank (IsDB),
and the United Nations Development Programme (UNDP).

3.      The main purpose of CAREC Program is to promote economic development through
cooperation, and thus accelerate economic growth and reduce poverty. By fostering regional
cooperation in priority areas of transport, trade, and energy, the CAREC Program assists the
participating countries pursue their economic potential and improve the quality of life for their
citizens.

4.      The Strategy was developed consistent with CAREC’s long term vision of “Good Neighbors,
Good Partners, and Good Prospects.” Therefore, the Strategy suggests that it will take good
neighbors and good partners to respond to common challenges and opportunities. The policies and
projects proposed in the Strategy and Action Plan require partnership and cooperation for their
successful implementation. The Strategy indicates that there are good prospects for higher
economic growth, the reduction of poverty, and the diversification of trade in the CAREC region
based on the creation of reliable, safe, secure and low-cost transport and trade corridors and their
transformation into economic corridors. The CAREC Program and the evolution of the Strategy
and its vision are briefly explained in Appendix 1.

1.2       THE ECONOMIC AND SOCIAL POLICY CONTEXT

5.      While CAREC countries taken individually are landlocked, as a region they are contiguous
and can serve as competitive transit gateways to other regions, i.e., become “land-linked”. For all
except XUAR, the orientation of transport corridors, especially rail, was toward markets and
sources of supply in the major population and industrial centers of the former Soviet Union (FSU).
This infrastructure is now aging. Also, links between the eastern XUAR and western FSU ends of
CAREC were underdeveloped. The first Senior Officials’ Meeting (SOM) held in 2001 in Manila
1
    Since February 2007, extensive consultations with CAREC participating countries and stakeholders have
    taken place. Comments received on the draft reports from CAREC participating countries have been
    incorporated into this report. The Strategy was endorsed at the Sixth Ministerial Conference held in
    Dushanbe, Tajikistan, in November 2007. The Implementation Action Plan for the Strategy was prepared
    based on the draft reports. It was endorsed at the Seventh Ministerial Conference held in Baku, Azerbaijan
    in November 2008. During the preparation of the Strategy, the governments of CAREC countries provided
    the study team with extensive support, cooperation, and inputs. In particular, the members of TSCC and
    CCC carried out comprehensive reviews of the draft Strategy and provided constructive comments and
    suggestions.
2
    During the Senior Officials Meeting on CAREC held in September 2008, the PRC delegation expressed its
    desire to include the Inner Mongolia Autonomous Region in the CAREC Program.
2



affirmed that transport was the highest priority area for regional cooperation. Hence, considerable
emphasis has been placed on improving infrastructure.

6.     For most of CAREC’s existence, other aspects of transport and trade policies with a
potential regional dimension such as ownership and management (restructuring,
commercialization, and privatization) have received less attention. The same can be said about
competition (intermodal transport, attractiveness of extra-regional corridors, anti-competitive
behavior, etc.). In other words, the emphasis has been on the hardware and not software of
transport and trade development.

7.     Delays at border crossings have been acknowledged and addressed in numerous studies,
discussions, and plans. However, until recently relatively little investment by national governments
and multilateral institutions has been allocated to the problem.

8.      The Strategy was developed in the context of the CAREC mission to increase inclusive
economic growth, reduce poverty and foster trade through regional cooperation on transport, trade,
and energy. In this connection, three important factors are currently at play. First, the gross
domestic product (GDP) growth rate in the Central Asia region in recent years has been quite
respectable at around 7% per year. Second, the acceleration of policy reform in trade, transport,
and energy areas is needed to continue in order to realize the full potential of the Central Asian
economies. Third, the higher growth rate of recent years has not noticeably improved the living
standards of the poor. In this regard, policies, programs or projects in transport and trade or any
other area should be tailored to address the issue. At the same time, better governance is essential
in Central Asia to fully seize economic opportunities, meet the challenges of any particular sector
(including transport and trade), and address social problems.

9.      The Strategy takes account of current
                                                                                Afghan Truck
economic conditions, projections, and demands
that will be put on the CAREC region’s transport
and trade systems. Efficient and reliable
transport and trade systems will make a major
contribution to the realization of the region’s
economic potential. The Strategy thus promotes
development of efficient and reliable transport
and trade networks in a cost effective and
sustainable manner in order to support the
regional economies.

10.     Two economic development scenarios
were considered for the Strategy. The first was
the “business as usual” scenario as the base
case, while the second “closing the gap” scenario assumes a more aggressive implementation of
policy reforms in several areas. Based on some acceleration of economic growth in the CAREC
region since 1997 and further acceleration after 2002 fueled by the commodity boom, the prospects
for the future do indeed appear good. In a “business as usual” scenario a 7.5% annual growth rate
could well be achieved for the next 10 years. However, a well-designed and effectively
implemented strategy will make a significant contribution to the achievement of over 8.0% growth in
the “closing the gap” scenario.

11.    This report projects that trade flows for the CAREC countries would triple by 2017 over the
2005 base, and that GDP could grow by two and one half times in that period. The assumptions are
acceleration of policy reforms and actions including enhanced regional cooperation, and
development of efficient and reliable transport and trade systems with sound financial and
environmental sustainability.
                                                                                                    3



12.     Two concepts were considered for successful transport and trade corridor development in
the CAREC region. The first is the industry cluster concept which would involve the exploitation of
the existing CAREC resource base and the attraction of related industries. The CAREC region’s
resource base provides good opportunities and good prospects for at least six industry clusters:
petroleum and natural gas, minerals and metals, agrifood, agrifibre, construction, and tourism. The
Strategy considered the backward (inputs) linkages as well as forward (processing and distribution)
linkages of these “resources” and the role of transport and trade in their emergence as full fledged
clusters of industries. For example, the petroleum cluster might contain refineries and
petrochemical plants and even plastics manufacturing facilities, which are all related to further
processing of hydrocarbons. An important input or backward linkage in the evolution of the
petroleum cluster would be oil and gas field services including exploratory drilling and geological
information services. The Strategy reviewed trade and traffic implications by using the industry
cluster concept.

13.      The Strategy also reviewed
trade and traffic implications by using                   Transshipment at Irkeshtan Border
the concept of global production
networks or global value chains (GVCs).
A GVC integrates the full range of
activities in bringing a product from its
conception to its end use and ultimate
consumption. This includes activities
such as design, production, marketing,
distribution, customer service, and
recycling. The activities that comprise a
value chain can be contained within a
single firm or divided among different
firms.

14.     Integrating people, processes, and information to design and develop the right goods,
manufacture them in the most suitable locations and deliver the goods to where they’re supposed
to go, just in time and at the right price is a powerful business concept. When value chain activities
are spread over wide swaths of geographic space, they become a GVC.

15.     The international business communities have increasing demands for raising the efficiency
of transport and logistics services in the context of highly competitive globalization. Realization of
an effective GVC requires that transport and trade infrastructure, management, and technology
must be at world class standards and operate on a best-practice basis since competition among
GVCs is quite intense. Intermodal transport and a mature logistics industry are always a key
component in a GVC, and are emphasized in the Strategy. The idea of Central Asia participating in
a GVC involving electronic products may appear premature at this moment and with the current
transport and logistics system it probably is. However, the region does have some of the resources
needed for component production including “rare metals.” Thus, there will be good prospects for
CAREC countries to realize over the long-term industries which will require sophisticated logistics
services.

1.3    CONFRONTING THE TRADE AND TRANSPORT CHALLENGES

16.      Transit traffic through CAREC countries is growing but the region has so far only captured a
small portion of the potential trade flows between Europe and Asia. Less than 1% of the PRC–
Eurasia trade presently transits through Central Asia. By improving the competitiveness of the
corridors in terms of transport cost and time, CAREC countries can increase their share of this
traffic, and reduce the cost of trade with their own trading partners.

17.     For export, import and transit, rail is the dominant mode since the region’s economies are
largely resource based. Its exports comprise a high proportion of low unit value bulk goods such as
4



coal and raw materials transported over long distances. These circumstances will always favor rail
over road transport.

18.     The region has relatively well-developed transport infrastructure. In certain sections of the
corridors the initial standard of construction is, however, inadequate for today’s needs. Furthermore,
problems can often be attributed to lack of maintenance over many years. Also, road transport is
constrained by border crossing delays and unofficial payments. The present economic rebound is
unfortunately accelerating the deteriorating transport and trade infrastructure. Particularly, the road
sector has felt negative impacts of deteriorating road infrastructure acutely. In much of the region,
road asset values are declining faster than rehabilitation works can compensate. Rail has been less
affected but the same problems will plague it sooner or later unless preventive measures are taken
now.

19.    With increased vehicle ownership and declining road infrastructure quality, road safety has
become one of the major issues in the region. Safety has not been a major issue for rail operations,
yet there is a growing need for improved maintenance and modernization. Since demand for air
transport is growing rapidly, civil aviation safety has become a concern.

20.    Overall, the region’s transport sector regulations and its procedures are highly disparate.
They are only slowly being aligned with best international practice. This has particularly constrained
cross-border trade and transportation.

21.     During the period immediately preceding the demise of the FSU, the region’s eastern and
western transport networks resembled two dead-ends (blind alleys) opening in opposite directions.
Transport links between them were weak and trade flows were low. There is ample evidence both
current and past that this apparent insularity can and is being overcome. The region’s governments
are now actively participating in initiatives such as CAREC, Special Programme for the Economies
of Central Asia (SPECA), Eurasian Economic Community (EURASEC), the Shanghai Cooperation
Organization (SCO), and Transport Corridor Europe-Caucasus-Central Asia (TRACECA). Some
have acceded to the World Trade Organization (WTO); all participate in the World Customs
Organization (WCO), UNESCAP, and other international organizations that promote trade and
transport facilitation and integration.

22.       During the last 10 years, about $5 billion in external financing was mobilized to improve
regional transport infrastructure and trade and customs procedures in the CAREC region, including
implementation of institution building projects.3 Major financiers include ADB, EBRD, EU, IsDB,
JICA, and World Bank. About $3 billion went to improvement of international road corridor projects
(such as the north-south corridor between Kazakhstan and the Middle East, regional road transport
corridors in Afghanistan, east–west and north–south road corridors in Azerbaijan, regional
corridors in Xinjiang, People’s Republic of China (PRC), the north–south corridor in the Kyrgyz
Republic, international road corridors in Tajikistan, and an international road corridor in Uzbekistan).
The improvement of railways in Mongolia, Kazakhstan, and Uzbekistan received about $662 million
in total. A total of $565 million was mobilized for the improvement of airports in Afghanistan,
Kazakhstan, Kyrgyz Republic, Tajikistan, and Uzbekistan. The Baku port in Kazakhstan and Aktau
port in Kazakhstan each received $20 million in financing. Customs modernization and trade
facilitation in Afghanistan, Kazakhstan, Kyrgyz Republic and Tajikistan welcomed international
financing totaling about $100 million. EU provided the CAREC countries with institutional building
projects in the areas of transport and trade facilitation totaling more than €120 million. External
assistance to the transport sector is detailed in Appendix 2.

23.     Historically the region was braided by multiple routes linking vibrant centers of artisanship,
trade, and learning along the Silk Road. This provided not only interfaces between the region’s
populations but a conduit for the flow of goods and ideas between the two extremities of the


3
    According to the data base maintained by the CAREC Transport Sector Coordinating Committee.
                                                                                                     5



Eurasian land mass. The region is not now closely integrated into the modern global value chains,
but in a sense it invented them.

24.       The region is facing many challenges. However, CAREC countries may be able to transform
the challenges into opportunities by looking at the challenges from different perspectives and
taking active measures to overcome the challenges. For instance, the region’s transport and trade
technology and logistics capacity have fallen behind that of the most modernized areas of the world.
However, CAREC countries’ populations are generally young and well educated. Its trading
traditions are fast re-emerging as opportunities in the 21st century, and modern technology-based
logistics practices are developing in the region. Table 1.1 below compares some of the major
challenges and opportunities. The comparison augurs well for the region being able to overcome its
difficulties.

                               Table 1.1: Challenges and Opportunities
                      Challenges                                  Opportunities
                                                 Land-linked     networks      contiguous   with
         Landlocked                              emerging economies to the east and to the
                                                 west
                                                 A regional tradition of the Silk Road which can
         Globalization
                                                 be re-activated
         Low penetration of leading edge Young population with high levels of education,
         technology                              able and eager to adopt
         Inadequate infrastructure               The basic route layout exists
         Inadequate systems of management Well-proven global models are available
         and legal structures
                                                 Has bottomed, and a resource based boom is
         Economic decline
                                                 developing
        Source: Consultant.

25.      Challenges and opportunities including GDP and trade growth, challenges related to
transformation of transport corridors into economic corridors, the legal framework and regulations
on cross border transport, regional institutions and system management, and border crossing point
facilities and logistics are detailed in Appendix 3.

1.4    A BROAD WELL-FOUNDED APPROACH

26.     The importance, which the Strategy places on the key transport and trade corridors and
their physical infrastructure, is easily understood. However, there has been a growing recognition
that reliable and low-cost transport, logistics, and trade systems cannot be achieved through
investments in infrastructure alone. Achieving improved infrastructure, managerial excellence, and
modern technology—three pillars of successful corridor performance— is essential for CAREC
countries to operate and maintain road and rail networks as well as air and shipping lines effectively
(Figure 1.1). The same is true for border crossing points (BCPs) and their effective operation. The
three pillars were actively used for formulating the Strategy and the Action Plan in order to achieve
broad and well-balanced transport sector and trade facilitation development in the region.
6



    Figure 1.1: Three Pillars of Successful Corridor Performance




                    Infrastructure
                  W eak                           Weak
                Technology                     Management
                                Balanced
        Ma

                             Infrastructure,




                                                            y
                             Management &




                                                       lo g
                              Technology
           na




                                                     no
              ge




                                                   ch
                me


                                 W eak
                             Infrastructure




                                                 Te
                    nt




      Source: Consultant.
                                                                                                    7




          SECTION 2:        CAREC TRANSPORT AND TRADE FACILITATION STRATEGY
                                       2008-2017

2.1    ORIGINS AND OVERARCHING GOALS

27.     The Central Asia Regional Economic Cooperation (CAREC) Transport and Trade
Facilitation Strategy (the Strategy) was developed through active discussions and consultations
with the members of the Transport Sector Coordinating Committee (TSCC), Customs Cooperation
Committee (CCC), Senior Officials’ Meetings (SOMs), transport and trade authorities, and
stakeholders in the region. Past initiatives and technical assistance provided by the Asian
Development Bank (ADB) and other multilateral institutions active in the region were incorporated
into the Strategy. After active consultations, the Strategy was endorsed by the Sixth Ministerial
Conference in November 2007.

28.      The Strategy underpins the overall CAREC vision described in Section 1 by addressing the
major challenges and opportunities through achieving well-balanced interventions in the three
pillars (infrastructure, management, and technology). The following policy statement of the Strategy
provides an overall framework for the regional transport and trade strategy:

       “It is the policy of the Governments of CAREC countries to foster safe, dependable,
       effective, efficient, and fully integrated transport and trade operations and
       infrastructure in order to support social and economic development in the CAREC
       region. This will be achieved by improving levels of service; minimizing costs; and
       improving infrastructure, management, and technology in a manner which is both
       economically and environmentally sustainable. In addition, the efficiency of the
       transport and trade systems will be enhanced in a regional context to allow CAREC
       to exploit its unique geographical position.”
29.    The Strategy has three overarching goals:

           (i)     to establish competitive transport corridors across the CAREC region;
           (ii)    to facilitate efficient movement through corridors and across borders;
                   and
           (iii)   to develop sustainable, safe, and user-friendly transport and trade
                   networks.
30.   These goals are further described following the discussion on the Strategy’s impacts and
outcomes.

2.2    IMPACTS AND OUTCOMES

31.      A problem tree analysis was conducted to identify the causes and effects of the core
problems in transport and trade facilitation. The results framework was then developed to define
the inputs needed to implement the Strategy and its goals, expected outcomes, and impacts. The
result framework is shown in Figure 2.1 and the problems tree analysis is in Figure 2.2.

32.      The Strategy provides a vehicle by which investment and technical assistance projects are
targeted to address the causes of the core problems and the effects, and thereby enable the
identified outcomes and the desired impacts. By adopting a regional corridor approach, the
Strategy identifies the optimal routes to access major external markets for the import and export of
goods to/from the region, as well as providing for increased transit of goods between external
markets. Increased transit traffic will enable economies of scale for transport and trade activities,
which should lead to reduced travel and trade costs for residents of the CAREC region.
8

               Figure 2.1: Schematic of the CAREC Transport and Trade Facilitation Strategy Results Framework
                                                                                                                                                                                      1


    NATIONAL
    IMPACTS                                         Enhanced Inclusive Economic Development in the CAREC Region




                                  Increased business and employment opportunities                                   Improved health and education opportunities

    CONSEQUENT
    IMPACTS
                                                                                                                                                                   Lower incidences
                                                                                                                               Decreased
                                                                                                      Increased access                       Decreased traffic     of HIV/AIDS, and
                                         Reduced transport and trade costs                                                   environmental
                                                                                                      to social services                        accidents          human and drug
                                                                                                                              degradation
                                                                                                                                                                      trafficking




                     Pragmatic regional transport and trade facilitation cooperation among and beyond CAREC countries

    GOALS                                          Goal 1: Establish competitive corridors across the CAREC Region
                                                               Goal 2: Facilitate efficient movement across borders

                                               Goal 3: Develop sustainable, safe and user-friendly transport networks


                       Improved         Improved border                                Increased
                                                                  Balanced
                        capital             crossings,                                  PPP/PSP
                                                                development of                            Improved transport and trade
                     investment and        intermodal                                opportunities
                                                                infrastructue,                          facilitation and coordination with              Enhanced border and
    OUTCOMES          maintenance       facilities, logistic                              for
                                                                 technonogy                                     other countries and                       transit operations
                      budgets for         centers, and                               infrastructure
                                                                     and                                  transport/logistics operators
                       transport        inland container                             investment and
                                                                 management
                     infrastructure           depots                                   operation




                                                               Transport and Trade Facilitation Strategy Action Plan

                                      Infrastructure                                        Management                                       Technology
    INPUTS
                                                                                    Governments' actions
                                                                                 Corridor investment projects
                                                                                    Technical assistance

    Source: Asian Development Bank staff and the Consultant.
                                                                                                                                                                                              9

                             Figure 2.2: Transport and Trade Facilitation Strategy Problem Tree



EFFECTS           Limiting Economic                                                                             Poor Access to Social                            Environmental
                                                                   Limiting Poverty Reduction
                Development Prospects                                                                                 Services                                    Degradation




CORE
PROBLEMS                                         High Transport and Trade Costs along Non-competitive Corridors




                                         Poor transport infrastructure and                                                        Delays at border crossings and
                                   outdated technology and sector management                                  limited Intermodal nodes, logistic centers, and inland container depots




                                                            Outdated
                                                                                 Non-                           Inadequate transport and trade faciliation
                                                         transport and                                                                                             Inefficient border and
                                                                             harmonized                           coordination with other countries and
                                                              trade                                                                                                  transit operations
                                                                              technical                               transport/logistics operators
                                                           facilitation
                                                                              standards
                                                           equipment




                                                                                                                                                                  Inefficient coordination
              Inadequate capital      Inadequate border                                                                                Limited accession to/
                                                                    Unbalanced            Limited PPP/PSP          Limited                                          among Quarantine,
                investment and            crossings,                                                                                     implementation of
                                                                 development of           opportunities for      institutional                                    Customs, Immigration,
                  maintenance        intermodal facilities,                                                                                 international
CAUSES                                                             infrastructue,           infrastructure     capabilities for                                    and Security services
                  budgets for        logistic centers, and                                                                                conventions and
                                                                 technonogy and            investment and       transport and
                    transport          inland container                                                                               national legislation and
                                                                   management                 operation       trade failication
                 infrastructure             depots                                                                                           procedures




                                                                                                                                                                 Insufficient harmonization
                                                                                                                                                                      of Customs and
                                                                                                                                                                     inefficient transit
              Lack of prioritization and critical mass for                                                                                                               procedures
                              trade routes


                       Limited managerial capabilities for transport and trade facilitation, inadequate human resources development, and
                                                              inconsistent application of regulations


                Limited fiscal resources
                                                                 Inadequate policy support, regulatory and legal framework, development strategy, planning
                    and competing
                                                                                    and procedures for transport and trade facilitation
                 government priorities


Source: Asian Development Bank staff and the Consultant.
10



33.      Moreover, by utilizing a regional corridor approach, CAREC countries will be able to
prioritize and coordinate transport and trade investments along the major transport and trade
corridors which have the highest economic development potential and returns. This in effect will
multiply the impact of these investments by augmenting national and cross-border trade and traffic
generation with broader regional and international transit demand.

34.     The Strategy envisages a network of efficient and competitive corridors for freight and
passenger traffic within and through the region. This Strategy foresees that the regional multiplier
effect could triple trade flows by the year 2017 and that GDP could grow by two and one half times
in that period.

35.     There are additional potential downstream benefits from utilizing the regional corridor
approach including the development of economic activities along the corridors. These could
ultimately result in them transitioning from regional transport and trade conduits to economic
corridors with linkages to global value chains (GVC). Export led growth could then be generated by
a broader range of activities than the oil and natural resource exploitation upon which the region
largely depends at present. Collectively, these benefits will lead to broader and increased inclusive
economic and social development across the region.

36.     Traditionally governments have mainly focused on activities within their respective borders,
with limited attention given to activities in neighboring countries. The Strategy expects the CAREC
governments to go further by developing the corridors together as competitive international
linkages. The regional corridor approach adopted for the Strategy encourages the CAREC
countries to plan and implement their national interventions along the major corridors based on
extensive coordination among member states.

2.3     COMPETITIVE TRANSPORT AND TRADE CORRIDORS

2.3.1   Focused Development

37.      CAREC populations are concentrated at nodes, separated from each other and world
markets by deserts, mountain ranges, and the longest land transport distances on earth. The
CAREC corridors must be the arteries that nourish and allow them to develop. Their economies
have been growing strongly, but the region’s population densities are low. The extent and lengths of
their infrastructure linkages pose huge cost burdens on the economies.

38.     Comprehensive network plans of roads and railways were drafted by the continent’s nations.
Ultimately they will be realized, but the 10-year time frame of the Strategy emphasizes a selective
transit corridor approach. This will focus resources both for investment and for operational
management. It avoids patchwork development and focuses on balanced improvement of
infrastructure, management, and technology.

2.3.2   Corridor Performance Parameters

39.  Within the selected corridors the trade and transport infrastructure as well as its
management systems are to be developed in order to provide services that are

           (i)     reliable,
           (ii)    fast,
           (iii)   seamless between modes and across borders,
           (iv)    competitive,
           (v)     safe, and
           (vi)    environmentally friendly.
                                                                                                    11



40.     Achieving these requires a continuous effort by CAREC countries to improve transport and
trade infrastructure and services. Overall costs and travel time as well as the quality of physical
infrastructure along the corridors need regular monitoring to ensure performance meets standards
(see Section 4.3 Performance Measurement and Monitoring).

41.    Intermodal efficiency must be pursued by removing physical, commercial or technological
constraints.

42.    Physical improvements of corridors must have beneficial impacts on the countries. For
instance, road improvements will increase vehicle speed, thus improving the transport efficiency.
However, improved speed tends to increase road accidents. Therefore, appropriate measures to
reduce accidents must be introduced in conjunction with road infrastructure upgrading.

43.      Caspian Sea port and sea lane capacity must match the expected demand in the future.
Technical standards, regulatory controls, and emergency intervention capacity must be also
sufficient to safely handle the dangerous cargoes carried across the Caspian and handled at port
facilities. Aviation capacity must be expanded, together with safety improvements, while matching
the high demand growth.

44.     Partnerships with development institutions must be encouraged for the improvement of
transport and trade infrastructure and services in the region in order to introduce international best
practices. Public private partnerships and private sector participation should also be pursued for the
provision of such infrastructure and services.

2.3.3 Competition and Efficient Use of Funds

45.    Competition among transport and trade corridors must be encouraged. Modal connections
must be seamless to best exploit physical conditions, and to stimulate competition between modes.
The ultimate corridor selection will be made by transport service users and traders, not by its
providers. It is, therefore, important to bear in mind that successful corridor performance depends
on how well market needs are satisfied.

46.     Sustained beneficial impacts require regular maintenance of the transport and trade
infrastructure. Corridor investments must be economically and financially sustainable, without
relying on excessive national public debt. This will require innovative financing mechanisms based
on fair and balanced user-pay principles. To maximize efficiency in usage of the available financial
resources, maintenance services should also be organized on the basis of competition.

47.    The CAREC rail operators offer the highest capacity to move long haul freight (particularly
bulk cargo), and demand is rising. The restructuring measures taken by some CAREC countries
must be further implemented. Establishing competitive rail services must be further pursued.
Private sector participation must be encouraged to increase funding and enhance the marketing
expertise needed for such ventures.

48.     Air transport capacity and all of its vital support infrastructure and services must be
expanded to match rapidly growing demand. Private sector investment with improved management
is usually mobilized only when the provision of services is liberalized. Compliance with International
Civil Aviation Organization (ICAO) guidelines must be pursued for airports and air services.

2.3.4 Technology

49.     The Strategy must support accelerated introduction of modern intelligent transport systems
(ITS). ITS have been successfully introduced in many operational and control applications. They
efficiently respond to the needs of shippers and passengers with reduced cost and transit times,
and safer and secure transport. Their adoption will foster not just an efficient but also an agile,
12



flexible and resilient supply chain. This is essential in today’s increasingly demanding freight
environment where all parties in the GVC must deal with lean inventory, demanding schedules, and
tight resources, including extreme cases such as threats of natural disasters, strikes, and terrorist
attacks.

50.    The public sector must be aware of and facilitate introduction of these technologies.
Furthermore, it must also note that the most effective catalysts to adopting these technologies are
the global carriers, third-party logistics service providers, and suppliers and shippers who already
extensively utilize these technologies.

2.4     EFFICIENT TRANSPORT AND TRADE ACROSS BORDERS

2.4.1   Accelerating Progress

51.      The Strategy lays emphasis on harmonization and simplification of cross-border transport
and trade procedures, documentation and regulations among the countries to create a level playing
field for economic operators, and promote efficiency and better services. Previous TSCC and CCC
meetings have prepared specific recommendations on harmonizing and simplifying cross-border
transport procedures and documentation in CAREC countries. These were approved at the SOM
held in Manila in April 2005 and then expressed in an action plan encompassing six priorities:

        (i)     harmonizing regional road transport agreements,
        (ii)    harmonizing transport user tariff and fee frameworks,
        (iii)   harmonizing regulations on the weights and dimensions of vehicles,
        (iv)    harmonizing regulations on vehicle emissions,
        (v)     improving regional transport safety, and
        (vi)    reducing delays at border crossings.
52.       Some progress has been made in
implementation, but these priorities remain and            Dual gauge track in Ala Shankou China
are to be incorporated into the Strategy.                       Railways Container Terminal
Expanded technical assistance is foreseen to
accelerate movement forward in resolving the
difficulties that the Strategy and the Action Plan
seek to address.

53.     Similarly,   CCC      meetings     have
emphasized the need to harmonize procedures,
to encourage the free movement of goods and
people, and to enhance the transparency of laws,
regulations, and documentation. Consistent with
the Strategy, the World Customs Organization
(WCO) is assisting with assessments of customs
procedures, leading to concerted customs reform
and modernization. CAREC countries have
successfully completed the diagnostic assessments of customs procedures with support from
WCO and sped up the implementation of customs reform and modernization programs.

2.4.2 Border Crossing Points and Procedures

54.    The Strategy promotes improvement of the physical conditions and harmonization of
procedures on the basis of adherence to and implementation of international standards. The
Strategy encourages collaboration with organizations that develop and maintain these instruments
                                                                                                     13



(such as United Nations Economic and Social Commission for Asia and the Pacific [UNESCAP],
and WCO).

55.   Under the CCC, considerable resources are being targeted to harmonize procedures and
processes, and ultimately provide the seamless transit necessary to reduce travel costs and time.

2.4.3 Harmonized Technical Regulations

56.      CAREC cross-border traffic is enabled and regulated by a number of disparate bilateral and
multilateral agreements. Some are active, while others are under negotiation. To further improve
transit traffic and trade, these agreements require harmonization and clarification, preferably on the
basis of UN international conventions since UN international conventions for trade and transport
foster integration both within the region and with international markets. The Strategy promotes UN
international conventions and subsequent development of national legislations and procedures.

57.     Some guidelines have already been set and developed. Actions in the fields of technical
regulations and in facilitating flows of goods and people across and between borders are
interrelated. They are to be integrated into the Strategy.

2.4.4 Institutional Coordination

58.      Mature and successful regional groupings elsewhere in the world have developed strong
supra-national institutions to coordinate, and in some cases, to direct their intra- and inter-regional
trade and transport. Examples of these include the European Union (EU) and North American Free
Trade Agreement (NAFTA). CAREC is not near the stage of emulating such structures, and
CAREC countries have not expressed a wish to do so in the foreseeable future. The Strategy does
not therefore point CAREC towards a level of institutional integration that participants have not
endorsed. However, if CAREC’s expressed strategic goals are to be achieved, some overall
institutional structures must be established.

59.      Experience from the Greater Mekong Subregion (GMS), which has evolved several years
ahead of CAREC, suggests that interface between participating countries needs coordination firstly
at the national level followed by the establishment of a regional structure which will coordinate
national activities. Using GMS lessons learnt, the Strategy proposes a step-by-step coalescence of
effort focusing firstly at the national level, but commencing soon after and in parallel increasing
regional cooperation in specific areas (such as harmonized border-crossing procedures and truck
axle weights) of mutual benefit to CAREC participants. In this respect the Action Plan devotes
considerable attention to the establishment and work of national joint transport and trade facilitation
committees (NJCs). Azerbaijan, PRC, Kazakhstan, Kyrgyz Republic, and Mongolia, have
established transport and trade facilitation organizations or similar institutional structures to
address transport and trade issues. The NJCs or similar institutional structures will coordinate legal
and regulatory frameworks as well as procedures at the national level, but are also intended to
become the interfaces for establishment of agencies with trans-corridor responsibilities. The
Strategy envisages the establishment of a regional joint transport and trade facilitation committee
which will coordinate the work of the NJCs in order to ensure the overall consistency and efficiency
of transport and trade facilitation work.

2.5    SUSTAINABLE, SAFE AND USER-FRIENDLY TRANSPORT AND TRADE NETWORKS

60.    The Strategy is people-oriented and safeguards their interests, including vulnerable groups.
Poverty reduction and inclusive development are core foci of ADB and other multilateral institutions.
The design of CAREC programs and projects will support this emphasis to develop sustainable,
safe, and user-friendly transport and trade networks.
14



61.     Reflecting increasing trade and travel, the market has responded by providing both formal
and informal mechanisms to generate economic growth and development. These include shuttle
trading, container bazaars, and the increased presence of imported goods from globally
competitive producers. The Strategy builds upon these successes and promotes further
development of mechanisms that will stimulate sustainable economic growth and global
opportunities.

62.    The objectives of sustainable, safe, and user-friendly transport and trade networks are

           (i)     to develop and maintain a safe transport and trade system,
           (ii)    to develop a user-friendly transport and trade network,
           (iii)   to mitigate potential health impacts of increased traffic and mobility,
           (iv)    to develop and maintain an environmentally sustainable transport and
                   trade system, and
           (v)     to utilize transport and trade investments as engines of economic growth
                   for development along the corridors, and thereby alleviate poverty.
63.     Achieving these objectives will require commitment based on partnerships and utilizing best
practices that have been demonstrated in the CAREC region. These include innovative reduction of
HIV transmission and human trafficking projects in Afghanistan (testing facilities in border
provinces), XUAR (awareness programs and health posts at borders), and Mongolia (health
educators at borders). Partners to address poverty, HIV and AIDS, communicable diseases,
human trafficking, and movements of contraband include ADB; the World Bank; Global Fund for the
Fight against HIV/AIDS, Tuberculosis and Malaria; UNDP; Joint United Nations Programme on
HIV/AIDS (UNAIDS); United Nations Office on Drug and Crime (UNODC); World Health
Organization (WHO); UNICEF; International Organization for Migration; EU; Organization for
Security and Cooperation in Europe (OSCE), and bilateral agencies such as Australian Agency for
International Development (AusAID), Department for International Development of United Kingdom
(DFID), Japan International Cooperation Agency (JICA), Swedish International Development
Agency (SIDA), the United States Agency for International Development (USAID), and the US
Centers for Disease Control (US CDC), among others. The Strategy encourages intensified
operational coordination with partners active in the region.

2.6    WIDESPREAD BENEFITS

64.    Successful implementation of the Strategy will result in lower costs to consumers and
producers in and around the CAREC region, more competitive exports, and a more attractive
investment climate. The better environment for trade and business will stimulate economic growth,
improve living standards, and reduce poverty.

65.    The distribution of these benefits will be enhanced by promoting economic activities along
the corridors including the less developed and often remote areas that are traversed by
cross-border links.

66.    Significantly, evidence from other regions indicates that when economic linkages are
strengthened, broader economic development will be achieved and thus, improvement of the major
transport and trade corridors can serve as a basis for deeper and more inclusive economic growth
across the region.

67.   Negative impacts from improved mobility will be minimized by introducing safeguard
measures in the design, implementation, and operation of projects.

68.    Strategic focus areas are detailed in Appendix 4.
                                                                                                 15




                   SECTION 3: IMPLEMENTATION OF THE STRATEGY

3.1    RATIONALE

69.     The current transport and trade system in the CAREC region will not be able to support
effectively traffic and trade expansion during the next 10 years. Implementation of the 10-year
Central Asia Regional Economic Cooperation (CAREC) Transport and Trade Facilitation Strategy
(the Strategy) will take an integrated approach combining transport infrastructure investment,
technology, and management with trade and transport facilitation initiatives in a comprehensive
package.

70.     The Implementation Action Plan was endorsed at the 7th CAREC Ministerial Conference in
Baku, Azerbaijan in November 2008. It was developed based on the Strategy to bring about
significant and measurable improvements to the CAREC corridor performance in handling
intraregional, interregional, and transit movements.

71.    Proposed actions reinforce the three pillars of management, infrastructure, and technology
required to support a competitive transport and trade system. A balanced menu of projects was
designed to build institutional capacity and deliver the infrastructure, technology, and management
required for the development of the competitive transport and trade system in the region during the
next 10 years.

72.    The themes and the projects included in the Action Plan were derived from extensive
consultations with CAREC countries and stakeholders, and CAREC meetings.

3.2    LINKAGES TO REGIONAL AND GLOBAL TRADE

3.2.1 Major Transit Directions

73.     The selection of corridors has firstly identified major transit trade directions around the
CAREC region. Some trade already transits through Central Asia. Much more could be attracted if
corridor performance is improved. Five major trade directions have been considered (Figure 3.1).

74.      These trade directions represent the major trade origin and destination areas around the
CAREC region. Much of the trade between third countries separated by CAREC trade goes by sea
with little transit traffic passing through the CAREC region. For example, less than 1% of PRC
exports to Europe go by rail through CAREC countries. The trade directions depicted in Figure 3.1
constitute the basis for selection of the following six CAREC corridors (Figure 3.2):

           (i)     Corridor 1: Europe – East Asia,
           (ii)    Corridor 2: Mediterranean – East Asia,
           (iii)   Corridor 3: Russian Federation – Middle East and South Asia,
           (iv)    Corridor 4: Russian Federation – East Asia,
           (v)     Corridor 5: East Asia – Middle East and South Asia, and
           (vi)    Corridor 6: Europe – Middle East and South Asia.
16



                      Figure 3.1: Major Transit Trade Directions around CAREC




3.2.2 Corridor Characteristics

75.    A corridor is a route or a set of parallel routes linking two gateways into the CAREC region
(mostly port to port or port to major economic activity center). The route can be a road, a railroad, a
sea route or any combination of modes. To be selected, the corridor must pass through at least two
CAREC countries.

76.    All corridors are transit corridors since their origin and destination points are outside the
CAREC region. This does not mean that the Strategy considers only transit trade. In fact, the
current intra-regional movements of freight and people along the corridors are mainly within or
between CAREC countries with relatively little transit movements. Although some corridors are
already transit conduits, others have the potential to become so.

77.    The corridors reflect current and potential trade flow patterns. The selection of the corridors
is based on the following five criteria:

           (i)     current traffic volume;
           (ii)    prospect of economic and traffic growth;
           (iii)   ability to increase connectivity between regional economic and
                   population centers;
           (iv)    prospect of mitigating delays and other hindrances such as the number
                   of cross-border points, number of gauge changes, etc.; and
           (v)     economic and financial sustainability of infrastructure, management, and
                   technology improvements.
78.     To be selected a corridor must meet the following conditions: (a) either (i) or (ii) or both
criterion above; and (b) at least one of the remaining three criteria.
                                                                       17



PLACE HERE FIGURE 3.2 THE FOLDOUT A3 SIZE MAP OF SIX CAREC CORRIDORS
18



THIS IS THE BACK SIDE OF THE A3 SIZE MAP. IT IS BLANK
                                                                                                   19




                                                        Corridor 2: Uzbek Road Sign to Kashi




79.    The vast majority (about 80%) of external trade and transit is carried by rail. Hence the rail
network dominates long-distance movements. Most international highways run parallel to the rail
routes and the corridors are broad enough to accommodate both. Inter-modal changes can bridge
missing links in one or the other mode so these are also taken into account.

80.    The CAREC region already has a well-developed network of road, rail, and sea links, as
well as airports. In most cases, their condition has deteriorated in recent years. However, they
remain a valuable regional asset, and offer excellent opportunities for CAREC countries to reap
quick and high returns from their infrastructure investments through rehabilitation of the existing
transport and trade system.

3.2.3 The Six Major CAREC Corridors

81.    The six CAREC corridors, which the Strategy will support until 2017, are shown in Figure 3.2.
The six corridors may not satisfy each of the region’s cross-border traders and travelers, but when
they are improved to international standards, they will be able to

           (i)     open CAREC’s gateways to global trade;
           (ii)    increase CAREC’s share in Eurasian transit transport; and
           (iii)   support the rapid growth of intra- and inter-regional trade of CAREC
                   countries.
82.    The selection of the six CAREC corridors by using the five criteria is summarized in Table
3.1. The matrix uses both qualitative and quantitative analysis. The corridors serve the principal
regional trade and transit directions, and also each CAREC country’s internal and cross-border
transport needs.
20



                                       Table 3.1: Matrix of Selection Criteria for CAREC Corridors

                                                                                                                                       Economic &
                                                                                     Capacity to increase
                                                                                                               Potential to              financial
                                                                                         connectivity
 Corridors/                    Current traffic          Prospect of economic                                  mitigate delays         sustainability
                                                                                      between economic
 Countries                        volume                  and traffic growth                                    and other           when investing
                                                                                       and population
                                                                                                               hindrances               in corridor
                                                                                           centers
                                                                                                                                     improvements
                                                                                                                                   Good prospect for
                                                                                                              Construction of
                  (KAZ,
      CAREC 1 Europe –




                                                        Prospect for economic        1b and 1c provide                             investments;
       KGZ, and XUAR)




                                                                                                              Khorgos rail line
                                                        growth remains very          good population and                           Electronic Data
                            This is the most active                                                           will resolve
                                                        good. Witness the high       potential economic                            Interchange (EDI)
                            corridor for Central                                                              capacity
                                                        growth in trade between      connectivity passing                          is already being
                            Asia export/import                                                                problems. Few
                                                        Europe and PRC and           through Astana,                               used on a limited
     East Asia




                            and transit traffic both                                                          border crossings
                                                        the construction of the      Almaty (1b) and                               basis and logistic
                            by road and rail.                                                                 and therefore
                                                        Khorgos new rail             Bishkek and Kashi                             centers exist or
                                                                                                              high prospect to
                                                        connection.                  (1c).                                         are going to be
                                                                                                              mitigate delays.
                                                                                                                                   established.
                                                                                                              This corridor has
  CAREC 2: Mediterranean




                                                                                                              strong intermodal
   – East Asia( AZE, KAZ,
    KGZ, TAJ, UZB, and




                                                        Trade prospect along                                  (by sea via Black
                                                                                                                                   Prospect to
                                                        the corridor is very good.   This corridor brings     Sea and Caspian
                                                                                                                                   implement logistic
                            This is a TRACECA           Transport pattern            strong connectivity      Sea; by road in
           XUAR)




                                                                                                                                   centers are good.
                            corridor, significant       currently dominated by       (both economic and       KGZ; plus rail in
                                                                                                                                   The fact that it
                            volumes for Central         oil products will change     population centers)      others) potential.
                                                                                                                                   involves many
                            Asia export/import.         overtime with                throughout Central       Relatively high
                                                                                                                                   countries may act
                                                        construction of              Asia.                    number of border
                                                                                                                                   as a limitation.
                                                        additional pipelines.                                 crossings scores
                                                                                                              average on this
                                                                                                              criterion.
                                                                                     Good connectivity        Because of           This is a railway
 Asia, Middle East
 (AFG, KAZ, KGZ,




                            Currently limited           Prospect is good for
  TAJ, and UZB)




                                                                                     (population and          change of railway    corridor which
   RUS - South




                            transit volume              exports of timber,
     CAREC 3




                                                                                     economic centers)        gauge and            should make use
                            between RUS and             minerals and metals
                                                                                     and also connects        numerous border      of block trains.
                            Bandar Abbas                from RUS and
                                                                                     forest products and      crossings, this      The fact that it
                            through Central Asia        Kazakhstan with general
                                                                                     mining regions in        corridor scores      involves many
                            and Iran to Bandar          goods coming from
                                                                                     north and gulf oil       low on this          countries may act
                            Abbas.                      Persian Gulf.
                                                                                     production.              criterion.           as a limitation.
                                                        With completion of the
                                                                                     Little population
                                                        western road trade
        RUS – EAST ASIA




                                                                                     connectivity for 4 a
                                                        expansion expected
                            Western corridor                                         with some important      Prospects for
           CAREC 4




                                                        between PRC and RUS,                                                       Good possibility
                            traffic is currently low.                                economic centers         mitigation of
                                                        traffic on Western                                                         for technology
                            Eastern corridor traffic                                 connectivity along 4a.   delays are very
                                                        corridor (4a) will grow.                                                   improvements
                            (4b) both rail and road                                  Good economic and        good on this
                                                        Corridor 4b traffic will                                                   (EDI).
                            is high.                                                 population               corridor.
                                                        grow with completion of
                                                                                     connectivity along 4b
                                                        Choir-Zamyn-Uud road
                                                                                     via Ulaanbaatar.
                                                        project.
                            Traffic varies along                                                              This is a typical    Situation in
KGZ, TAJ, , and
East Asia (AFG,
 South Asia- –
 Middle East,




                            stretches but remains       Substantial prospect for                              inter modal          Afghanistan and
  CAREC 5




                                                                                     Potential for
    XUAR)




                            low in Kyrgyz               Pakistan – PRC trade.                                 corridor. Because    efficiency of the
                                                                                     increased economic
                            Republic and                The corridor is a better                              of numerous          Pakistan Railway
                                                                                     exchanges between
                            Tajikistan except           alternative than through                              border crossings,    may limit
                                                                                     PRC and Pakistan.
                            between Kabul and           the Karakoram Highway.                                scores low on this   prospect for
                            Peshawar.                                                                         criterion.           improvement.

                                                                                                              Because of
 East, South Asia
 Europe – Middle




                                                                                                                                   Situation in
 (AFG, KAZ, TAJ,




                                                        Faster and cheaper                                    railway gauge
                            Relatively high rail                                     Potential for                                 Afghanistan and
    and UZB)
    CAREC 6




                                                        route from Europe to                                  changes and
                            traffic on the Uzbek                                     increased economic                            efficiency of the
                                                        Arabian Sea implies                                   numerous border
                            and Kazakh part and                                      exchanges between                             Pakistan Railway
                                                        potential for the corridor                            crossings, this
                            at the Afghan –                                          North of Europe and                           may limit
                                                        to compete with the                                   corridor scores
                            Pakistan border.                                         Gulf region.                                  prospect for
                                                        all-sea route.                                        low on this
                                                                                                                                   improvement.
                                                                                                              criterion.

AZE=Azerbaijan; AFG=Afghanistan; CAREC = Central Asia Regional Economic Cooperation; PRC=People’s Republic of
China; KAZ=Kazakhstan; KGZ=Kyrgyz Republic; MON=Mongolia; RUS=Russian Federation; TAJ=Tajikistan;
UZB=Uzbekistan; XUAR=Xinjiang Uygur Autonomous Region.
Source: Consultant.

83.   CAREC 1 (1a, 1b, 1c): Europe – East Asia. CAREC 1, linking Europe to PRC through
Kazakhstan, is currently the most active corridor. Corridor 1a begins in Troitsk on the border with
                                                                                                                    21



the Russian Federation, and is a rail and road network that passes through Kairak, Astana,
Kostanai, Karaganda, Mointy, Aktogay, and Dostyk and then connects to the China Railway in Ala
Shankou. The route then passes through Kuytun/Urumqi/Turpan/Hami/Hexi and ends in the ports
of Lianyungang or Tianjin in the PRC’s east coast. Corridor 1b which coincides with the Mega R-50
project of Kazakhstan begins in Orenburg, Russian Federation, passes through Kos
Aral/Zhaisan/Aktobe/ Kyzyl-Orda/Shymkent/Taraz/Almaty/Korgas, and then enters the PRC at
Khorgos, and proceeds on to Kuytun/Urumqi/Turpan/Hami/Hexi and eastward. The rail line from
Khorgos to Kuytun via Jinghe will soon be completed.4 The third alternative (1c) begins in Troitsk
and passes through Kairak/Kostanai/Astana/ Karaganda/Mointy/Shu, and then continues through
Merke/Chaldovar/ Bishkek/ Balykchy/Naryn/Torugart in the Krygyz Republic before entering the
PRC at Torugart (Topa) and continuing to Kashi/Turpan/Hami/Hexi and points eastward. This
routing uses the Kyrgyz Railway to Balykchy and then continues by road to Kashi (or Kashgar),
where it connects to the China Railway network. Another alternative would be a road that is being
considered to link Almaty with Corridor 1c between Balykchy and Bishkek near Lake Issyk-Kul. The
governments of Kazakhstan and Kyrgyz Republic with assistance from EBRD are currently
evaluating the feasibility of a new, shortened, Almaty–Issyk-Kul Road.

84.    CAREC 2 (2a, 2b): The Mediterranean – East Asia. In recent years, trade has been
growing between South Europe, Turkey, and Iran, and Central Asia. With the “go west” policy of the
PRC, trade has also been expanding between South Europe, Turkey, Iran, and the PRC. Corridor 2
connects Istanbul to Georgian ports of Poti and Batumi by vessel across the Black Sea. The route
passes by rail or road through Azerbaijan via Beyuk Kesik/Agstafa/Yevlakh/Baku.5 Corridor 2a
includes rail/road car ferry service across the Caspian Sea to Aktau in Kazakhstan and continues
through Beyneu, crossing into Uzbekistan at Karakalpakya and then on to
Nukus/Bukhara/ 6 Navoi/Samarkand/Djizzak/Khavast/Bekabad, passing through Nau/Khujand/
Kanibadam in Tajikistan, and then on to Kara Suu/Osh/Gulcha/Sary Tash/Irkeshtan in the Kyrgyz
Republic, and then into the PRC at Yierkeshitan and to Kashi/Turpan/Hexi and the eastern ports of
the PRC. This corridor is rail and road except for the section in the Kyrgyz Republic to Kashi, which
is road only. Corridor 2b uses the rail/road car ferry to Turkmenbashi, Turkmenistan. The route
continues from Turkmenbashi to Ashgabat/Farap before entering Uzbekistan at Alyat, passing
through Bukhara/Navoi where it follows the same routing as 2a. An alternative road runs from
Djizzak through Tashkent and Andijan to Osh. In the future it is likely that a large part of the traffic
coming from South Europe and Turkey will choose the new rail connection being built between
Turkey and Georgia (125 km) originating at Kars in Turkey.

85.    CAREC 3 (3a, 3b): Russian Federation (RUS) – South Asia and Middle East. CAREC 3
connects Rubtsovsk/Veseloyarsk, Russian Federation, to the Persian Gulf through Central Asia.
Corridors 3a and 3b pass through Kazakhstan from Aul/Semey/Charskaya/Aktogay/Almaty/Merke,
where 3a and 3b separate. Corridor 3a continues through Kazakhstan via Merke/Taraz/
Shymkent/Arys/Saryagash. It then enters Uzbekistan and passes through Keles/Tashkent/
Syrdaryinskaya/Djizzak/Samarkand/Navoi/Bukhara/Alyat. It enters Turkmenistan and passes
through Farap/Mary/Sarahs. It enters Iran at Sarakhs and passes through Mashad and on to
Bandar-Abbas on the Persian Gulf. This is a road/rail corridor that requires a gauge change at
Sarakhs. From Merke, Corridor 3b enters the Kyrgyz Republic at Chaldovar from Merke, and
continues through Kara Balta/Osh/Gulcha/Sary Tash/Karamik before entering Tajikistan at Karamik.
The corridor then passes through Dushanbe/Tursunzade/Pakhtaabad, and enters Uzbekistan at
Sarayasia, then on to Termez/Airatom, where it crosses into Afghanistan at Hairatan before passing

4
  Currently, rail traffic from Urumqi to Almaty can utilize the Urumqi-Ala Shankou-Dostyk-Aktogay-Sary Ozek-Almaty
  routing, which is 1,331 km in length. The line under construction from Jinghe to Khorgos and the planned line from
  Korgas to Zhetygen (about 50 km north of Almaty) will reduce the rail distance between Urumqi and Almaty to 910 km, a
  reduction of 421 km. However, most current traffic (over 2,200 trucks per day) to Almaty goes by road through Khorgos
  and then on to Almaty. When the rail lines are completed, it is expected that some truck cargo will switch to rail.
5
  An alternative and more direct routing from Yevlakh to Baku is being developed based on a recently defined World
  Bank-funded project.
6
  An alternative rail route is Nukus-Uchkuduk-Navoi.
22



through Mazare-e-Sharif/Herat/Islam Qila, where it enters Iran at Dogharoun, and then on to
Bandar-Abbas. Corridor 3b is also a road/rail corridor except for the portion in Afghanistan, where
only road is available. An alternative feeder route would be from Herat to Delaram to Zaranj in
Afghanistan, and then on to Chabahar, an Iranian port on the Arabian Sea.

86.     CAREC 4: Russian Federation – Mongolia – PRC. CAREC 4a is a road corridor
connecting XUAR to the Russian Federation via the Yarant/ Ulaanbaishint/Tsaganuur road. The
route starts from Tashanta in RUS and then passes through Mongolia via
Ulaanbaishint/Olgiy/Hovd/Yarant, and enters the PRC at Takeshiken, where it continues to Urumqi.
The present traffic is low but it offers a good potential for the future when the road is improved with
ADB and other lender assistance currently under preparation. Corridor 4b is a rail corridor that will
soon be accompanied by a paved all-weather road when the southern section to the border with the
PRC between Choir and Zamyn-Uud is completed in 2008. Beginning in Naushki, RUS, the corridor
passes through Sukhbaatar/Ulaanbaatar/Zamyn-Uud and into the PRC at Erenhot. This is
Mongolia’s key north-south railway and soon to be completed road corridor running through the
capital, Ulaanbaatar, which connects through northeast PRC to the port of Tianjin, which is
landlocked Mongolia’s primary seaport. The rail line also carries considerable transit traffic between
RUS and the PRC.

87.    CAREC 5: Middle East and South Asia – East Asia. CAREC 5 connects the Arabian Sea
region (including Pakistan and India) to the PRC through Central Asia. Starting from Karachi (or
Port Qasim), it is a rail and road corridor until it reaches Afghanistan and continues northbound by
road. The newly opened Port Gwadar is another terminus which is currently connected by road. In
Pakistan, there are three alternatives: Karachi/Hyderabad/Lahore/Rawalpinidi/Islamabad/
Peshawar/Landi Kotal; and on the west bank of the Indus River, Karachi/Hyderabad/ Larkana/Dara
Ghazi Khan/Kohat/Thal or Parchinar. In Afghanistan, the route from Parchinar, Pakistan passes
through Nazyan to Jalalabad. The routing from Thal goes into Afghanistan at Gulam Khan and
continues through Gerdez/Kabul. The route that carries most of the traffic goes from Peshawar,
Pakistan to Landi Kotal, crossing into Afghanistan at Torkham and continuing through Jalalabad to
Kabul/Kunduz and Shirkhan Bandar. From the Tajikistan border crossing of Nizhni Pianj, the route
passes through Kurgan Tyube/Dushanbe/Karamik. In the Kyrgyz Republic the road goes to the
Chinese border via Karamik/Sary Tash/Irkeshtan, and then into the PRC via Yierkeshitan/
Kashi/Turpan/Hexi and the eastern ports. An alternative route, or feeder corridor, passes from the
PRC into Tajikistan via Kulum Pass/Murgab/Khorog/Dushanbe/Nizhni Pianj.

88.     CAREC 6 (6a, 6b, 6c): Europe – Middle East and South Asia. The first route (6a) enters
the CAREC region as a rail/road corridor from Aksarayskaya in RUS, and passes through
Atyrau/Makat/Beyneu       in      Kazakhstan     and      continues     to    Uzbekistan     through
Karakalpakya/Nukus/Bukhara/Tashguzar/Baisun/Kumkurgan/Termez. After crossing the border, in
Afghanistan it is a road corridor proceeding from Hairatan/Mazare-e-Sharif/Herat on the Regional
Ring Road, reaching the Iranian border at Islam Qila and continuing to Dogharoun and Bandar
Abbas by road/rail. The second corridor (6b) originates from Orenburg/Kos Aral, RUS, passing the
Kazakhstan border at Zhaisan/Aktobe/Kyzl-Orda/Arys/Shymkent and Sarayagash at the Uzbek
border.     In   Uzbekistan     it   follows   by    rail   from    Keles/Tashkent/Syrdaryinskaya/
Djizzak/Samarkand/Tashguzar/Baisun/Kumkurgan before reaching Termez. 7 In Afghanistan it
follows the route of 6a to Islam Qila at the border with Iran and Port of Bandar Abbas. The third
corridor (6c) begins in Orenburg/Kos Aral and then passes through Zhaisan/Kandagash/
Kyzyl-Orda/Arys/Shymkent/Saryagash in Kazakhstan, crossing the Uzbek border at Keles and
going through Tashkent to the Tajik border at Bekabad. In Tajikistan it proceeds by road from Nau to
Istaravshan/Ayni/Dushanbe/Kurgan Tyube/Nizhni Pianj. In Afghanistan, it goes through Shirkhan
Bandar/Khunduz/Kabul/Torkham, crossing into Pakistan border at Landi Kotal and continuing by
rail/road to Peshawar and Karachi. Alternatively, it could also connect via road to the new port of
Gwadar from Sukkur.            In addition, 6c could utilize the alternative routes from

7
    An alternative routing for 6b would bypass Djizzak.
                                                                                                     23



Jalalabad/Nazyan/Pachinar and Kabul/Gerdez/Gulam Khan described for Corridor 5, as well as the
alternative routings within Pakistan via Islamabad or the west bank of the Indus River.

3.2.4 Project Development Rationale

89.       The traffic flows on the six CAREC corridors are shown in Maps 2.1 and 2.2 for road and rail,
respectively. Road traffic is largely concentrated around population nodes, and cross border traffic
is relatively light. Even so, congestion and delays at border crossings are severe. The figures
highlight the importance of an integrated CAREC program for regional transport and for trade
facilitation aimed at reducing border-crossing delays and increasing intra-regional and transit
traffic.




90.    The traffic flows are shown in greater detail in linear schematics in Appendix 5 with key
technical indicators describing the corridors including for roads design class, length, terrain,
24



pavement type, and surface condition and for railways traction power, terrain, length, gauge, and
number tracks.

3.2.5 Summary of the Corridors

91.     The Strategy will focus on improvement of (i) about 24,000 km of roads,8 20,000 km of
railways, 9 and 28 border crossing points along CAREC corridors; (ii) two ports (Aktau in
Kazakhstan and Baku in Azerbaijan) and shipping (400 km between Aktau and Baku);10 and (iii) 41
airports with international air services. Table 3.2 summarizes key characteristics of the corridors.
The distances shown for the various corridors do not include distances in for example, Pakistan and
Iran, to ports such as Bandar-Abbas and Karachi through which CAREC goods are shipped.
Similarly, distances for Corridor 2b through Turkmenistan (1,166 km by rail), a non-CAREC country,
are not included. Main cities include capitals and leading population centers such as Almaty.

3.2.6 The Dynamics of Corridors

92.     Corridors are not “final products.” Rather, once a corridor is established, it must perform to
the satisfaction of users or customers. Thus, upgrading the physical infrastructure (e.g., rail lines
and roads) is only one step in ensuring that traffic increases along a specific route. It is also
necessary to ensure that border-crossing times and costs as well as gauge changes and other
transshipment operations are completed as seamlessly as possible. Harmonization of procedures
and processes accompanied by new off-the-shelf technologies will greatly facilitate movements.
However, in addition, there will be the need to constantly and consistently review corridor
performance and compare it to other including competing corridors. These reviews will indicate
what measures need to be taken in order for a corridor to become or remain competitive.

93.     Having noted the above parameters, some discussion of the present dynamics of the
CAREC corridors is necessary. Since the beginning of the preparation of the Strategy, two key
corridor stretches have been added or are in the process of being added to the CAREC transport
network. In August 2007, in Uzbekistan, a new rail line from Tashguzar – Baisun – Kumkurgan was
opened. Before, to reach Termez, the railway line had to enter Turkmenistan. The new line
eliminates the need to enter Turkmenistan and cuts the distance by approximately 200 km,
resulting in savings of about $20 million per year. The new rail line could also reduce Tajik import
and export costs.

94.    The other addition is the construction in XUAR of the Jinghe-Yining-Khorgas rail line
expected to be completed in 2009. It will be extended on the Kazakhstan side by a new rail line
between Zhetygen and Korgas. When constructed the new line will cut by 421 km or 32% the rail
distance between Almaty and Urumqi. Expected traffic at completion (2009) is 5 million tons,
reaching 25 million tons after 10 years.




8
     Sixty-four percent of the CAREC road corridors are in good condition, followed by fair (21%), and bad (15%).
     Interventions will focus on the fair and bad road sections.
9
     Fiber optic communications networks along the railway tracks will provide telecommunication and information
     technology companies with new expansion opportunities, creating digital corridors along the railway lines.
10
      Shipping between Baku and Turkmenbashi, Turkmenistan, totaling 325 km, is also monitored.
                                                                                                                                                                  25



                                                                    Table 3.2: Summary of CAREC Corridor Characteristics
                                                                                      Distance            % Rail in                   BCP     Transshipment
                                                                             Distance             Road                Main Cities
              Corridor/Characteristics                                                (km) Rail             Rail                    number on      Points
                                                                            Road (km)             AADT                on corridor
                                                                                        Route             corridor                   Corridor    (number)
                                    CAREC 1 Europe- East



                                                           CAREC 1a KAZ,                                                Astana,                 1 (gauuge
                                                                              4,196     3,720     4,979     100                        1
                                                           XUAR                                                         Urumqi                   change)

                                                           CAREC 1b KAZ,                                                Almaty,                 1 (gauuge
                                           Asia




                                                                              4,517     3,685     4,913     100                        1
                                                           XUAR                                                         Urumqi                   change)
                                                                                                                       Astana,
                                                           CAREC 1c KAZ,                                                                       2, Rail-Road,
                                                                              4,875     4,572     4,989      88        Bishkek,        2
                                                           KGZ, XUAR                                                                             Road-Rail
                                                                                                                       Urumqi
                    Mediterranean -




                                                           CAREC 2a KAZ,                                                                      4, rail-sea, sea-
                                                           UZB, KGZ,          5,664     5,705     5,389      89          Baku          6       rail, rail-road,
                      CAREC 2

                      East Asia




                                                           XUAR                                                                                   road-rail
                                                           CAREC 2b                                                                           4, rail-sea, sea-
                                                                                                                        Baku,
                                                           TKM, UZB,          4,231     4,018     8,237      95                        6       rail, rail-road,
                                                                                                                       Ashgabat
                                                           KGZ, XUAR                                                                              road-rail
    Russia - Middle
    East and South




                                                           CAREC 3a KAZ,                                                Almaty,                  1 (gauge
                                                                              2,667     2,884     4,963     100                        2
      CAREC 3




                                                           UZB, AFG                                                    Tashkent                  change)
         Asia




                                                           CAREC 3b KAZ,
                                                                                                                       Almaty,                  2 rail-road,
                                                           KGZ, TAJ, UZB,     4,206     1,947     2,474      30                        4
                                                                                                                      Dushanbe                   road-rail
                                                           AFG
          Russia - East




                                                           CAREC 4-a                                                                                No
                                                                              1,311       0       1,812      0          Urumqi         1
           CAREC 4




                                                           MON, XUAR                                                                          transshipment
             Asia




                                                           CAREC 4-b                                                                             1 (gauge
                                                                              1,041    1,110.3    450       100       Ulaanbataar      1
                                                           MON, XUAR                                                                             change)
   Middle East

   Asia- East
   and South
    CAREC 5




                                                           CAREC 5 AFG,
                                                                                                                       Kabul,                  2, Rail-Road,
      Asia




                                                           TAJ, KGZ,          3,682     2,025     5,685      51                        3
                                                                                                                      Dushanbe                   Road-Rail
                                                           XUAR

                                                                                                                      No capitals
          Middle East and South




                                                           CAREC 6a KAZ,
           CAREC 6 Europe -




                                                                              3,266     2,516     2,445      59         on the         2       1, Rail-Road
                                                           UZB, AFG
                                                                                                                       corridor
                                                           CAREC 6b KAZ,                                                                       2, Rail-Road,
                  Asia




                                                                              3,907     2,644     2,976      72        Tashkent        2
                                                           UZB, AFG                                                                              Road-Rail
                                                                                                                      Tashkent,
                                                           CAREC 6c KAZ,                                                                       2, Rail-Road,
                                                                              3,419     2,036     2,687      65       Dushanbe,        3
                                                           UZB, TAJ, AFG                                                                         Road-Rail
                                                                                                                        Kabul

   AZE=Azerbaijan; AFG=Afghanistan; PRC=People’s Republic of China; KAZ=Kazakhstan; KGZ=Kyrgyz Republic; MON=Mongolia;
   RUS=Russian Federation; TAJ=Tajikistan; UZB=Uzbekistan; XUAR=Xinjiang Uygur Autonomous Region.
   Source: Consultant.

95.     The two rail projects described above have been incorporated into the design of the six
corridors. However, there are additional planned or ongoing infrastructure projects, which will
modify the transport network. Perhaps the most important is the construction in Kazakhstan of an
East-West rail corridor providing a direct connection between Aktau and Korgas and cutting the
distance by 1,000 km. The East–West corridor would require the construction of two new links. The
first one will be between Zhezkazgan and Saksaulskaya (on the Kandagash-Shymkent rail line,
CAREC 6b and 6c) with 550 km of new line at a cost of $ 990 million. The second one is the rail link
between Shalkar and Beyneu (470 km) at a cost of $ 846 million. The expected freight volume when
completed (circa 2012) will be over 20 million tons (60% of the export volume). This new corridor
will compete directly with current TRACECA corridors and CAREC 2a and 2b. By avoiding border
crossings with the Russian Federation, Uzbekistan, and Turkmenistan, the proposed new rail
corridor could gain considerable competitive advantage over the present routes. The ongoing rail
construction between Kars, Turkey, and Tbilisi, Georgia will complement the above to provide a
26



relatively seamless land bridge between the PRC and Europe via CAREC Corridor 2 with the
completion of the rail tunnel under the Bosporus in 2010.

96.     The Government of Uzbekistan is considering11 construction of a new rail line between
Angren and Pap in order to connect directly to the Ferghana Valley without passing through the
northern part of Tajikistan. Expected freight traffic on this new line could be as high as 10 million
tons being largely diverted traffic from the Bekabad–Kokand rail line. Though the Uzbek
Government will save on the cost of passing through Tajikistan (approximately $30 million),
economic justification has not yet been fully established. The construction of the Agren-Pap rail line
will considerably reduce the traffic and the revenues on the Tajik North rail line12.

97.    In 2003 in Turkmenistan, a new rail line was constructed between Ashgabat and Dashoguz,
and is otherwise referred as the Trans Karakum rail line. The line connects in Uzbekistan at
Urgench and provides an attractive reduction in distance from European and Russian transit to
Bandar Abbas and the Persian Gulf. This would divert traffic from the Nukus-Alyat line and
therefore competes with CAREC 6a.

98.    Recently Kazakhstan and Uzbekistan discussed building a new rail line between Uchuduk
(Uzbekistan) and Zhezkazaghan (Kazakhstan). This line of approximately 400 km will provide an
opportunity for Uzbekistan to benefit from some of the expected traffic on the new East-West,
Caucasus-PRC rail corridor that Kazakhstan has started building as stated above. Technical and
economic feasibility for the project has not yet been established.

99.     Very recently,13 Iran, Kazakhstan, Russian Federation, and Turkmenistan have reached a
quadripartite agreement on establishing a railway around the Caspian Sea. Each country will bear
the cost of the rail line on its own soil. The cost of this new 700 km rail link is estimated at $1 billion.
The longest stretch will be in Turkmenistan. In Kazakhstan, it will connect with the ports of Aktau
and Kuryk. The rail alignment will pass through unstable swampy areas making the construction
costly and difficult.

100. There are other rail projects in Iran which are likely to affect the CAREC transport network.
In 2005, Azerbaijan, Iran, and Russian Federation, signed agreements in support of building a rail
link from Qazvin to Astara through Rasht and Anzali. The rail link is 350 km with an estimated cost
of $600 million. When completed, the link will cut the distance for European and Russian goods to
the Persian Gulf by 800 km. Implementation, however, has been slowed and Azerbaijan
involvement has been cautious. The project may receive a boost based on the decision by Russian
Federation to actively participate in the financing and construction of the project and with
reconfirmed support from Azerbaijan following recent meetings. In 2008, the rail link between
Kerman and Zahedan will be completed and will permit freight to reach Pakistan using the Pakistan
rail in Baluchistan (via Quetta). In addition, Iran intends to connect the port of Chabahar on the
Oman Sea with this new rail link and connect by road in Chabahar with the newly built port of
Gwadar in Pakistan.

101. In the past, interest has been expressed in developing a railway network in Afghanistan. In
2003, Afghanistan, Iran, and Uzbekistan signed an agreement to accelerate the development of
transit routes including the study of the Mashad–Sanghan–Herat–Termez rail line. On 20
November 2008 the two governments executed an agreement in Baku to construct a new southern
railway link. A railway link between Hairatan and Torkham through Kabul is being studied in
conjunction with the copper mine development in Afghanistan. A railway connection from Hairatan
through Mazare-e-Shariff to Islam Qila together with a spur line to Shirkhan Bandar in Afghanistan
is also being considered.


11
   Final decision has not yet been taken by the Government. The question is not “if” but “when” the line will be built.
12
   About 80% of rail traffic in Tajikistan comes from the North Line and more than 90% of that traffic is Uzbek transit.
13
   As reported on September 15, 2007 by the web site of “IranMania.”
                                                                                                       27



102. Another railway project—the Chinese-Kyrgyz Republic-Uzbekistan railway project (CKUR)
has also been considered.. The PRC has included the construction of the XUAR section in the 11th
Five Year Plan (2006–2010). Studies have in the past concluded that the project was not attractive
according to internationally accepted financial and economic standards. Updating of traffic
forecasts is now required. The objective is to provide a rail link between Kashi in XUAR and Andijan
in the Ferghana Valley through Osh in the Kyrgyz Republic. This rail link is intended to attract a
share of the trade between the Mediterranean and the PRC as well as the trade between Middle
East-South Asia and the PRC. The project consists of the construction of 268 km in the Kyrgyz
Republic (40 tunnels and 150 bridges) and 130 km in XUAR, crossing the border at Torugart at an
estimated cost of $1. 4 billion in 2002 prices for the Kyrgyz portion. New assessments are planned
for this project as traffic forecasts could increase (and thus the economics of the project) to reflect
the potential development of additional resource projects and the subsequent transport of their
outputs.

103. Some of the planned or ongoing infrastructure projects mentioned above are, or will be,
natural complements to the six CAREC corridors. They will strengthen the capacity of the corridors
to perform. Others will be alternatives and competing corridors. This also is positive as it will
increase competition, motivate efficiency, and tend to keep costs down while offering better service
to users.

104. The six CAREC corridors could provide the basis for the region to become not only
land-linked to but also integrated with the neighboring dynamic external markets that are changing
the face of world trade. This will not happen overnight but it presents an opportunity for the CAREC
countries to utilize their central locations as a basis to further develop their resources and grow their
economies. This is an opportunity for which there is a sound economic rationale, and one that
should not be missed.

105.   Detailed assessments conducted for CAREC corridors are in Appendix 5.

3.3    SEAMLESS CROSS BORDER OPERATIONS

3.3.1 Corridor Continuity

106. The six CAREC corridors can offer the region itself and neighboring economic areas a
sufficiently dense and efficient network of routes to support trade and integration with major global
value chains between East Asia and Europe. A potential and actual weakness are the 28 border-
crossing points along these corridors, with their accompanying delays, changing regulations, and
resultant high transaction costs. Table 3.3 lists these crossings and shows the countries and
transport mode involved at each. Rendering the corridors seamless across these points will be a
major challenge for the Strategy.
28



                              Table 3.3: Border Crossings along the Corridors
      Corridor    Country 1              BCP 1         Country 2               BCP 2             Mode
     3B, 6A, 6B     AFG                 Hairatan          UZB          Termez (Airatom)        rail & road
     3B, 6A, 6B     AFG               Islam Qila          IRN               Dogharoun              road
       5, 6C        AFG                Torkham            PAK               Landi Kotal            road
       5, 6C        AFG           Shirkhan Bandar         TAJ              Nizhni Pianj            road
         2A         AZE       Baku (Torgovaya Pristan)    KAZ                  Aktau               port
                                  Rail - Beyuk Kesik                    Rail - Gabdabani
         2          AZE       Road - Krasnyi Most (Red    GEO      Road - Krasnyi Most (Red rail & road
                                        Bridge)                                Bridge)
        1A          PRC              Ala Shankou          KAZ                  Dostyk          rail & road
        4A          PRC              Takeshiken           MON                  Yarant              road
        4B          PRC                 Erenhot           MON              Zamyn-Uud           rail & road
        1B          PRC                 Khorgos           KAZ                  Korgas              road
        1C          PRC            Torugart (Topa)        KGZ                 Torugart             road
        2, 5        PRC        Irkeshtan/Yierkeshitan     KGZ                Irkeshtan             road
         2          KGZ                Kara Suu           UZB        Savay (Karasu)/Andjan rail and road
      1C, 3B        KGZ            Rail - Chaldovar       KAZ       Rail - Merke (Lugovaya) rail and road
       3B, 5        KGZ                 Karamik           TAJ                 Karamik              road
         3          KAZ                    Aul             RF              Veseloyarsk         rail & road
      1A, 1C        KAZ                  Kairak            RF                  Troitsk         rail & road
                                                                    Rail - Kos Aral (Iletsk-1)
     1B, 6B, 6C     KAZ                 Zhaisan            RF        Road - Novomarkovka       rail & road
                                                                           (Sagarchin)
                                    Rail - Beyneu
      2A, 6A        KAZ             Road - Tazhen         UZB       Karakalpakya (Daut-Ata)    rail & road
                                   Rail - Saryagash                 Rail - Keles (Chukursay)
     3A, 6B, 6C     KAZ          Road - Zhibek Zholy      UZB         Road - Gisht Kuprik      rail & road
                              Rail - Ganyushking (Akkol)               Rail - Aksarayskiy
        6A          KAZ          Road - Kurmangazy         RF          Road - Krasnyi Yar      rail & road
                                      (Kotyaevka)                         (Karauzek)
        4B          MON             Sukhbaatar              RF              Naushki            rail & road
        4A          MON       Ulaanbaishint (Tsaganuur)     RF             Tashanta                road
         2          TAJ             Kanibadam              UZB        Suvanobad / Kokland           rail
         2          TAJ                 Nau                UZB              Bekabad                 rail
        3B          TAJ             Pakhtaabad             UZB         Saryasia (Kudukli)      rail & road
      2B, 3A        UZB                 Alyat              TKM               Farap             rail & road
       6C           UZB               Khavast              TAJ            Istaravshan              road
 AZE=Azerbaijan; AFG=Afghanistan; PRC=People’s Republic of China; KAZ=Kazakhstan; KGZ=Kyrgyz Republic;
 MON=Mongolia; RUS=Russian Federation; TAJ=Tajikistan; UZB=Uzbekistan; XUAR=Xinjiang Uygur Autonomous
 Region.
 Source: Consultant.

3.3.2 Institutional Interfaces

107. The reinforcement of institutional interfaces is the most important action for overall
long-term results as well as for sustainability of the benefits derived from technology and
investment in this focus area. However, interest in maintaining the status quo can be strong and
may delay change. Thus, the different parties involved must be given time and be assisted in
discovering that a win-win prospect is unfolding with change.

108. The CCC cannot separately bring to bear all of the institutional interface and expertise
necessary to achieve results in all Action Plan components. Using lessons learnt from the GMS
program, the intra-governmental management of regional issues needs to be integrated. The
Strategy will foster the creation of National Joint Transport and Trade Facilitation Committees
(NJCs) or equivalent entities under a mandate from the government that incorporates all relevant
private and public sector representatives. Each government should choose its own structure for this,
and some already have such structures in place. Coordinated functionality rather than form is the
                                                                                                      29



key issue. Ministry of Transport and Communications and customs authorities are both expected to
play prominent roles in these bodies, but other interests (agricultural control and quarantine,
immigration, health, security, traffic police, and other functions) should also be represented
including most certainly private sector users and service providers. The NJC will harmonize
national procedures and standards in accordance with international conventions and practice. This
will in itself develop a high degree of standardization across the region as well as with global trading
partners. The Strategy promotes close liaisons and active collaboration with related bodies such as
WCO, UNESCAP, the EU (their Border Management in Central Asia and TRACECA programs in
particular), multilateral institutions, and bilateral assistance organizations.

109.   A regional joint transport and trade facilitation committee (RJC) will be established. RJC will
coordinate the work of the NJCs in order to ensure the overall consistency and efficiency of
transport and trade facilitation work.

110. The Strategy envisages that once these bodies are established and working, they will
become the interfaces within an integrated CAREC trade facilitation and transport program to
establish and run CAREC corridor management agencies whose remit would extend throughout
each corridor.

3.3.3 International Conventions, Regional Agreements and Regulations

111. The Strategy strongly supports accession to international conventions and development of
national legislation and procedures to implement them. These cover a broad range of border
crossing and more technical harmonization issues. In certain cases, the conventions are crucial
management pillar components of the Strategy. Important conventions include those listed in the
UN ESCAP resolution 48/11 list of priority conventions as well as the UN Convention Against
Corruption, December 2005.

112. Although the conventions are broad, their implementation is sometimes difficult. Specific
actions are planned in the Strategy to assist CAREC countries in

           (i)     road safety (a very urgent priority),
           (ii)    vehicle emissions,
           (iii)   equitable transit and cross-border entry charges, and
           (iv)    vehicle insurance.
113. Nearly all of the region’s cross-border and transit road transport is conducted under bilateral
agreements. Their implementation mechanisms are absent or weak, allowing unilateral
interpretation. Many multilateral agreements are not effective, and others are under negotiation.
Diverse technical standards are enforced. This opens ambiguity in regulatory application, and
creates a confusing mosaic of rules. The Strategy and its Action Plan will assist CAREC countries in
adopting international standards as the reference benchmarks to harmonize their cross-border
transport regulations and procedures.

3.3.4 Customs Cooperation

114. Strengthened customs co-operation and modernization will be promoted under the aegis of
an enhanced partnership with the WCO Columbus program. This will be at the core of the trade
facilitation program. The work program will be progressively expanded in scope to address broader
issues of trade facilitation as the NJCs and the RJC establish themselves and allow a fuller
integration of strategies between the national authorities involved.

115.   The precepts of the revised Kyoto Convention will be applied, including

           (i)     standard, simplified procedures;
30



          (ii)      continuous development        and   improvement     of   customs   control
                    techniques;
          (iii)     maximum use of information technology; and
          (iv)      a partnership approach between customs and trade.
116. The key elements within the revised Kyoto Convention to be applied by modern customs
administrations are

          (i)       maximum use of automated systems;
          (ii)      risk management techniques (including risk assessment and selectivity
                    of controls);
          (iii)     use of pre-arrival information to drive programs of selectivity;
          (iv)      use of electronic funds transfer;
          (v)       coordinated interventions with other agencies;
          (vi)      easily available information on customs requirements, laws, rules and
                    regulations;
          (vii)     system of appeals in customs matters; and
          (viii)    formal consultative relationships with the trade.
3.3.5 Border-Crossing Point Improvements

117. While certain CAREC border crossing points (BCPs) have been improved, there are some
with inadequate infrastructure and equipment. Cooperation between customs authorities, as well
as corridor monitoring results and adjacent transport infrastructure improvement projects are
expected to generate the detailed point by point program for border crossing infrastructure
improvements. A survey of CAREC BCPs is suggested in order to prioritize BCPs for systematic
interventions.

118. Improved functioning of the BCPs will be best achieved by fully complying with the
Convention on the Harmonization of Frontier Controls of Goods including the new Annex 8. This
prescribes, among other functions, efficient

          (i)       visa issue to drivers
          (ii)      vehicle inspection and weight certification;
          (iii)     joint controls (one stop technology);
          (iv)      synchronized BCP times of operation;
          (v)       separation of lanes (e.g., TIR, perishable freight, and other);
          (vi)      off-lane inspection areas, parking and terminals;
          (vii)     hygiene and telecommunication facilities; and
           (viii)   facilities for auxiliary transport service providers (also referred to as
                    “Authorized Economic Operators” such as customs brokers, forwarders
                    and operator association representatives).
119. It is essential that information and communications technology (ICT) and non-intrusive
testing equipment (such as scanners) at BCPs be of a technical level necessary to support rapid
processing. Training of customs and other relevant officers in application of the new procedures
and utilization of new equipment is important.
                                                                                                         31



120. Processes and documentation should fully exploit the efficiency and effectiveness of new
infrastructure and equipment, with minimum one-window controls at the BCPs themselves,
clearance at destination, use of risk management techniques, common adoption of the single
administrative document (SAD), advanced information transfer, and processing.

121. Customs officers and other control authorities will receive training in application of the new
procedures and utilization of new equipment. The Action Plan includes projects which were
designed to address improvements in border-crossing facilities, procedures, technologies, and
capacities.

3.3.6 Rail Operations
                                                     Container Train on CAREC Corridor 1 in Kazakhstan
122. CAREC railways are predominantly
state-owned and operated. All are at present
undergoing some degree of reform and
restructuring. Much of ADB’s and other
multilateral institutions’ support has been
provided to assist in this process. However,
regional cooperation among CAREC
countries with respect to reforms and actions
has been limited, including the division of
ownership of assets (e.g., rolling stock, track),
technical regulation and licensing (market
access) of cross-border operators, and
equitable distribution of revenues that should
accompany these changes. The Strategy will
focus on

            (i)    the enablement of cross-border operations of block trains including
                   locomotives by operating entities which would be at least partly private;
                   and
            (ii)   the cost accounting and tariff models that are needed to implement
                   national and cross-border operations when infrastructure owners,
                   operators, and regulators are separate entities.
123. Furthermore, inter-modal operations extending beyond CAREC borders should be foreseen.
These actions will assist CAREC’s integration both internally and with global logistic chains.

3.3.7 Financing of Construction and Transport Equipment

124. External assistance and the private sector will be able to help CAREC countries develop
transport and trade facilitation infrastructure. Upgraded transport and trade facilitation infrastructure
will increase trade opportunities and will improve mobility. These investments will provide many
opportunities for private domestic construction industries to renew their fleet to improve their
operational efficiency. Furthermore, improved transport and trade facilitation infrastructure will
induce introduction of new bus services as well as logistic services.

125. Present credit loan facilities are generally too expensive for CAREC transport and trade
operators. CAREC actions under this Strategy will explore the possibilities of easier access to credit,
for example, for trucking and logistics service providers. In addition, opportunities for easier access
to credit or leasing services for construction industries in CAREC countries are pursued.
32



3.4    AIR AND MARITIME TRANSPORT

126. The CAREC Program is relatively new to the air and maritime transport sectors. It is clear
that demand for both is growing rapidly and that investment is urgently required in infrastructure,
management and technology.

127. Investment in ports, vessels, and support facilities on the Caspian Sea has been insufficient
to match demand. A comprehensive project to study the needs and opportunities is planned. Oil is a
hazardous cargo engendering safety and environmental concerns. All due attention will be paid to
investment possibilities, institutional structures, private sector capacity, and environmental and
safety standards.

128. Currently, there are two main ports along the CAREC corridors: Baku (Azerbaijan, and
including Dubendi terminal) and Aktau (Kazakhstan). Although Turkmenbashi (Turkmenistan) is not
officially included in the Strategy, the performance and development opportunities of this port will be
monitored during the implementation of the Action Plan. Baku may eventually be replaced by a
new port that will expand berth capacity and relieve current urban congestion behind the port.
Aktau is being upgraded and expanded, as are nearby facilities at Kuryk and Bautino to relieve
Aktau, as is the port of Atyrau on the northern Caspian. The Turkmenbashi facilities are being
complemented by upgrades at the more southerly port of Ekarem.

129. CAREC’s civil aviation is confronted by high growth in demand at a time when a few regional
airlines have been found to be non-compliant under ICAO guidelines. Certain urgent needs are
already apparent and will be acted upon, including

           (i)    compliance with ICAO standards and recommended practices including
                  language competence for Air Traffic Controllers (ATC) and pilots;
           (ii)   creation of a regional aviation safety oversight authority; and
           (ii)   modernization of certain airports and air traffic control systems.
130. An assessment study is needed to develop a more comprehensive approach to the
sub-sector’s development and identification of actions needed for ICAO compliance.

131. The CAREC region has 41 international airports (Table 3.4). Some of the airports listed as
international may only have one or two international flights per week, whereas others serve
numerous carriers and international destinations. A number of airports are being upgraded or
expanded. For example, Uzbekistan recently indicated that they are planning an upgrade of the
Bukhara passenger terminal. In addition, Ulaanbaatar is planning a new international airport with
financing from JICA at a location that will enable bi-directional landings, and will include an
intermodal facility and rail link.

132. International air transport is becoming increasingly important as global integration and trade
linkages increase. Reflecting this trend, passenger volumes (arrivals and departures) are rising
throughout the region, with some airports experiencing double-digit growth (e.g., Urumqi).
Moreover, air transport will be a key to developing the CAREC region’s tourism resources, since
tourism numbers are showing marked increases. For example, Mongolia expects a record for
tourism arrivals in 2008, and the Ulaanbaatar airport is the most common arrival and departure
point for tourists.

133. During the implementation of the Strategy, increasing emphasis will be given to air transport,
especially airport infrastructure development, aviation navigation system improvement, and safety
areas. The recent increases in oil prices are impacting the economics of the airline industry globally,
and airlines operating in the CAREC region are not immune to these factors. This points to the
need for CAREC airlines to make efforts in order to improve their operational efficiency and
profitability.
                                                                33



         Table 3.4: CAREC International Airports
      Country           Airport Location          Corridor
Afghanistan                    Kabul                5, 6c
                        Mazare-e-Sharif           3b, 6a, b
                               Herat              3b, 6a, b
                           Khandahar          Not on corridor
Azerbaijan                     Baku                   2
                              Ganja                   2
                          Nakhichevan         Not on corridor
China/Xinjiang               Urumqi               1a, b, 4a
                               Kashi               1c, 2, 5
Kazakhstan                    Astana                1a, c
                              Almaty                1b, 3
                              Semey                   3
                            Shymkent            1b, 3a, 6b, c
                              Aktau                  2a
                              Atyrau                 6a
                           Karaganda                1a, c
                            Kostanai                1a, c
                           Oral/Uralsk        Not on corridor
                         Petropavlovsk        Not on corridor
                             Aktobe               1b, 6b, c
                            Kzyl Orda             1b, 6b, c
                            Oskemen           Not on corridor
                            Pavlodar          Not on corridor
Kyrgyz Republic              Bishkek                 1c
                                Osh                 2, 3b
Mongolia                       Olgiy                 4a
                           Ulaanbaatar               4b
Tajikistan                  Dushanbe              3c, 5, 6c
                             Khujand                  2
                              Kulyab          Not on corridor
Uzbekistan                  Tashkent              3a, 6b, c
                               Navoi               2b, 3a
                              Nukus                  6a
                             Urgench                  2
                             Termez               3b, 6a, b
                             Andijan                  2
                             Bukhara                2a,6a
                           Samarkand                3a,6b
                           Namangan           Not on corridor
                              Karshi                 6a
                             Fergana                  2
Source: 2008 data from countries and internet searches.
Note: "International Airport" is defined as an airport with
scheduled flights to another country.
34



3.5    TECHNOLOGY AND GLOBAL LOGISTIC CHAINS

134. Global logistics chains depend on reliable transit times, which in turn require rapid
transmission of information. Excepting aviation control systems, reduction in border-crossing
delays is the most glaring need to be addressed by the Action Plan. These include tools to assist full
implementation of Annex 8 of the International Convention on the Harmonization of Frontier
Controls of Goods such as

           (i)     risk management and other software for rapid border crossing
                   processing;
           (ii)    smart cards, smart seals, bar codes, and radio frequency identification
                   (RFID), global positioning system (GPS) and other devices supporting
                   fast processing systems;
           (iii)   communications and data transmission hardware; and
           (iv)    inspection instruments such as scanners, probes, and detectors of
                   radioactive materials and contraband.
135. Other equipment such as digital devices for recording and controlling commercial vehicle
driver’s working hours, speed, and idling times will also be introduced.

3.6    SAFEGUARDS

136. The Strategy clearly acknowledges that corridor development and increased traffic flows
may induce negative social and/or environmental impacts. In order to minimize such risks,
appropriate internationally recognized safeguards will be introduced and appropriate mitigation
measures will be implemented in conjunction with all investment projects included in the Action
Plan. These will be supplemented by the following technical assistance projects

            (i)    promoting and developing inter-country bus services and the small-scale
                   trading in which bus travelers are often engaged for their livelihoods;
           (ii)    encouraging the provision of safe rest stops and other amenities for long
                   distance drivers, while countering chaotic development on land too close
                   to heavy and increasing traffic; and
           (iii)   addressing the problems faced by migrant workers.
137. Appropriate safeguards will be incorporated in project design and implementation, including
due consideration to poorer communities and the environment. For example, vehicle emissions
must be addressed very carefully. The old vehicles should be replaced with new vehicles to reduce
air pollution. However, it is frequently observed in rural areas that such old vehicles are frequently
vital means of subsistence for rural communities. Likewise, imposition of modern international
logistics standards for trade and transport of perishable goods, desirable though it may be in many
respects, may negatively impact agricultural communities that are unable to meet these standards
and poor urban dwellers that rely on low-priced foodstuffs. Modernization and globalization must be
accompanied by measures to assist those who otherwise will loose out.

3.7    IDENTIFICATION OF PROJECTS

138. Based on the detailed assessments summarized above, the Action Plan was developed
covering continuation of necessary reform and restructuring initiatives, investment projects, and
institutional/managerial strengthening assistance. The Action Plan includes investment (or capital
expenditure) and technical assistance projects that have been identified during extensive
consultations in 2007–2008. The Action Plan is in Appendix 6.
                                                                                                   35



139. Investment projects are those that governments have already decided to implement and
included in their investment programs. Technical assistance projects may take the form of feasibility
studies or advisory services, including preliminary planning, technical knowledge transfer, and
support for institutional capacity improvement or restructuring. The improvements in policy,
regulations, and procedures together with investment projects and institutional/management
strengthening will achieve a well-balanced transport sector development in the CAREC region.

140. Projects and actions agreed at the 5th Ministerial Conference on CAREC (Urumqi, October
2006) and the 6th Meeting of the TSCC (Urumqi, August 2006) have been carried over and included
in the 10-year Strategy.
36
                                                                                                                      37




                        SECTION 4: IMPLEMENTATION ARRANGEMENTS

4.1       INTRODUCTION

141. Implementation of the Action Plan for the Transport and Trade Facilitation Strategy (the
Action Plan) has commenced following its endorsement by the Seventh Ministerial Conference in
November 2008. This section describes the overall implementation arrangements for the Action
Plan.

4.2       REALIZATION: THE ROLE OF GOVERNMENTS, MULTILATERAL INSTITUTIONS,
          AND THE PRIVATE SECTOR

142. The Action Plan includes the priority investment and TA projects to develop infrastructure,
upgrade technology, and improve management through policy reforms and capacity strengthening.
There are 62 investment projects with an estimated cost of $21.1 billion. The investment projects
include 40 new projects with an estimated cost of $15.8 billion and 22 ongoing projects with an
estimated cost of $5.3 billion.14 Sixty-five (65) TA projects with an estimated cost of $68.5 million will
undertake feasibility studies for potential investments or provide advisory support for planning,
technical knowledge transfer, and institutional capacity development. A summary of the projects is
shown in Table 4.1.

                  Table 4.1: Summary of Investment and Technical Assistance Projects
 Mode                                      Investment                   Technical Assistance
                                   New       Ongoing     Total      New      Ongoing       Total
 By Cost Estimates                           ($ billion)                     ($ million)
 Road                              10.3          2.5      12.8        10.3      1.8         12.1
 Railway                            4.3          1.4        5.7        6.8      0.0          6.8
 Airport and Civil Aviation         0.5          0.4        0.9       11.6      0.5         12.1
 Port and Shipping                  0.1          0.4        0.5        2.0      0.0          2.0
 Logistics                          0.4          0.1        0.5        7.2      1.1          8.3
 Trade Facilitation                 0.2          0.5        0.7       25.5      1.7         27.2
          Total                    15.8          5.3      21.1        63.4      5.1         68.5

 By Number of Projects
 Road                                      12            13             25            12          2              14
 Railway                                   15             3             18            10          0              10
 Airport and Civil Aviation                 6             1              7             4          1               5
 Port and Shipping                          1             1              2             2          0               2
 Logistics                                  4             1              5             8          2              10
 Trade Facilitation                         2             3              5            23          1              24
          Total                            40            22             62            59          6              65

143.      The investment and TA projects will support the following three goals of the Strategy:

               (i)     Establishment of Competitive Corridors across the CAREC Region.
                       The Action Plan will develop, manage, and maintain the identified
                       CAREC corridors by addressing four major constraints: (i) fragmented
                       regional transport networks and deteriorated infrastructure, (ii) high
                       transport costs and long travel time, (iii) limited intraregional and transit
                       trade, and (iv) insufficient funding for maintenance. This will be achieved
                       through 52 investment projects with an estimated cost of $19.9 billion

14
     The ongoing projects are those that the governments of the CAREC countries are implementing, and the new projects
     are those that the governments of the CAREC countries have either committed to after endorsement of the Strategy by
           th
     the 6 Ministerial Conference or are recently programmed.
38



                    and 20 TA projects with an estimated cost of $15.7 million. The
                    investment projects include 34 new projects (about $15.2 billion) and 18
                    ongoing projects (about $4.7 billion).
           (ii)     Facilitation of Movement through CAREC Corridors and across
                    Borders. The Action Plan will help achieve this goal by focusing on (i)
                    customs reforms and modernization, (ii) effective functioning of the
                    national transport and trade facilitation committees (or similar
                    organizations), (iii) regional logistics development, and (iv) private sector
                    participation. There are 10 investment projects with an estimated cost of
                    $1.2 billion (6 new projects for $600 million and 4 ongoing projects for
                    $600 million) and 40 TA projects with an estimated cost of $48.2 million.
           (iii)    Development of Sustainable, Safe, and User-Friendly Transport
                    and Trade Networks. The Action Plan will assist in achieving this goal
                    by (i) minimizing the negative environment and social impacts during the
                    development of the CAREC corridors; (ii) replacing aging vehicle fleet
                    with fuel efficient and less polluting equipment; and (iii) facilitating
                    movement of people across borders. The Action Plan includes 5 TA
                    projects with an estimated cost of $4.6 million.
144. Financing Plan. The governments of the CAREC participating countries finance about 49%
of the cost of the ongoing projects, followed by external financing (32%) and the private sector (2%).
The CAREC participating countries are actively pursuing external financing to fill the remaining
financing gap. The governments of the CAREC participating countries are expected to provide
$2.4 billion to finance 15% of the cost of the new investments during 2008–2017. External
development partners including the Asian Development Bank (ADB), European Bank for
Reconstruction and Development (EBRD), Islamic Development Bank (IsDB), and World Bank are
expected to cover 31% ($4.9 billion) of the cost of the new investments. The private sector is
expected to finance 32% ($5.1 billion) of the cost of the new investments. There is a financing gap
amounting to $3.4 billion (around 22% of the cost of the new investments), which will be filled
through annual consultations among CAREC countries, development partners, and the private
sector during the implementation period. A preliminary financing plan for the ongoing and new
investment projects is shown in Table 4.2. The financing plan will be updated, as necessary, during
the implementation period.

                      Table 4. 2: Financing Plan for Ongoing and New Investments
                                                ($ billion)
                   Source                     Ongoing          New        Total

                   CAREC Governments                2.6           2.4           5.0
                   Development Partners             1.7           4.9           6.6
                   Private Sector                   0.1           5.1           5.2
                   Financing Gap                    0.9           3.4           4.3
                   Total                            5.3          15.8          21.1

145. An important consideration is increasing the role of the private sector, especially with
respect to the emerging logistics industry. The Trade Logistics Report (Kie and Goh, ADB, 2008)
provides an example of how transport and trade activities could be portioned between public and
private sector involvement is shown in Figure 4.1.
                                                                                                39



                Figure 4.1: Proposed Public–Private Partnership in Trade Logistics


                                          Public                 Private

               ‘Hard’                 Roads,                 Logistics Centres
               (physical              Rails                  Multi-modal Centres
               infrastructure)        Ports                  Cargo Terminals
                                      Free Trade Zones       Container Terminals



                ‘Soft’               Single Electronic       Training and
                (policies and        Window                  Development
                initiatives)         Industry Incentives     New Logistical
                                     Financial Services      Services
                                     Land Use Reforms        ICT Applications

                 Source: Kie and Goh. 2008. Trade Logistics Report.

146. The trade report paper continues and gives a further example at the country level that
involves various levels of government to establish strategic infrastructure in XUAR (Figure 4.2).

          Figure 4.2: Strategic Architecture for Trade Logistics Development in Xinjiang




        Source: Kie and Goh. 2008. Trade Logistics Report.

4.3    PERFORMANCE MEASUREMENT AND MONITORING

147. The results of the implementation of the Action Plan will be closely monitored. A
performance monitoring system will be developed to establish baseline information on the
movement of people and goods along the CAREC corridors, identify bottlenecks, and propose
actions to solve them. The performance monitoring will cover assessments of infrastructure,
customs, and other trade and/or transport regulations and procedures, and logistics services. This
40



will be undertaken by three methods: (i) time/cost–distance analysis along selected corridors, (ii)
time-release analysis at border points, and (iii) logistics performance analysis along selected
corridors.

148. Based on consultations with CAREC countries during February–March 2008 and a
thorough assessment, six subcorridors (i.e., 1b, 2a, 3b, 4b, 5, and 6c), out of a total of 13
subcorridors, were selected for pilot performance monitoring. The pilot performance monitoring will
start in 2009. The national joint transport and trade facilitation committee (NJC) or a similar
organization in each CAREC country will oversee performance measurement and monitoring
activities. The NJC or a similar organization will include representatives of (i) all government
agencies in charge of transport, trade, and border-crossing activities (e.g., Ministry of Transport,
Ministry of Trade, Ministry of Economy, Customs, and agencies in charge of quarantines, sanitary
and phytosanitary, product standard, security, and immigration); and (ii) freight forwarders
associations and logistics service providers.

149. An association of freight forwarders or logistics service providers in each CAREC country
will be engaged to collect the data required for the time/cost–distance analysis of these
subcorridors every quarter. Using the collected data and with ADB assistance, the NJC will
undertake the time/cost–distance analysis, review the results, evaluate the constraints, and take
corrective actions. Based on the results of the time/cost-distance analysis, the NJC will periodically
authorize time-release assessments of particular border points and logistics performance
assessments. ADB will finance performance monitoring activities and will help strengthen the
capacity of the NJC (a similar organization) in each CAREC country.

4.3.1      Performance Indicators

150. Performance indicators are quantitative and periodic assessments of a process (in this case
the movement or transport of goods) that help define and measure progress toward a specific goal
(in this case, trade facilitation). They reflect the efficiency or quality of the corridor’s components
individually or in combination. It is important for indicators to be comparable across routes, modes
of transport, and border posts and links or segments between stops.

151. Performance can be measured through outcome indicators of time and cost. Time is the
amount of time taken to complete the movement of the goods from the beginning to the end of the
route. Costs are those payments related to the movement of the goods and transport vehicle. A
possible set of logistics indicators that would be important for supply chain management is as
follows.15 As these suggestions show, they may be in totals or broken down into their component
parts.

               (i)     total time for trade-related procedures:
                       (a)   time for customs inspection,
                       (b)   time for technical control,
                       (c)   time for trade document processing, and
                       (d)   inland transport time.
               (ii)    vehicle waiting time to obtain entry at border posts.
               (iii)   vehicle turnaround time.
               (iv)    time to resolve customs appeals.
               (v)     total cost for trade-related procedures:
                        (a) port and terminal-related charges,
15
     These examples were suggested by Warren H. Hausman, Hau L. Lee and Uma Subramanian (2005), “Global Logistics
     Indicators, Supply Chain Metrices, and Bilateral Trade Patterns” World Bank Policy Research Working Paper No. 3773,
     Nov. 2005.
                                                                                                               41



                     (b) costs of trade document processing,
                     (c) border-control costs, and
                     (d) inland transport costs.

152. Performance is also measured in terms of complexity, and indicators such as the following16
are highly useful for pinpointing bottlenecks or the risk of delays:

            (i)      number of documents and signatures per transaction;
            (ii)     criteria for customs inspection;
            (iii)    percent of containers electronically scanned, percent of physically
                     inspected, number of times consignments are inspected, level of
                     inspection;
            (iv)     inland transport speed per day;
            (v)      number of inspection agencies;
            (vi)     damage or pilferage as a percent of value of container;
            (vii)    shutdown of post due to natural circumstances and labor disputes; and
            (viii)   frequency of vehicle arrivals at post.
153.    In addition, being landlocked adds to the complexity17 and may be represented by

            (i)      waiting time at border crossings;
            (ii)     inland freight cost (through transit country);
            (iii)    harmonization of documents with transit country;
            (iv)     number of transit countries crossed;
            (v)      number of borders crossed; and
            (vii)    existence (or absence) of free transit access for vehicles across borders.
154. Two other important parameters are reliability and flexibility. 18 Reliability refers to the
variation in transit time for a specific combination of services and origin-destination pair. The
greater the variability, the harder it is to predict actual transit time and in turn, to coordinate
sequential activities in the supply chain, which affects average order cycle time and leads to
bunching of arrivals and departures. Flexibility refers to different combinations of cost, time, and
reliability that allow suppliers to meet varying demands of consumers.

155. Infrastructure quality and performance indicators would include (for roads) surface
roughness, level of congestion, number and severity of accidents, exhaust emissions, percent of
availability, cost and frequency of maintenance operations, and their impact in terms of remaining
asset life. Rail indicators are somewhat equivalent but based on permissible loads, speeds, and
intensity of usage of rolling stock. It is more difficult to separate them from overall management
policies.




16
   Hausman, Lee and Subramanian (2005) “Global Logistics Indicators, Supply Chain Matrices, and Bilateral Trade
   Patterns” World Bank Policy Research Working Paper No. 3773, Nov. 2005.
17
   Hausman, Lee and Subramanian (2005) “Global Logistics Indicators, Supply Chain Matrices, and Bilateral Trade
   Patterns” World Bank Policy Research Working Paper No. 3773, Nov. 2005.
18
   John Arnold (2006), “Best Practices in Management of International Trade Corridors” World Bank Transport Paper
   TP-13, Dec 2006.
42



4.3.2 Performance Monitoring Methods

156. Performance will be measured and monitored periodically to ascertain the current situation
along the links and nodes of each CAREC corridor, identify bottlenecks and courses of action to
address them, or assess the impact of regional cooperation initiatives. Three methods that
measure and monitor performance will be considered for CAREC, each focused on a particular
corridor component, notwithstanding the fact that they examine the quality of all three components
together. The UNESCAP Time/Cost-Distance method will focus on infrastructure, the WCO Time
Release study will assess the legal and regulatory component, and the World Bank Logistics
Performance Index will cover logistics services.

157. The UNESCAP Time/Cost-Distance method19 is based on the graphical representation of
time and cost data associated with transit transport processes, with the vertical axis for time and
cost and the horizontal axis for distance traveled from origin to destination. The purpose is to
identify bottlenecks along a particular route by looking at the detailed breakdown of cost and time
involved in moving along every section along a route, including indirect costs e.g., inventory cost
and demurrage charges.

158. The method entails the collection of data, with the use of spreadsheets, on the following:
date and name of transporter, route (place of departure and destination), type of cargo, quantity
and/or value of goods transported, date goods leave the place of departure and arrive at final
destination, and international transit system used. In addition, for road transport, the nationality of
driver and country of vehicle registration is asked. Before conducting the survey, decisions must be
made on the route including place of departure, any kind of stop and final destination, the type of
goods transported, their quantity and value and whether single or multiple.

159.    For each stop along the route, the following is asked also using the spreadsheet:

             (i)      place of departure, time spent per activity, costs by type;
             (ii)     mode of transport;
             (iii)    distance to next stop, duration of travel;
             (iv)     cost per leg;
             (v)      place of next stop;
             (vi)     reason for stop;
             (vii)    description of stop – specific activity, duration and costs; and
             (viii)   description of actions taken with breakdown of time and costs.
160. The Time/Cost Distance method enables easy comparison of (i) changes over time, (ii)
modes of transport along the same route, and (iii) alternative transit routes.

161. At border crossing stops, the WCO Time Release method,20 which measures the average
time taken between the arrival of goods at the border post and their release21 to the importer/broker,
will be used. The aim of the method is to determine where problems exist in the process, the
reasons for these problems, and possible solutions. It recognizes that the international movement
of goods involves customs and other national authorities such as port, health, veterinary,


19
   Described in “Cost/Time-Distance Methodology for Analyzing Transit Transport Route”, and “Instructions on Data
   Collection for Route Analysis with the UNESCAP Time/Cost-Distance Methodology: Detailed Template Version (veer
   2.0 as of Aug 2007)” from www.unescap.org.
20
   Described in the “Guide to Measure the Time Required for the Release of Goods” from www.wcoomd.org.
21
   Here the term release means the action by Customs to permit goods undergoing clearance to be placed at the disposal
   of the trader/broker, while clearance means the accomplishment of all formalities needed to allow the goods to enter
   home use, be exported, or placed under another Customs procedure.
                                                                                                                      43



agriculture, standards, as well as the trading community of importers, exporters, brokers,
forwarders, carriers, banks, and others.

162. Using a survey form, each respondent is asked to provide information on the customs office
and location, type of transport document22 and document number, declaration number, declarant
code, name and identification number, type of declaration, form of declaration, goods regime,23 and
goods classification (tariff heading, value, origin, weight).

163. Then for each step in the clearance process, the respondent is asked to record the date and
time of (i) arrival of means of transport at border post where the declaration will be made to obtain
release, (ii) unloading from means of transport, beginning and end, (iii) delivery to temporary
storage, (iv) lodgment of the declaration, acceptance of the declaration, (v) documentary control,
beginning and end, (vi) physical inspection (at the beginning and end of the trip), (vii) laboratory
analysis, (viii) intervention of other agencies, grant of authorization if applicable, (ix) assessment of
duty, payment of duty and acknowledgement of receipt, (x) release of goods, note returned to
broker, and (xi) removal of goods from the area of Customs control.

164. The above list of elements is not exhaustive and administrations are encouraged to
determine their own, undertaking a simplified study first to capture key elements. Information may
be analyzed by mode of transport and border post, type of good and goods regime.

165. It is also suggested that customs administrations establish a working group to bring together
all the officials of the agencies involved to prepare, plan, and implement the project. Terms of
reference must be defined with functions and responsibilities. The trading community must also
take active part in the working group.

166. The World Bank’s Logistics Performance Index24 was developed in response to the need for
an effective measure of trade facilitation to allow policymakers, logistics professionals, business
stakeholders and researchers to (i) benchmark a country’s overall performance on several
dimensions in trade logistics, and (ii) assess the quality of a country’s trade connections to the
global market. It uses a comprehensive approach to supply chain performance to measure some of
the critical factors of trade logistics performance, including the quality of infrastructure and logistics
services, the security of property from theft and looting, the transparency of government
procedures, macroeconomic conditions, and the underlying strength of institutions. It provides a
global benchmark of logistics efficiency and service quality that is not treated specifically in other
measures such as the obstacles to movement of goods from the Doing Business database or the
composite macro- and micro-data based Global Competitiveness Index.

167. The Logistics Performance Index is built on information from a web-based questionnaire
completed by logistics professionals, i.e. operators or agents of the world’s largest logistics service
providers, worldwide. Respondents rate performance in countries where they conduct business or
where they are based, using a 5-point scale (1 for lowest, 5 for highest), on the following s areas:

               (i)      efficiency of clearance by customs and other border agencies,
               (ii)    quality of transport and information technology infrastructure for logistics,
               (iii)   ease and affordability of arranging international shipments,


22
     May be airway or seaway bill, consignment note, manifest, multimodal document, etc. Type of cargo may be
     containerized (either full or less than full), or not containerized.
23
     May be dutiable or non-dutiable, exempted, preferential, inward processing, free zone, transit, perishable, express
     consignment, relief consignment, etc.
24
     Described in World Bank (2007) “Connecting to Compete: Trade Logistics in the Global Economy” from
     www.worldbank.org/lpi and Lauri Ojala, “Integrated Approach for Performance Measurement and Monitoring” Power
     Point presentation during Seminar on Trade Logistics and CAREC Corridor Performance Measurement and
     Monitoring, 23 April 2008.
44



            (iv)    competence of the local logistics industry,
            (v)     ability to track and trace international shipments,
            (vi)    domestic logistics costs, and
            (vii)   timeliness of shipments in reaching destination.
168. This information is synthesized or aggregated as a weighted average of the seven areas in
a composite index to allow for comparisons, and constructed using the principal component
analysis method.

169.   Each respondent also provides time and cost data on

            (i)     rate of physical inspection (%),
            (ii)    customs clearance (days),
            (iii)   lead time for export (days), for import (days),
            (iv)    number of border agencies for exports and for imports,
            (v)     possibility of a review procedure (%),
            (vi)    typical charge for a 40-foot export container (US$), and
            (vii)   typical charge for a 40-foot import container (US$).

4.3.3 Some Considerations in Developing Performance Indicators and the Performance
       Monitoring Survey Questionnaire

170. Performance measurement and the choice of indicators must be relevant to the
requirements of CAREC countries. To ensure this, objectives must be clearly identified, the strategy
for using the results agreed upon, and the process understood and accepted by those involved.
Performance indicators must include information on the quality of service and reliability, efficiency,
assets and utilization, financing, and regulatory practices.

171. Comprehensive performance monitoring would specifically take into account, in addition to
the elements listed under the UNESCAP, WCO, or World Bank methods, those requirements and
procedures that are undertaken even before the goods/transport vehicle are en route, e.g. drivers
visas, import licenses, vehicle registration, technical standards certification, etc., also referred to as
“beyond the border” requirements.

172. Performance targets may use either benchmarks or baseline indicators. A benchmark is
usually that which obtains from ideal conditions where the movement of goods is smooth, i.e. the
quality of infrastructure is high, there are no regulatory bottlenecks or extraneous requirements or
arbitrary procedures, and logistics services are efficient. The target in this case will be to move
towards the benchmark. In contrast, baseline indicators reflect current conditions and therefore
existing inefficiencies, low capacities, or poor quality of services, in which case the target would be
to move away from the baseline. Since benchmarks are difficult to set, baseline indicators are used
for practical reasons.

173.    A survey focusing on corridor performance will address the need for uniform cross-country
trade logistics data from both traders and logistics firms in the CAREC region. The survey can make
use of existing international benchmarks and results, as well as numerous trade facilitation
references, regional studies, and individual country assessments.

174. The questions will be translated into the main local languages and Russian and
double-checked carefully so that each question and/or formulation corresponds to the actual issue
at hand. This can be a difficult task if the issues studied are complex or unfamiliar, e.g. the concept
                                                                                                    45



of logistics costs. General knowledge of management or logistics terminology may also be limited,
thus the questionnaire needs to be simple, self-explanatory and where multiple or confusing
interpretations are kept to the absolute minimum. It is also better to have a smaller sample of
reliable data from a limited set of clearly defined issues, than a lot of data from ambiguous,
ill-defined and ill-understood ones.

175. Data gathering may be undertaken through mailed questionnaires, web-based
questionnaires, personal interviews, and telephone interviews. This will be done in each country,
and the results will be compiled into a regional profile according to each group of respondents, and
a regional trade logistics benchmark.

176. Two main groups of respondents are logistics users (manufacturers, wholesalers and
retailers) and logistics service providers (transport firms, freight forwarders, warehouse operators).
Data may be collected from the following informants, and the approach will vary depending on the
respondent:

           (i)     truck driver actually moving along the corridor(s) – for concrete and
                   pragmatic information on bottlenecks and impediments, although the
                   data may be anecdotal in nature;
           (ii)    transport and freight forwarding company arranging transport along the
                   corridor(s), also Customs brokers in some cases - for more
                   comprehensive information on overall transport and transit performance,
                   and the related bottlenecks;
           (iii)   border-crossing authorities – since it is typical for data gathering to be
                   organized at these points; and
           (iv)    shippers (exporters/importers) using transport/logistics services – for
                   overall transport and logistics costs and needs to be addressed; requires
                   personal interviews using a closed quantitative questionnaire.
177. Infrastructure quality and performance measurement is purely technical and normally
collected by the ministry or agency responsible, using a specialist department or outside
consultant.

4.3.4   Performance Monitoring Mechanism and Institutional Arrangements

178. With ADB support, a regional joint transport and trade facilitation committee (RJC) will be
established to manage the implementation of the Action Plan, in coordination with NJCs or similar
organizations. The Transport Sector Coordinating Committee (TSCC) will be responsible for
transport activities of the Action Plan, and the Customs Cooperation Committee (CCC) will focus on
customs cooperation activities. The NJCs or similar organizations will report the results of the
performance monitoring analysis to RJC, TSCC, and CCC at least annually. Until the RJC and
NJCs or similar organizations start to function, ADB will directly administer integrated trade
facilitation activities of the Action Plan. Such implementation arrangements will be reviewed
regularly and will be adjusted, as necessary, to ensure the successful execution of the Action Plan.

179. With support of development partners, RJC, TSCC, and CCC will annually review the
progress of the Action Plan, and will report the results to the Senior Officials’ Meetings and
Ministerial Conferences. A midterm review of the Action Plan will be conducted during 2013–2014.
The midterm review will refine the Action Plan, as necessary, for its effective implementation in the
remaining period.
46
                                                                                                    47




       SECTION 5: CONCLUDING REMARKS—BUILDING A BETTER FUTURE

180. The Central Asia Regional Economic Cooperation (CAREC) Transport and Trade
Facilitation Strategy (the Strategy) and the Action Plan define a program of roughly a decade’s
worth of investment by CAREC countries and multilateral institutions in developing a unified
approach to upgrading infrastructure, technology, and management capacities in order to advance
transport and trade within and through the region. The Strategy is one further step towards
capturing the potential opportunities that exist in the current and future global markets and
overcoming the challenges of the past.

181. CAREC countries pursue a shared vision of “Good Neighbors, Good Partners, and Good
Prospects.” The importance of this phrase will become even more apparent in the future as the
region moves to further implementing seamless and harmonized border crossings, unified
approaches to movements across borders and along corridors, and the development of integrated
transport, logistics, and trade networks. Realizing these outcomes requires coordinated and
dedicated cooperation among CAREC countries and development agencies in order to present the
region as a viable transport, trade and transit alternatives to currently utilized trade routes. These
are not small tasks and will necessitate a change from the current “business as usual” stance to a
more dynamic global vision.

182. CAREC countries in conjunction with multilateral institutions and other development
partners have committed considerable resources to upgrading and rehabilitating their transport
networks; improving border crossing facilities, processes and procedures; and coordinating
activities. The results of these efforts are becoming apparent with increased trade flows, rising
GDP and GDP per capita, and new investment coming into the region. There are also more
concrete examples that demonstrate the results of these efforts such as the increase in traffic at the
border between Nizhni Pianj (Tajikistan) and Shirkan Bandar (Afghanistan) from about 40 vehicles
per day in 2007 to approximately 500 per day in 2008, following the opening of the new bridge
across the Amu Darya River in late 2007.

183. While the results of the recent and current efforts are impressive, this is only one aspect of
the evolution of the CAREC corridors. The Strategy focuses on developing transport and trade
corridors that will both serve the region as well as provide it with additional opportunities and
income through attracting transit traffic between major neighboring external markets. Specifically,
the transport and trade corridors can become economic corridors where broader economic
development occurs far beyond the transportation alignment’s right-of-way. Furthermore, the
corridors can become part of the global value chains that add value to products as goods efficiently
move towards specific external markets, and support sustainable inclusive economic development
within the region.

184. The global financial crisis of 2008 will likely slow economic growth in the CAREC countries
in the near term. This will inevitably be a challenging period for CAREC countries. However, the
global financial crisis and possible fiscal constraints will require CAREC countries to pursue the
Strategy more progressively—effectively targeting investments along CAREC corridors with
intensified transport and trade facilitation coordination among CAREC countries in order to achieve
quick, cost effective returns from limited resources. Removing impediments to transport and trade
in a cost effective manner is essential to firmly support economic development in the region and a
necessary action to turning economic opportunities into economic realities, and building a better
future for the region.
48
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                                          Krasnyi Yar                                                                                                                                                  Lake
                                                       Kurmangazy                                                                                      Karaghandy
                    To Europe                                                                                                                                                                         Zaysan                                 Hovd                    MONGOLIA                                                         Erenhot
                                       CAREC 6a                                                                                                                                       Charskaya
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                         Beyuk Kesik                                 Aktau                         Karakalpakya                                                                                            1b                      Urumqi
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                   40o 00'N                                                                                                                                                                                       Kuytun
                                       AZERBAIJAN                                                                                                                                                          Huocheng                      Turpan
                                                                                                                                        6b,c                          Shu                               Korgas                                                  CAREC 1
                            Yevlakh                                                                                 UZBEKISTAN                                                                Almaty                     1c                                     CAREC 2        To Lianyungang
                                                   BAKU                                                                6a                                                                                                                              Hexi     CAREC 5
                                           Alyat                                                   Nukus                        Uchkuduk Shymkent                                                  Lake Yssyk Kul
                                                                                                                                                                                             Balykchy                                                                                                       PEOPLE’S REPUBLIC OF CHINA
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                                                                                  TURKMENISTAN                                                                          Jalal-Abad
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                                                                                                                                         Karachi
                                                                                         Arabian Sea
                                                                                             60o 00'E                                      Port Qasim                                                                                                                                60o00'E                                          100o00'E
                                                                                 49   Appendix 1




                CAREC PROGRAM AND EVOLUTION OF THE STRATEGY

A.1.1 Genesis of CAREC

1.      It has now been a decade since the launch in 1997 of the Central Asia Regional
Economic Cooperation (CAREC) Program. CAREC is a vibrant development partnership of
eight Central Asian countries - Afghanistan, Azerbaijan, People’s Republic of China (with
focus on Xinjiang Uygur Autonomous Region [XUAR]), Kazakhstan, Kyrgyz Republic,
Mongolia, Tajikistan, and Uzbekistan and six multilateral institutions including, ADB, The
World Bank, International Monetary Fund (IMF), European Bank for Reconstruction and
Development (EBRD), Islamic Development Bank (IsDB), and United Nations Development
Programme (UNDP). Therefore, CAREC represents a dual partnership between eight
participating countries and six multilateral institutions.
2.     The main purpose of CAREC is to promote economic development through
cooperation, and thus accelerate economic growth and reduce poverty. By fostering regional
cooperation in transport, trade, energy and other areas, CAREC helps the participating
countries pursue their economic potential and improve the quality of life for their citizens.

A.1.2 CAREC as an Institution

3.       From the beginning of CAREC, ADB has performed the secretariat function for the
institution. The CAREC Unit at ADB headquarters and at ADB resident missions in
participating countries are the glue which holds the Program together. They perform many
analytical, organizational and facilitative tasks at headquarters and in the field. Also, they play
an important role in ensuring that projects are implemented on time and within budget in
conjunction with their colleagues in the regional and operational departments of ADB. The
liaison role also involves other multilateral institutions and of course, the relevant
departments and agencies of the CAREC countries. In fact, the CAREC units maintain
connectivity with all the involved development partners and stakeholders.
4.     The overall institutional framework of CAREC has evolved over time. At present,
besides the secretariat, it consists of the MC which approves major initiatives such as the
Comprehensive Action Plan (CAP) adopted at Urumqi in October 2006 (Figure 1.1). The MCs
are usually held in the autumn with the last one (7th MC) held on 21 November 2008 in Baku,
Azerbaijan. The MCs are co-chaired by ADB and a CAREC country on a rotating basis with
the other member countries and MIs sending representatives. Also, there is representation by
other development partners.
5.      Prior to the MCs, there is usually a preparatory SOM to firm up the agenda and other
aspects of the conference. SOMs are also held in the spring (at least this has been the
practice since 2003) to monitor progress with the approved initiatives. Sector coordinating
committees exist for trade policy (Trade Policy Cooperation Committee [TPCC]), customs
(Customs Cooperation Committee [CCC]), energy (Energy Sector Coordinating Committee
[ESCC]), and transport (Transport Sector Coordinating Committee [TSCC]). The TSCC and
the CCC met jointly to consider the Strategy report in Tashkent on 30-31 January 2008 and in
Baku on 11-12 June 2008. Future joint meetings are also planned.
6.       The four “action” areas of the CAREC Program included in Figure 1.1 were made
explicit in the context of the adoption of the CAP at Urumqi in October 2006. The activities
carried out in relation to each area are intended to greatly enhance the capacity for designing
and implementing mutually beneficial regional initiatives.
50   Appendix 1



           Figure 1.1: CAREC Strategic Direction and Overall Institutional Framework




            Source: ADB CAREC Comprehensive Action Plan (CAP).

7.        This is especially true of the knowledge and capacity building area, but is also
relevant for the regional infrastructure networks area, the trade, investment and business
development area, and the regional public goods area. The CAP makes the very relevant
point that the Program should not only be widened (e.g., second tier activities) but also
deepened. In terms of the latter, activities under regional infrastructure include logistics
systems, multi-modal east-west and north-south corridors, harmonization of transport
regulations, and accession to international transport agreements. In general, the whole
border crossing issue receives considerable attention whether in terms of facilities and
equipment at the border crossing posts or customs modernization and harmonization. In this
area, there is an obvious need for complementarity between the regional infrastructure
networks area and the trade, investment and business development area. In any case, the
Strategy’s focus on border crossing issues has to reflect the strategic direction being
developed for trade policy, on transport infrastructure, and on other aspects of trade
facilitation.
8.      If border crossing issues related to transport and logistics, customs and other
agencies, tariffs and non-tariff barriers to trade, and taxes and other fees represent the
downside, then their resolution provides a major upside in terms of potential trade and
inclusive economic development. The activities noted under the investment and business
development area will then bear fruit and the private sector will play its proper role of
capturing for Central Asia some segments of the global value chains and turning what would
become an efficient and reliable transport corridor into an economic corridor. At least, this is
an underlying theme in the CAREC Program, and thus bears examination in the context of
the Strategy.
                                                                                                 51 Appendix 2



    EXTERNAL ASSISTANCE TO THE TRANSPORT AND TRADE FACILITATION SECTOR1

1        CAREC countries have made conscious efforts to respond to transport and trade
challenges over the last 10 years. With support from development partners, they have improved
critical segments of main transport corridors in the region. External financing—totaling about $5
billion—was mobilized to improve transport infrastructure and trade in the region. About 60% of
the total length of major road corridors has been rehabilitated.

2       Roads. CAREC countries have mobilized external financing to rehabilitate about 3,000
km of the 6,000-km north–south road corridor between Kazakhstan and the Middle East. The
improved section runs from Almaty in Kazakhstan through Bishkek and Osh in the Kyrgyz
Republic, Dushanbe in Tajikistan, Termez in Uzbekistan, and Hairatan to Islam Qila in
Afghanistan. The five governments along this corridor and development partners, including the
Asian Development Bank (ADB), Islamic Development Bank (IsDB), and Japan International
Cooperation Agency (JICA), 2 provided financial and technical support. About 95% of the
regional road transport corridors in Afghanistan, totaling about 3,780 km, have been or are
being improved with external assistance of more than $1 billion. ADB, Saudi Fund for
Development, IsDB, Organization of the Petroleum Exporting Countries (OPEC) Fund for
International Development, and World Bank committed a total of more than $1 billion to upgrade
the east–west and north–south road corridors in Azerbaijan. Regional corridors in Xinjiang,
People’s Republic of China (PRC) are being upgraded with financial assistance from ADB and
World Bank ($400 million). ADB, the European Bank for Reconstruction and Development
(EBRD), and IsDB supported the rehabilitation of main roads in Kazakhstan, including the
Almaty–Bishkek regional road ($270 million). ADB, IsDB, and JICA provided a total of about
$310 million to improve the north–south corridor in the Kyrgyz Republic. ADB assisted Mongolia
to upgrade the two main international road corridors, with financial assistance amounting to
$127 million. Tajikistan mobilized a total of $118 million from ADB to rehabilitate its international
road corridors. ADB provided one loan (a total of $75.3 million) to upgrade the road network in
Uzbekistan. On 26 August 2007, the governments of Afghanistan and Tajikistan inaugurated a
bridge across the Pianj River, financed by the United States, which replaced the cross ferry
service and enabled 9-hour road travel from Kabul to Dushanbe.

3      Railways. EBRD supported Kazakhstan’s railway sector to enhance track maintenance
and commercialization ($67.1 million). Railways in Mongolia were rehabilitated with two JICA
concessional loans totaling about $75 million and a grant of about $10 million from the
Government of Japan. Railway transport capacity in Kazakhstan was improved with a JICA loan
of about $70 million. ADB and EBRD supported railway modernization in Uzbekistan through
four loans totaling $250 million. Railways in Uzbekistan, including construction of a 222-km
railway line between Tashguzar and Kumkurgan, have been upgraded with support from two
JICA concessional loans amounting to about $190 million. The Government of Uzbekistan
opened the Guzar–Termez railway section on 25 August 2007.

4       Container block train services linking the PRC and Moscow, Russian Federation started
in October 2007, providing speedy, reliable, and punctual services between Lianyungang and
Moscow. All cargoes are tracked continuously and are accorded efficient customs clearance.
Investments are currently underway to expand the marshalling yard and gauge change facilities
in Ala Shankou and Dostyk in anticipation of an expected increase in cross-border rail traffic.

1
    Prepared based on the data base maintained by the CAREC Transport Sector Coordinating Committee.
2
    Concessional loan operations of the Japan Bank for International Cooperation (JBIC) were integrated into the
    operations of JICA on 1 October 2008.
52 Appendix 2




5       Airports. ADB assisted the rehabilitation of seven local airports in Afghanistan ($30
million). Azerbaijan upgraded its international passenger terminal and civil navigation systems
with EBRD assistance ($13.7 million). Kazakhstan improved the Atyrau Airport with EBRD
financing ($30 million). The Osh Airport in the Kyrgyz Republic was rehabilitated with IsDB’s
financial support ($7 million). The international airport in Ulaanbaatar, Mongolia was improved
with a loan from ADB ($36 million) in the 1990s. The Kabul International Airport (Afghanistan),
Urumqi International Airport (PRC), Astana Airport (Kazakhstan), Bishkek Manas International
Airport (Kyrgyz Republic), and three regional airports (Bukhara, Samarkand, and Urgench in
Uzbekistan) were improved through five concessional loans from JICA, amounting to about
$350 million, and grants from Japan of about $30 million. EBRD assisted Khujand Airport’s
improvement and upgrading of its air fleet and air navigation systems in Tajikistan ($19.7
million). The Tashkent Airport was rehabilitated with a loan from EBRD ($48 million).

6       Ports. Baku’s ferry terminal was upgraded with EBRD financing (about $20 million). The
port at Aktau (Kazakhstan) received about $20 million from the Japan Bank for International
Cooperation (semi-commercial) through the Kazakhstan Development Bank for the
development of oil export facilities.

7       Customs and Trade Facilitation. CAREC countries have made important progress on
customs modernization and trade facilitation. They have simplified customs procedures in line
with international standards. In addition, some border-crossing points were improved with
support from development partners. CAREC countries successfully completed the diagnostic
assessments of customs procedures with support from the World Customs Organization and
sped up the implementation of customs reform and modernization programs. Azerbaijan, PRC,
Kazakhstan, Kyrgyz Republic, and Mongolia have established transport and trade facilitation
organizations or similar institutional setups to address transport and trade issues. Afghanistan
has made progress in customs modernization and trade facilitation with World Bank support
($31 million). The Khorgas Global Logistics Center is being developed in Xinjiang Uygur
Autonomous Region (Xinjiang), PRC. In Kazakhstan, a Kazakh–Russian joint venture company
is developing large-scale logistics centers in Astana, Aktobe, and Almaty for distribution
services in Kazakhstan and Central Asia. Kazakhstan is carrying out customs modernization
with a World Bank loan of $18.5 million. In 2002, Kyrgyz Republic and Tajikistan started to
pursue regional trade facilitation and customs cooperation with ADB assistance ($25 million).
They also implemented regional customs modernization and infrastructure development with
additional ADB assistance ($18.2 million). Mongolia’s customs modernization was assisted by
ADB ($5.5 million), and ADB financed regional customs modernization and infrastructure
development in Kyrgyz Republic and Tajikistan ($18.2 million).

8       Institution Building. CAREC countries have implemented institutional building projects
with support from development partners including ADB, European Union, World Bank, and
bilateral sources. For instance, the European Union provided over 60 technical assistance and
investment projects totaling more than €120 million, covering issues such as training freight
forwarders, contract supervision for highway rehabilitation, agreements on transport of
dangerous goods, and maritime and civil aviation training.
                                                                                                     53   Appendix 3




                                  CHALLENGES AND OPPORTUNITIES

A.3.1 GDP AND TRADE GROWTH

A.3.1.1 Population Growth and Economic Expansion

 1.    The geography, population, economy and trade flows of Central Asia have an important
 bearing on the transportation challenges of the region. Within the region, distances are
 substantial with around 4,500 km between Baku and Ulaanbaatar and 2,000 km between
 Astana and Kabul. Distances to major markets on the east coast of the People’s Republic of
 China (PRC) or in the European Union (EU) are, of course, great as are the distances to ports
 on the Persian Gulf and the Indian Ocean. The implications of distance and the landlocked
 status of Central Asian countries on transport costs are noted at the outset.

 2.       A second factor involves the terrain and the related consideration of climate. The
 differences between the minimum and maximum elevation above sea level are very large in
 most of the Central Asia Regional Economic Cooperation (CAREC) countries with challenging
 mountain passes which have to be traversed by road or rail often with tunneling. Also, some
 passes are only open between May and October. Again, this factor adds to transport cost and
 travel time. On the positive side, where rivers flow, there is an obvious hydroelectricity potential.
 For example, Tajikistan has a minimum elevation of 300 meters (m) and a maximum elevation
 of 7,495 m above sea level, and hence, a comparative advantage in electricity intensive
 industries if infrastructure challenges can be overcome.

 3.      Population developments in the CAREC countries have been broadly similar with growth
 per annum ranging between 0.5% and 1.6% (Table A.3.1). During the transition, there was
 some decline in average life expectancy, but the dominant demographic factor has been the
 significant out migration of ethnic Russians the last few years with emigrants exceeding
 immigrants for the CAREC countries and the Russian Federation showing the reverse. For
 Mongolia, out migration to the Russian Federation has been less of a factor with, PRC,
 Kazakhstan, Republic of Korea, the United States (US), and Japan being more important
 receiving countries.

                        Table A.3.1: Population Indicators for CAREC Countries
           Country/Indicator                  AFG     AZE    KAZ     KGZ     MON     TAJ    UZB     XUAR/PRC
Population (Million)
                                      2001             8.1   14.9      4.9     2.4    6.3    24.8           18.8
                                      2006    22.8     8.4   15.3      5.2     2.7    6.7    26.5           20.5
Growth Rate (%)                                        1.0    0.5      1.2     1.6    0.9     1.4            1.7
Population Density (people/sq.km.)
                                  2006                103        6     27        2     47      62
Life Expectancy (year)
                                  2006                  72     66      68       67     64      67              71
In-migrants (Thousand)                                  13    293      23               7       -
Out-migrants (Thousand)                                 28    557     136              58       -
Net migration, 2000-2004 (Thousand)                    -15   -264    -113      -50    -51    -240
AFG=Afghanistan; AZE=Azerbaijan; PRC=People’s Republic of China; KAZ=Kazakhstan; KGZ=Kyrgyz Republic;
MON=Mongolia; RUS=Russian Federation; TAJ=Tajikistan; UZB=Uzbekistan; XUAR=Xinjiang Uygur Autonomous
Region.
Sources: "Statistical Digest: Tajikistan and CIS Countries," Dushanbe, 2005. "World Development Indicators," WB,
Washington, various years.
Note: During the 2000-2004 period immigration to the Russian Federation was 986,000 and the out migration was
547,000 for a net gain to the Russian Federation of 439,000.
    54 Appendix 3




    4.     What have been the economic implications of these population trends? The most
    important impact has been on the large role that emigrant remittances play in the balance of
    payments and also as a source of personal income. Emigrant remittances are especially
    important for Kyrgyz Republic and Tajikistan where they amount to around 15% and 20% of
    GDP, respectively. In absolute terms, the inflows to Azerbaijan and Uzbekistan are higher than
    Kyrgyz Republic and Tajikistan with an estimated value of $700 million in 2006.6 It has been
    estimated that 60% of Tajikistan’s population depends to a significant extent on emigrant
    remittances for its income. 7 Emigrant remittances are not only a source of income for
    subsistence, but may also be a source of financing for business startups. In this regard, one
    should note that in dollar terms, they are larger than official development assistance (ODA) and
    foreign direct investment (FDI) in all CAREC countries, except Azerbaijan. While emigrant
    remittances reflect the current weakness of the PC economies and especially their labor
    markets, they can be a source of strength in the future by providing funds to the private sector.

    5.      In a 20-year time horizon, one could project some declines in the birth rate, a modest
    increase in average life expectancy and certainly declines in out migration if the current
    economic expansion is maintained. Therefore, for the region as a whole a 1% per annum
    increase in population would be a reasonable estimate. At the same time, increased
    urbanization will also occur. This tendency may have abated somewhat during the transition
    because of the lack of industrial and service sector jobs, but it will be a significant factor in the
    future. It is worthwhile noting that transport, especially of people, but also of goods is enhanced
    at the intraregional and international levels by both out migration and immigration. On the
    domestic level, population and income growth as well as urbanization are more important
    factors. This point is noteworthy for any regional transport strategy.

    6.      In terms of economic growth, it is essential to discuss the past, present, and future both
    at the country and regional level because some of the main features of the growth experience
    have a regional dimension and others do not. Below, some brief remarks will be made on
    economic reforms and economic policies which provide an introduction to the next section on
    trade flows and trade policy. Recently, policies and programs on integration and cooperation as
    well as industrial competitiveness have been viewed as increasingly important as part of the
    policy mix. Of course transport infrastructure and logistics costs are important components of
    these policies and programs.8

    7.      During the 1990s CAREC countries, with the exception of Afghanistan and the PRC
    (Xinjiang Autonomous Region [XUAR]), underwent the so-called “transition to a market
    economy”. The experience of CAREC countries during this period was broadly similar with real
    GDP falling between 1990 and 1996, and then subsequently recovering, although the
    percentage of the fall varied from country to country because of differences in industrial
    structure and the degree of integration into the former Soviet Union countries (FSU):
    Kazakhstan - 39%, Kyrgyz Republic - 49%, Tajikistan - 58%, Turkmenistan - 39%, and
    Uzbekistan - 19%. Tajikistan had the worst experience partly because of the civil war while
    Uzbekistan benefited somewhat from the greater reliance on agriculture and relatively high
    prices of cotton during the period.

    8.      The recovery since the mid-1990s has also been somewhat uneven, and some analysts
    distinguish between oil and gas exporters (Azerbaijan, Kazakhstan, and Turkmenistan) and the
    other CAREC countries. However, it should be noted that Kazakhstan also has many other
    resources and Uzbekistan has some oil and gas used mainly for local and regional

6
  Sena Eken, “Regional Economic Outlook: Economic Development, Prospects and Policy Issues in Central Asia,” IMF
  paper presented at the fifth CAREC Ministerial Conference, Urumqi, 2006.
7
  Erica Marat “The State-Crime Nexus in Central Asia: State Weakness, Organized Crime and Corruption in Kyrgyz
  Republicand Tajikistan,” Silk Road Paper, October, 2006.
8
  Malcolm Dowling and Ganeshan Wignaraja “Central Asia after Fifteen Years of Transition: Growth, Regional
  Cooperation and Policy Choices,” ADB, Manila, July, 2006.
                                                                                                            55   Appendix 3




    consumption.9 At the same time, Kyrgyz Republic has gold and coal, Tajikistan has aluminum
    (based on electric power), and Mongolia is an important producer of gold, copper, and fluorspar.
    This fact has tended to even out growth in the 2000-2006 period as Table A.3.2 shows, with
    Azerbaijan, however, showing a stellar performance of real growth of 17% per annum followed
    by XUAR at 10%. Nevertheless, the other growth rates have been respectable since 2000.

                                     Table A.3.2: Main Macroeconomic Indicators
                                                                                                                  XUAR/
           Country/Indicator               AFG      AZE       KAZ       KGZ       MON        TAJ       UZB
                                                                                                                   PRC
    Population (million, 2006)              22.8       8.4     15.3      5.2           2.6    6.7        26.5        20.5
    GDP (billion current $ 2006)             8.4     20.1      77.2      2.7           2.7    2.8        17.2        35.2
    GDP/capita ($ 2006)                     368     2,375     5,046      518        1,040     423        647        1,717
    GDP PPP (billion current
                                            23.9     53.3     150.5       9.4          7.5   10.7        58.2         135
    $ 2006)
                                                 Real GDP Growth (%)
    2000-2006                                  9    17       10      4                  6       9            6            10
    2006                                       5    30       11      3                  8       7            7            11
    2007                                      13    23        9      8                 10       8            9            11
    2008                                       9    19        8      9                  9       4            8            10
    2009                                       9    16        9      9                  8       7            7            10
                                                GDP By Sector 2005 (%)
    Agriculture, forestry, fishery            23      7       6     33                 19      24           28            17
    Industry                                  19    62       31     17                 33      24           23            41
    Construction                               5      8      10      3                  2       7            6             7
    Services                                  53    23       54     47                 48      46           43            35

    GDP Deflator 2006 (% change)               -       14        27        -          24        -          20            -
    CPI 2006 (% change)                        5        8         9        6           6       11          15            2
    Exchange Rate per $ 2006               49.80     0.87    132.88    40.10    1,180.00     3.30    1,220.00         7.97
    AFG=Afghanistan; AZE=Azerbaijan; PRC=People’s Republic of China; KAZ=Kazakhstan; KGZ=Kyrgyz Republic;
    MON=Mongolia; RUS=Russian Federation; TAJ=Tajikistan; UZB=Uzbekistan; XUAR=Xinjiang Uygur Autonomous
    Region.
    Sources: "Statistical Digest: Tajikistan and CIS Countries," Dushanbe, 2007. "World Development Indicators," WB,
    Washington, various years. "Article IV Consultation Reports", IMF, Washington, various years. "Xinjiang Statistical
    Yearbook 2007". "Asian Development Outlook 2008", ADB, Manila.

    9.     It should be noted that this is economic growth from a low base. Annual per capita
    incomes vary from a low of $368 in Afghanistan to a high of $5,046 in Kazakhstan. Expressed
    in purchasing power parity (PPP) terms per capita GDP is considerably higher, but poverty in
    CAREC countries is a serious problem with an estimated poverty incidence of around 40% on
    average.

    10.     An obvious question, therefore, arises: can the recent momentum in economic growth
    be maintained and will this lead to higher living standards and lower rates of poverty? An
    associated question concerns the role of policies, programs and projects, including policies on
    regional cooperation and projects in the transport and trade facilitation in creating conditions for
    inclusive economic development.

    11.     Most observers are cautiously optimistic on the economic momentum question. For
    example, Dowling and Wignaraja note that the market for commodities has probably changed
    based on increasing demands from the PRC and India, which should result in the continuation
    of high oil and natural gas prices. They see progress on macroeconomic stability which may not
    prevent crises in local capital markets, but should limit spillovers into other countries.

9
    See for example Sena Eken quoted above and Malcolm Dowling and Ganeshan Wignaraja, “Central Asia’s Economy:
    Mapping Future Prospects to 2015,” Silk Road Paper, Washington and Uppsala, July, 2006.
56 Appendix 3




12.    Based on these assumptions and others including the absence of major political
upheavals, Dowling and Wignaraja develop their “business as usual” scenario for GDP to the
year 2015 for six CAREC countries. On Table A.3.3, three countries are added, namely,
Afghanistan, Mongolia, and the PRC (XUAR) and the time period is extended to 2017. Under
this scenario the region’s economy more than double over the 13-year period from 2006 to
2017. The two largest economies, Kazakhstan and XUAR, with over 60% of regional GDP are
expected to grow relatively faster. Azerbaijan, a medium-size economy in regional terms, is
projected to be the growth leader at a projected 10.5% per annum.

13.    The growth rates in Table A.3.3 appear high by international standards, but they are not
over what was achieved in the 2000-2006 period except for Kyrgyz Republic and Mongolia (see
Table A.3.2) and they are below what was attained in 2006 and 2007. The figures for the last 2
years raise the obvious question on whether higher rates than in the “business as usual”
scenario are possible over the longer term. One can argue that obtaining another one percent
annual growth out of the regional economy is attainable if economic policy reforms proceed
more quickly than in the past. This would include greater openness through World Trade
Organization (WTO) membership and its successful implementation.

                                 Table A.3.3: CAREC (8) GDP 2005 and 2017
                             Business As Usual Scenario                Closing The GAP Scenario
                 GDP $                 2005-2017    GDP $            2005-2017     GDP $
  Country
                Million        %        Annual     Million     %       Annual      Million    %
                  2005                  Growth       2017              Growth       2017
 AFG               7,168.0        5.6          6.5   15,261.4   4.9           7.8  17,653.2    5.4
 AZE             12,561.0         9.8         10.3   40,731.5  13.1          10.5  41,626.7   12.8
 KAZ             56,088.0        43.8          7.1 127,744.9   41.1           7.3 130,637.1   40.2
 KGZ               2,441.0        1.9          5.6    4,693.9   1.5           6.7    5,315.5   1.6
 MON               1,880.0        1.5          7.0    4,234.1   1.4           8.0    4,734.2   1.5
 TAJ               2,326.0        1.8          6.0    4,680.4   1.5           7.1    5,297.7   1.6
 UZB             13,667.0        10.7          5.2   25,110.9   8.1           6.9  30,437.3    9.4
 XUAR            32,006.0        25.0          8.8   88,059.9  28.4           8.9  89,036.1   27.4
 Total          128,137.0       100.0          7.6 310,516.9 100.0            8.0 324,737.6 100.0
 AFG=Afghanistan; AZE=Azerbaijan; PRC=People’s Republic of China; KAZ=Kazakhstan; KGZ=Kyrgyz Republic;
 MON=Mongolia; RUS=Russian Federation; TAJ=Tajikistan; UZB=Uzbekistan; XUAR=Xinjiang Uygur Autonomous
 Region.
 Sources: For 2005, "Country Profiles," WTO, Geneva; For 2018, based on "Asian Development Outlook 2007,"
 ADB, Manila "Central Asia: Mapping Future Prospects to 2015," Malcolm Dowling and Ganishan Wignaraja,
 Caucasus Institute, Silk Road Paper, July, 2006.


14.     The package of policy reforms would also include more progress on a larger scale on
commercialization and privatization. Also an industrial competitiveness strategy would lead to
the participation by the regional economy in segments or niches of global value chains (GVC).
Finally, regional cooperation on trade facilitation and transport would ensure that the
opportunities created by greater openness could be realized.

15.     The results of higher growth based on improved policies and strategies and their
speedier implementation are shown under the “closing the gap” scenario of Table A.3.3. The
additional growth may not appear very impressive, but it should be noted that the base case
already has high growth rates, and the smaller countries benefit relatively more from improved
economic policies and more regional cooperation. There is also a gain in the quality of growth in
the sense that greater diversification through industrial competitiveness leads to less volatility in
the economy and in the value and volume of trade. The latter point is a subject for the next
section.
                                                                                                  57   Appendix 3




A.3.1.2 Trade Policies, Flows, and Potential

     16.     The linkage between trade and transport has been of primary importance since the
     beginning of the development of market economies. Improvements in transport widen the extent
     of the market, increase specialization, raise productivity and ultimately lead to higher living
     standards. For these gains from trade to be realized in the CAREC countries, the challenges
     posed by the relatively small size of national economies and natural and manmade barriers to
     trade must be overcome. Regional cooperation on trade policy, transport and trade facilitation
     (including customs transit) can be a powerful tool in eliminating the existing obstacles that
     hinder participation in international trade.

     17.     With regard to trade policy, analysts familiar with Central Asia have argued that a
     multilateral approach would bring the greatest gains from increased trade.10 In contrast to freer
     multilateral trade, regional trade agreements and bilateral trade agreements can cause what
     economists call trade diversion as well as trade creation. In other words, because of preferential
     treatment of neighboring countries (e.g., lower or no tariffs) one does not obtain goods from the
     most efficient or cheapest source on a global basis since tariff and other barriers remain on
     imports from outside the region. At the same time, exports may be diverted from where they
     would fetch the highest price. It is interesting to note that there is no such ambiguity in the case
     of improvements to the regional transport and logistics system that brings about a less costly
     and more reliable service. The gains are there to be captured. To be sure, increased
     competition from imports may affect local production negatively, but the economies of Central
     Asia have few import competing industries.

     18.      Table A.3.4 confirms some of the comments just made. CAREC countries have small
     economies, as well as significant barriers to trade, and hence, the value of their trade tends also
     to be small. In 2005, they ranked far down the list of countries with regard to exports and
     imports of goods and services. Kazakhstan, and to a lesser extent Azerbaijan, have a
     respectable rank given the size of their economies, but this is largely due to their petroleum
     exports. These two countries also rank high in terms of their imports of services including
     transport services. In general, transport service imports tend to be high in the CAREC region
     reflecting high costs and an uncompetitive domestic transport system. Table A.3.4 also
     presents two measures of openness, the ratio of trade flows (exports plus imports) to GDP and
     the average tariff levied on all goods. Taken in combination, these measures show that Kyrgyz
     Republic and Mongolia are the most open and these countries along with the PRC are
     members of WTO. Other CAREC countries have observer status and are at various stages of
     accession.

     19.      What has been the track record of CAREC countries on trade flows over time? In the
     last decade, annual growth of exports and imports has been impressive for the oil exporting
     countries and Mongolia. The high import growth for Afghanistan represents a special case as
     does the very small amount of legal exports from this country. The Mongolian numbers are
     intriguing because contrary to expectations based on the experience of most countries, the
     volume of trade has grown more than the value of trade. In this connection, one should note
     that the market for mineral products has been buoyant for some years, but significant increases
     in prices came along only in 2003. Mongolia is a significant producer of copper and
     molybdenum concentrate and fluorspar in addition to gold. Agricultural raw material prices
     (including cotton) also turned up in 2002, and this improved the terms of trade for Tajikistan and
     Uzbekistan. With petroleum prices already moving up in the late nineties, it is not surprising that
     the value of Azerbaijan and Kazakhstan exports has grown at an annual rate of over 20% since
     2000, and for Azerbaijan the volume has also grown at this pace partly because of foreign
     investment in oil production and pipelines.


10
     ADB, “Central Asia: Increasing Gains from Trade through Regional Cooperation in Trade Policy, Transport and
     Customs Transit,” Manila, 2006.
 58 Appendix 3




                            Table A.3.4: Main Trade Indicators of CAREC Countries
                                                                                                            XUAR/
             Country/Indicator               AFG      AZE       KAZ      KGZ      MON      TAJ      UZB
                                                                                                             PRC
     Exports ($ million, 2006)                430 6,372 40,470      796 1,543             1,399    5,617     5,040
     Imports ($ million, 2006)              2,960 5,268 24,956 1,718 1,486                1,723    3,998     3,964
                                   Exports Growth 2000-2006 ( % annual change )
                                  Value        15    24       29       8     19               10       12
                                  Volume        -    23        7       4     20               13        5
                                   Imports Growth 2000-2006 ( % annual change )
                                  Value        17    28       31     21      16               17        7
                                  Volume        -    28        4       2     19                7        5

     Foreign Trade/GDP (2006)                 40.4    57.7     84.7       92.6   111.1    110.7      55.8       23.6
                                                      Rank, 2006
     Exports-Merchandise                       161      87       49        144      126     127       91             -
     Exports-Services                          162     105       73        136      125     165      107             -
     Imports-Merchandise                       118      98       55        142      148     141      107             -
     Imports-Services                          171      70       46        141      133     145      144             -

     Duty as % of Imports
     2006                                      5.7      9.6        9.5     4.8      4.5      7.9     15.6        9.9

     WTO Status                              OBS.     OBS.     OBS.      1998     1997    OBS.     OBS.       2001
     AFG=Afghanistan; AZE=Azerbaijan; PRC=People’s Republic of China; KAZ=Kazakhstan; KGZ=Kyrgyz Republic;
     MON=Mongolia; RUS=Russian Federation; TAJ=Tajikistan; UZB=Uzbekistan; XUAR=Xinjiang Uygur
     Autonomous Region.
     Source: "Country Profiles," WTO, Geneva
     Note: Exports and Imports are merchandise exports F.O.B and merchandise imports C.I.F. The import duty is the
     simple average of ad valorem duties levied on all goods. OBS = Observer.

     20.     For the CAREC region as a whole, trade flows began increasing somewhat after 1997,
     but significant advances came more recently in 2002. Some of the growth numbers especially in
     value terms are phenomenal and clearly not sustainable, but they should also not be completely
     discounted when looking at the future. The growth rates in trade flows for XUAR appear also
     unsustainable over the longer term, and indeed there may also be questions regarding the
     quality of the data. Nevertheless, the PRC as a whole for the 2000-2006 period has apparently
     achieved a growth rate in the value of goods exports and goods imports of 18% and 17% per
     annum, respectively, and similarly a 19% and 16% growth rate in volume terms. Based on the
     XUAR data on GDP growth, which is similar to that of the PRC as a whole, robust growth in
     international trade must have taken place for XUAR as well. The major trading partner for
     XUAR is a rapidly-growing Kazakhstan.

     21.     Table A.3.5 shows the trade composition of CAREC countries in aggregate form.11 For
     the region as a whole, fuels, and minerals tend to be of primary importance, followed by
     manufactured goods, and agricultural products taking up the rear. There are a few exceptions to
     this observation. Although Kazakhstan has a sizable agricultural base, petroleum exports tend
     to dominate and the country also has some manufacturing capacity as do Kyrgyz Republic and
     Mongolia (processed minerals). However, the big exception is XUAR. Fifteen years ago, the
     major exports of this part of the PRC were primary products, but today 90% of the exports
     consist of manufactured goods. It is easy to dismiss this achievement by stating that XUAR has
     the rest of the PRC behind it, but in the context of the trade strategy that CAREC countries

11
     Detailed data can be found in Appendix I “Merchandise Trade Statistics on the Central Asian Republics,” in “Central
     Asia: Increasing Gains from Trade through Regional Cooperation in Trade Policy, Transport and Customs Transit,”
     ADB, Manila, 2006.
                                                                                                                                                      59      Appendix 3




  should diversify their trade to reduce volatility in value and volume, XUAR may represent some
  lessons to be learned.

                               Table A.3.5: Composition of Trade of CAREC Countries in 2006
                                                                                                                                                               XUAR
               Country/Indicator                              AFG                 AZE           KAZ          KGZ          MON          TAJ         UZB
                                                                                                                                                               /PRC
  Composition
  Exports-Merchandise ($ million)                                   430            6,372      40,470           796        1,543       1,399        5,617        7,139
            Agricultural products (%)                                                 5.7         3.2         18.6         12.8        14.4         21.7
                                                                                                                                                                    9.8
              Fuels and Minerals (%)                                                88.4        79.8          22.4         59.3        59.3         40.7
   Manufactured and other goods (%)                                                   5.7       17.1          59.0         27.9        26.3         37.5         90.2
  Imports-Merchandise ($ million)                                2,960             5,268      24,956         1,718        1,486       1,723        3,996        3,964
            Agricultural products (%)                                               11.4          7.4         15.6         12.5        10.4           7.8
                                                                                                                                                                  40.3
              Fuels and Minerals (%)                                                14.1        13.6          31.1         29.6        35.8           3.1
   Manufactured and other goods (%)                                                 74.4        79.1          53.3         57.9        53.8         89.0          59.7
  Exports-Services ($ million)                                                       841       2,584           346          441         110          773             -
                       Transport (%)                                                48.4        56.4          16.1         48.7          56         42.5
                            Travel (%)                                              13.9        32.4          44.7         43.2          1.9        23.4
                             Other (%)                                              37.7        11.1          39.2           8.1       42.1         34.1
  Imports-Services ($ million)                                                     2,784       8,581           421          532         393          400               -
                       Transport (%0                                                18.3        17.6          39.5         46.2        61.5         47.3
                            Travel (%)                                                7.2         9.6         20.8         33.4          1.5        25.4
                            Other (%)                 74.5       72.8     39.7    20.5      37.1   27.3
 AFG=Afghanistan; AZE=Azerbaijan; PRC=People’s Republic of China; KAZ=Kazakhstan; KGZ=Kyrgyz Republic;
  MON=Mongolia; RUS=Russian Federation; TAJ=Tajikistan; UZB=Uzbekistan; XUAR=Xinjiang Uygur Autonomous
  Region.
 Source: “Country Profiles,” WTO, Geneva; “Xinjiang Statistical Yearbook, 2006,” Statistical Bureau, XUAR/PRC,
  Urumqi.

  22.     Much has been said about the destination of the exports of CAREC countries and the
  origin of their imports. Thus, the trading system as well as the transport system developed in
  the FSU era has had and continues to have an important influence as shown in Table A.3.6 and
  Figures A.3.1 and A.3.2.

                       Table A.3.6: Origin and Destination of Trade of CAREC Countries in 2005
Exports-
Merchandise ($                4,347                 27,849                  672                  909                  4,749                1,054                  5,040
Million)
                    EU (25)            50.9 EU (25)           34.9 UAE              25.8 RUSSIA          37.4 RUSSIA          23.8 CHINA           48.1 KAZAK                  60.4
                    ISRAEL              9.0 SUISSE            18.9 RUSSIA           20.0 EU (25)         35.2 EU (25)         17.3 U.S.            14.3 KYRGYZ                 12.8
      Principal
                    RUSSIA              5.8 RUSSIA            13.9 KAZAK            17.3 UZBEK           14.1 CHINA           11.9 EU (25)         12.4 PAKISTAN                6.8
 Destinations (%)
                    GEORGIA             5.2 CHINA              9.7 SUISSE            9.7 SUISSE          10.4 KAZAK            6.9 CANADA          11.5 RUSSIA                  4.6
                    TURKEY              5.1 BVI                3.8 CHINA             4.0 KAZAK              8 TURKEY           6.8 KOREA            6.1 UZBEK                   2.7
Imports-
Merchandise ($             4,200                    17,353                 1,108                1,330                 3,666                1,149                  2,901
Million)
                    EU (25)            33.9 RUSSIA            37.2 RUSSIA           34.2 UZBEK           28.8 RUSSIA          26.6 RUSSIA          35.3 KAZAK                  68.0
                    RUSSIA             16.2 EU (25)           27.7 KAZAK            16.3 RUSSIA          16.2 EU (25)         21.7 CHINA           24.9 U.S.                    6.4
  Principal Origins KAZAK               6.7 CHINA              6.0 EU (25)          10.8 UKRAINE         13.1 KOREA           15.2 EU (25)         10.0 RUSSIA                  6.0
         (%)
                    TURKEY              6.4 UKRAINE            5.7 CHINA             9.3 KAZAK           12.8 CHINA           11.6 JAPAN            6.4 KYRGYZ                  3.5
                    UKRAINE             4.8 U.S.               4.3 U.S.              6.1 AZER             9.8 KAZAK            7.1 KOREA            5.4 UZBEK                 3.3

AFG=Afghanistan; AZE=Azerbaijan; PRC=People’s Republic of China; EU=European Union; KAZ=Kazakhstan; KGZ=Kyrgyz Republic; MON=Mongolia; RUS=Russian Federation;
TAJ=Tajikistan; UZB=Uzbekistan; XUAR=Xinjiang Uygur Autonomous Region.
Source: "Country Profiles," WTO, Geneva; "Direction of Trade Statistics," IMF, Washington; "Xinjiang Statistical Yearbook 2006," Statistics Bureau, XUAR/PRC, Urumqi. BVI =
British Virgin Islands.




  23.   Trade with the Russian Federation continues to be important for all CAREC countries
  based on connections and networks built up in the days of the Council for Mutual Economic
 60 Appendix 3




     Cooperation (CMEC). Recently, the PRC is growing in importance as a trading partner and
     some of the exports and imports of XUAR, which go largely to Kazakhstan may in fact end up in
     the Russian Federation or the EU 25. It may also be the case that exports to Switzerland, and
     the United Arab Emirates (UAE) do not represent the ultimate destination, but the location of the
     importing entities, which could have been established in these countries for tax or other
     advantages.

     24.    Other significant trading partners of CAREC countries include Japan and Korea, and
     Iran and Turkey. The latter countries represent growing markets for goods, but they are also
     gateways to the rest of the world. Nevertheless, the dominant consideration for the future is
     probably that three of the four large and growing BRIC 12 countries are in the CAREC
     neighborhood, namely, the Russian Federation, India, and the PRC. Along with Japan and
     Korea and the EU 25 these are major markets for exports, and of course, also a source of
     imports. The obstacles to be overcome may be great, but so are the opportunities.

     25.      There is no doubt that intraregional trade among CAREC countries has been limited by
     the policies, practices, and infrastructure put in place in the FSU times, and in some cases even
     more so by the barriers erected during the transition. The erection of borders can cause delays
     and increase costs even when the border crossings are functioning efficiently. On the macro
     level, the Kyrgyz Republic, Mongolia, and XUAR have adopted a liberal trade regime.
     Azerbaijan, Kazakhstan, and Tajikistan also have fairly liberal regimes, but Uzbekistan has a
     more controlled structure. Fairly low and uniform tariffs are the norm in countries with liberal
     trade regimes, but elsewhere tariffs can be complex, high and unpredictable. If one adds to the
     tariff and fee issues, the non-tariff barriers of all types (administrative, technical, quantitative
     restrictions) then the transaction costs for exporters and importers add up. The long and
     unpredictable transit times are, of course, another issue, but these are less directly relevant to
     the projections of CAREC intraregional trade and external trade.




12
     Brazil, Russian Federation, India, and the PRC.
                                                                                                                                                                                                                                                                         61   Appendix 3


                                Figure A.3.1: Foreign Trade of Mongolia, Azerbaijan, Kazakhstan and PRC, 2005 (000 Tons)




                                                                      Other              Mongolia                                                                                          Other
                 EU 391                                                CIS                                             ROW                             EU                                   CIS
                                                                                                                                        ROW            4,576                                 468              Azerbaijan
                                                                           102                                         893               743



                                                                                                         477
                                                                                         46        135         228
                                KAZ      2                                                                                                                         KAZ
                                                                                               3          MON                                                       32                                                     MON
                                                                                                                        86
                                                                                                   1       349
                                                                                                                                           1,291
                                                                                                                                                                  UZB
                           UZB44                    KGZ                                                                                 2,579 3,032                 13              KGZ
                                                                                                                                                   434
   AZE                                                                                                                                      AZE 254
                                                                                                                                                    5                         178 TAJ
                                               TAJ                                                             1,535                             4                                            38
                                                                                                                               212
                                                                                                                 PRC         ROK/JPN       281                                                                                    PRC
TUR/IRN                                                                                                                                TUR/IRN                            AFG                                                                                       ROK/
                                       AFG
                                                                                                                                                                                                                                                                    JPN




Red Imports                                                                                                                            Red Imports
Blue Exports                                                                                                                           Blue Exports




                                                               Other              Kazakhstan                                                                                             Other 768
                EU                                              CIS                                              ROW                                        EU                                                              PRC
                                                                                                                                                         11,329                           CIS
               17,494                                              5,254                                         26,215                                                                                                                                    ROW
                                                                                                                                                                                                                                                           77,875


                                                   1781
                  2,516         11,117                         2                              46
                     32         KAZ          211          72                                                                                                       KAZ    557
                          322    207                557                                                   MON                                                                                                              MON
                                         34                                                                                                                                                                                 349
                                                                                                                                                                                                     5,007
                                                                                 5,007                                                                                                                     4,556
                                 468                684 KGZ                                                                                                       UZB              KGZ 350               117
    435                         UZB                                                                                                       AZE                       512
   AZE                                                                                                                                          4                                                                      63,555
                                              347                                                                                                                                                        270                            459,521
                                                   TAJ                                                                                                                          TAJ 66         11                               1,535

                                                                                                                               891                                                                   2
                                                                                                                 PRC                     TUR/IRN                                                                                  PRC             28,890
                                       127                                                                                   ROK/              4,830                     AFG                             38
                                                                                                                                                                                                                                                                    ROK/JPN
  2,009                                                                                                                                                                                                                                                             75,142
TUR/IRN                             AFG                                                                                      JPN                                          0
                                                                                                                                                                                                               4,149




                                                                                                                                       Red Imports
Red Imports
                                                                                                                                       Blue Exports
Blue Exports
62 Appendix 3


                        Figure A.3.2: Foreign Trade of Afghanistan, Uzbekistan, Kyrgyz Republic, and Tajikistan, 2005 (000 Tons)
                                                                  Other                           Uzbekistan                                                                 Other         Afghanistan
                        EU                                                                                                                                                                                  ROW
                            309                                    CIS                ROW                                                                                     CIS                           328
                                                                   2609                286                                                                                    6
                                                                                                                                      EU
                                                                                                                                       53


                                          KAZ
                                          207                                                                                                           KAZ
                                                                                                       MON                                                                                            MON
                              309         1,612
                                    468         184
                                    13    UZB 150             316 TAJ                                                                                 UZB              KGZ
                AZE                      31 56 44 28                                                                                AZE
                254
                                                        164                     270                                                                                   TAJ
                                                          KGZ                                                                                                         4
                                                                                                       PRC                                                    16
                                                                                                                           355                              270 21 240               2                   PRC
                                                                                                                                   TUR/IRN            225                                                                     ROK
                 318                            350                                                                   ROK/            11
                                                                                                                                                          127
            TUR/IRN                               AFG                                                                                                   350       0                                                           /JPN
                                                                                                                      JPN
                                                                                                                                                            AFG




            Red Imports                                                                                                          Red Imports
            Blue Exports                                                                                                         Blue Exports

                                                               Kyrgyzstan                                                                                                            Tajikistan
                                                                                                       Other         ROW                                          EU                                                 Other   ROW
                                            EU                                                          CIS          631                                          891                                                        260
                                            39                                                          306                                                                                                           CIS
                                                                                                                                                                                                                      148



                                                                    KAZ                                                    MON                                                           KAZ
                                                                        211
                                                                                                                             1                                                           34

                                                                                      683 143 590        945
                                                         UZB
                                                                    56                 164    KGZ 350          PRC                                                          UZB
                                                                                                  12                                                                          150                            KGZ
                  AZE                                                                   211                    117                                                                                69 347 877   12            PRC
                        5                                                                                                                       AZE                                              316                               11
                                                                                      TAJ
                                                                                             69                                                                                                178    TAJ 69
                                                                                                                                                                                                 22          37 66
                                                                                                                                                                                                         4
                                                222                                                                                                         64
                                          TUR/IRN                              16
                                                                              AFG                                                                     TUR/IRN
                                                                                                 3                                                                                              21
            Red Imports
                                                                                              ROK/JPN
                                                                                                                                 Red Imports
                                                                                                                                                                                               AFG
            Blue Exports                                                                                                         Blue Exports
                                                                                          63 Appendix 3



26.    The maps in Figures A.3.1 and A.3.2 show a broadly similar picture for the direction of
trade on a tonnage basis. Thus, Azerbaijan and Kazakhstan have large export tons consisting
mainly of petroleum going to the EU with other Commonwealth of Independent States (CIS)
countries such as the Russian Federation, Ukraine, Belarus, also being an important partner in
two way trade. For Kyrgyz Republic, Tajikistan, and Uzbekistan, “Other CIS” is the most
important partner for total trade. In the case of Mongolia, “Other CIS” is the largest source for
imports while PRC is the largest market for exports consisting mostly of minerals. Again,
Afghanistan is a special case with very small recorded exports and significant imports from the
EU, “Other CIS” and rest of world. The map of the entire PRC has been included (rather than
XUAR) for comparison purposes and it is a principal originating and terminating country for
regional and transit trades. The PRC map shows a large tonnage especially of imports coming
from diverse sources. The volume of exports is less, but since the PRC has a trade surplus, the
value per ton is obviously far greater.

27.     In Table A.3.7, trade flows (exports plus imports) are projected to the year 2017 in value
terms. In these projections, trade among CAREC countries is expected to experience a robust
growth at 10.7% per annum. Clearly, such a rate assumes the continuation of favorable
economic conditions and the implementation of the policy package described under the
“Closing the Gap” Scenario in the previous section. It assumes also improved regional
cooperation and measurable results on the border crossing issues, and more generally the
whole area of trade facilitation. Further, it assumes timely implementation of action plans as
endorsed at Urumqi and/or as adopted through the strategic framework exercises. Otherwise,
there is no chance that the trade among CAREC members will grow more quickly than any
other trade (except with the PRC). The latter projection is based on the robust growth of the
PRC’s aggregate trade over the short and long term, and also on the observation that the
PRC’s trade tends to increase rapidly with adjacent countries when effective transport links
become available. By the year 2017, the share of CAREC intraregional trade and the share of
CAREC trade with the PRC’s increases as a percentage of total trade. However, external trade
of CAREC with other partners like the EU, Russia, Japan, Korea, Turkey, Iran and Pakistan
also are projected to increase at substantial rates. Therefore, the projection represents a win-
win situation for CAREC countries and their trading partners.

                       Table A.3.7: Projection of Trade Flows to 2017
                         Foreign                                Foreign
                                                   Annual
       Country         Trade, 2005   % of Total               Trade, 2017   % of Total
                                                 Growth (%)
                        ($ Million)                            ($ Million)
CAREC 8                        8,261        11.5        10.7         27,952         13.8
Russian Federation           13,974         19.5         9.1         39,839         19.7
PRC, excluding XUAR            9,737        13.6        11.5         36,093         17.9
EU 25                        22,840         31.8         7.4         53,502         26.5
ROW                          16,925         23.6         8.4         44,723         22.1
Total                        71,727        100.0         9.0       202,108        100.0
AFG=Afghanistan; AZE=Azerbaijan; PRC=People’s Republic of China;KAZ=Kazakhstan;
KGZ=Kyrgyz Republic; MON=Mongolia; RUS=Russian Federation; TAJ=Tajikistan;
UZB=Uzbekistan; XUAR=Xinjiang Uygur Autonomous Region.
Source: For 2005, "Country Profile," WTO, Geneva; For 2018, "Central Asia's Economy: Mapping
Future Prospects to 2015," Malcolm.Dowling and Ganeshan Wignaraja, Silk Road Paper, July,
2006 and Consultant's Estimates. EU (25) = European Union; ROW = Rest of the World.
64 Appendix 3



A.3.2 FROM TRANSPORT CORRIDOR TO ECONOMIC CORRIDOR

A.3.2.1 Integration into the Global Economy

     28.     “An economic corridor is simply a geographic area where commercial activities are
     concentrated.” 13 The concentration of economic activity implies competitive advantage and
     reliable and cost effective transport and logistics systems to transfer materials and components
     among the enterprises within the corridor and to access inputs not available locally as well as
     external markets. The interest in the economic corridor concept derives from its potential
     contribution to the acceleration of regional economic cooperation and regional development. As
     such, an economic corridor provides a mechanism for an increased standard of living and
     poverty reduction. Implicit in the economic corridor concept is a linkage between transport
     infrastructure projects and trade facilitation projects on the one hand, and increased production
     of goods and services and domestic/foreign private sector investment on the other hand.

     29.     What is the role and importance of the economic corridor concept in a CAREC context?
     In addition to increasing the rate of income growth, economic corridors can promote economic
     diversification, widen the range of employment opportunities, provide incentives to more
     regional cooperation in related areas, expand the options for resource mobilization, and spur
     development in the lagging areas of the Central Asian region. These positive effects of a
     successful economic corridor provide powerful arguments to facilitate their emergence in the
     CAREC region.

     30.  In this context, international experience suggests that the multilateral institutions and the
     CAREC countries should support

           (i)     the emergence of production networks and GVCs where a market driven,
                   commercial rationale exists (e.g., agro-industry);
           (ii)    a well-maintained network of feeder roads to enhance the already installed
                   transport corridor and logistics systems;
           (iii)   a smoothly functioning border-crossing system through improved facilities
                   and equipment, better and simplified management and procedures and
                   effective adherence to international agreements and conventions; and
           (iv)    the installation and operation on a best practices basis of pre-clearance
                   and transshipment centers along the transport corridor.
     31.     The successful pursuit of the above activities along with the marketing of the transport
     corridor has usually been met with positive results elsewhere. Indeed, the economic corridors of
     Africa, Southeast Asia, and North America offer some valuable lessons for Central Asia.

     32.     In Africa, one can look at the Northern, Central, and Southern economic corridors. The
     Northern Corridor is anchored by Mombasa, Kenya and the upgrading of its port to Shipping
     Conference Standards brought the modern version of the Corridor into being with the East
     African Railway to Kampala. The Central Corridor is centered on Dar es Salaam, Tanzania and
     also received its start by an early railroad line and was strengthened more recently through the
     construction of modern commercial ports at Bujumbura, Burundi and Kigomo, Kenya.14 Coffee
     and tea exports from the corridor interiors played a major role in the success of both the
     Northern and Central Corridors as did the import of consumer and industrial goods going in the
     opposite direction. The dense population also played a traffic and trade generating role.
     However, whether these economic corridors will graduate in terms of fostering greater
     diversification, and hence, support sustainability over the long term remains an open question.

13
     ADB, “Toward CAREC Economic Corridors: A Concept Note,” Senior Officials Meeting on Central Asia Regional
     Cooperation, Urumqi, XUAR, PRC, April, 2006.
14
     “Creating New Wealth in Southern Africa,” Regional SDI Support Program, December, 2003.
                                                                                                         65 Appendix 3



     33.    The Southern Corridor runs from Johannesburg in the Republic of South Africa (RSA) to
     the port of Maputo in Mozambique. Indeed one can think of this corridor as extending across
     the continent to Walvis Bay in Namibia, and hence, also encompassing Botswana. In this
     version, the corridor is referred to as the Trans Kalahari Corridor (TKC). There have been
     extensive activities along the TKC both in terms of infrastructure development (road, rail, air,
     and port), trade facilitation, and concessioning. Efficiency measures introduced include
     extended hours at BCPs and the simplification of customs procedures.15 An important aspect of
     the TKC has been the involvement of the private sector and public-private initiatives to improve
     competitiveness (Box 1).

     34.     More recently, the Maputo Corridor Logistics Initiative (MCLI) was launched by a new
     private sector group in order to “promote the Maputo Corridor as a first choice transportation
     route linking South Africa’s landlocked northern provinces and neighboring states to world
     markets.”16 Given all the improvements in transport infrastructure logistics and trade facilitation,
     the time taken to ship goods from Maputo or Walvis Bay to the center of the continent has been
     substantially reduced and traffic has increased. Thus, in 1999, the corridor was only operating
     at 15% of capacity, but by 2005 it was over 70%. In economic terms, the volume and value as
     well as the diversity of goods carried has increased substantially over time, as has the number
     of passengers that cross one or more of the borders.

     35.     In Southeast Asia and specifically the Greater Mekong Subregion (GMS), one can talk
     of three transport corridors which, are at the initial phases of transformation into economic
     corridors. The most prominent is probably the East-West Economic Corridor (EWEC) which
     encompasses four countries (Laos, Myanmar, Thailand, and Viet Nam) and runs from Danang
     Port in the east to Yangon Port in the west. Another economic corridor in the GMS runs from
     Kunming, PRC in the north to Bangkok in the south, and then there is the southern corridor from
     Ho Chi Minh City to Phnom Penh with possible extension to Thailand and Myanmar in the future.

     36.     Although much has been done on the EWEC in terms of transport infrastructure and
     trade facilitation much more remains to be done. For example, the implementation of the GMS
     Cross–Border Agreement and its annexes is an ongoing process, and the encouragement of
     private sector investment in one of the fastest growing regions of the world with a population of
     over 300 million has not yet transformed this transport corridor into an economic corridor. ADB
     is continuing its support in conjunction with other multilateral institutions and development
     partners as well as the governments involved to achieve a more robust private sector response.

     37.      There are other economic corridors which can provide lessons for the CAREC countries
     even though they may involve only one country or involve one or more industrialized countries.
     In India, the Government along with Japan and the private sector, is supporting the Delhi–
     Mumbai corridor, an ambitious industrial corridor project comprising huge investments in
     infrastructure including transport (a dedicated freight corridor), energy (4000MW) and port
     facilities (Jaijarat, Maharashtra). The project has two phases to be completed in 2012 and 2016
     with expected total cost between $90 billion and $100 billion. The corridor will feature industrial
     zones with some being sector specific and FDI from major Japanese companies who see good
     economic prospects and the chance to increase the pace of their investment in India.




15
     USAID, “The East and Central Africa Global Competitiveness Trade Hub,” Washington, D.C., 2005.
16
     United Nations Industrial Development Organization (UNIDO), “Beluluane Industrial Park Shaping Up,” Vienna, 2004.
66 Appendix 3




                                       Box 1: “Trans Kalahari Express”
Africa Business Journal; Issue 21, February - May 2005
Multi Modal container service between Port of Walvis Bay and Gaborone/Gauteng, “Trans Kalahari Express”

The US Trade and Development Agency (USTDA) provided the Walvis Bay Corridor Group (WBCG) with a feasibility
study grant for the Trans Kalahari Corridor (TKC) Improvement Project. The Walvis Bay Corridor Group, a public private
partnership of Namibian transport stakeholders, aims at maximizing the utilization of the Walvis Bay Corridor routes for
the benefit of Namibia, the region and Corridor stakeholders. The Study, which commenced on February 2004, was
carried out by TERA International Group, Inc. (TERA) for the WBCG and the USTDA. The Final Report presents the
findings and recommendations under the Study, which are based on the TERA Team's field work in Namibia that was
carried out from February to August 2004.
Development of the Trans Kalahari multimodal transport system will allow Namibia to achieve its goal of becoming a
transportation hub and Western Gateway to SADC as well as providing industry in Botswana and Gauteng with time,
cost and reliability improvement in their supply routes. To effectively reach their potential market, Namport,
TransNamib, trucking firms and freight forwarders have agreed to work together to create an integrated transport and
logistics service between the Gauteng/Gaborone and Europe/the Americas through the Port of Walvis Bay. This service
will be promoted as a single package, incorporating the sea leg as appropriate and designed in direct response to
customers' requirements. The Trans Kalahari route through Walvis Bay offers the fastest service for SADC countries to
these markets.
Throughout the Study, the TERA team considered a full range of alternatives. Numerous consultative meetings were
held with major stakeholders, such as Namport, TransNamib, trucking and freight forwarding companies, as well as
logistics providers and Namibian Government agencies, to present and discuss various alternatives and receive their
feedback on system design. In addition, meetings were held and presentations were made to various industry
associations and companies, who would be the potential users of the TKC, to determine their shipping needs as well as
to identify key factors that should be incorporated into the system design that would encourage them to consider the
TKC route for their import and export shipments. TERA is suggesting that the proposed company be called the Trans
Kalahari Express (TKE) to convey the idea of speed, reliability and a seamless service.
The Project

The objective of the project is to design a preliminary business plan for a dedicated container service between the
Gauteng and Walvis Bay as well as between Botswana and Walvis Bay. The route will offer a strategic alternative artery
for shipments between the SADC countries and ports around the Atlantic Ocean. It will be developed in such a way that
it generates jobs and economic development in Namibia, Botswana, and South Africa.

The project has two main features, one technical and the other logistics/marketing. On the technical side, the project
proposes to achieve technical and operational improvements in the system and careful monitoring of the intermodal
interfaces. The objective is a highly competitive, state of the art alternative to existing transport routes. On the
logistics/marketing side, the project will hold an internal bidding process for a logistics management company to market
and coordinate the system as a whole, including the information transfer among all the parts. The project design
combines public investment in infrastructure with private sector investment, risk-taking and profit incentive to the
business side. TKE will operate as a private company with long-term contracts with the transport and logistics operators
on the route.

Why create a private sector company for logistics and marketing?

A private sector company working to market the services of all the individual providers will have its investment at risk
and therefore a powerful incentive to market the corridor and to insure that all the individual components deliver the
service as committed. The company's earning power will be based on its ability to market, package services and deliver
consistently. If the system is done well, the profits stand to be considerable. The individual transport operators will
benefit from the increased business and the profits generated there from. They will also benefit from the technological
improvements that will enhance all their businesses and get their name effectively to a growing customer base from
which it will spread by word of mouth. Each transport provider can continue to market its services individually, but the
company will market the system as a whole. The individual providers will sit on the Board of Directors of the Company,
which will give them a voice in the overall direction of the company and its operation to ensure that their individual
interests are taken into account.

  38.     In North America, there are several geographic areas involving more than one country
  that could be described as economic corridors. However, the most prominent are the economic
  corridor running along the US-Mexico border (especially in California) and the Interstate 75 (I-75)
  corridor with its extension (Highway #401) running north–south between Canada and the US
  (Box 2).
                                                                                                   67 Appendix 3



                       Box 2: From Transportation Corridor To Economic Corridor

The San Diego-Tijuana Economic Corridor

A maquiladora is a factory that imports raw materials
on a duty-free basis for assembly and then re-exports
the finished product back to the originating country.
This term is primarily used to refer to factories set up in
Mexican towns along the US/Mexico border.

By 1985, maquiladoras had become Mexico’s second
largest source of income, just behind oil. The enacting
of the North American Free Trade Agreement in 1994
created extra impetus. Between 1995 and 2000,
exports of assembled products from Mexico tripled,
with one new factory built per day.

There are over 3,000 maquiladoras along the 2,000 mile-long United States–Mexico border, providing
employment for approximately one million workers. As of 2006, maquiladoras accounted for 45 percent of
Mexico’s exports. The first wave of maquiladoras were set up in Tijuana, just south of San Diego to tap into
its large pool of low cost labor and easy access to major US markets via Interstate 5.

San Ysidro, the traditional crossing between California and Mexico, is one of the busiest land border ports
in the world. Not long after the surge in maquiladoras, the planning authority recognized the need to create
a second Port of Entry (POE) to relieve the congestion at the San Ysidro crossing (pictured above). The
Otay Mesa POE was developed in 1985. In less than a decade, it became the principal POE for
commercial traffic between California and Mexico, handling the second highest volume of trucks and third
dollar value of trade among all US/Mexico border crossings. On average, more than $23 billion worth of
products pass through Otay Mesa border crossing each year. The success of this transportation corridor
brought tremendous growth to the region. Los Angeles is fusing with San Diego to form a major Economic
Corridor, creating almost contiguous economic development along Interstate 5.

The Interstate 75 Corridor

The I-75 corridor from Detroit to the Midwest has several intriguing features including its identification with
the auto sector although the goods that move along the corridor are quite diverse. Renewed emphasis on
this corridor came with the adoption by the auto industry of the Just-in-Time inventory system (JIT) which
led to some shifting of rail traffic to road traffic. Also, the Auto Pact of 1965 between the United States and
Canada provided an impetus to trade and traffic. Later, came the North American Free Trade Agreement
(NAFTA) but by that time there were already facilities, equipment, and procedures in place that ensured
smoothly functioning border crossing points, The busiest of these BCPs for freight traffic and the busiest in
North America is the Ambassador Bridge between Detroit (US) and Windsor (Canada) with over 3 million
trucks per year and $150 billion of trade.

  39.    The economic corridor running along the Mexican border is identified with the
  Maquiladora or a factory that imports materials and equipment on a tariff free basis for
  manufacturing, and then re-exports the assembled product usually back to the originating
  country. Apart from the infrastructure, this economic corridor is fuelled by the private sector and
  especially FDI from the US but also Japan and other countries.

  40.    The September 11 (9/11) attack on the US delivered a shock to the system with long
  lineups of trucks at the border which heretofore had been a rare event. There has been a
  response from both countries involving the opening of more lanes, the hiring of more staff, an
  increasing reliance on pre-clearance, the planning of a new border crossing and the acquisition
  of advanced technology. These initiatives are taking place under the umbrella of the Smart
  Border Initiative (SMI).

  41.     As in the case of the Mexico-US economic corridor, the I-75 economic corridor has been
  built up largely by private sector initiative including the efficient operation of the transport and
68 Appendix 3



 logistics system. However, key ingredients in terms of infrastructure and the institutional
 framework have involved the two governments either on their own or in a public private
 partnership.

 42.    The discussion of already successful or emerging economic corridors has underlined the
 importance of the factors noted above in facilitating corridor development including the
 existence of a reliable, low cost transport and logistics system, a basis for commercial
 competitive advantage, adherence to international agreements and conventions and the use
 best practices in administration and procedures especially at the border.

 43.     These factors have, of course, several preconditions such as the existence of feeder
 roads, availability of multiple services, and the capability of multi-modal operation. Other pre-
 conditions include the absence of rent-seeking activities and an acceptable level of security
 along the corridor. In other words, there must be an attractive package for the private sector to
 launch major investments along what is in the first instance only a transport corridor.

 44.    From a private sector and from a public-private sector partnership (PPP) perspective,
 which corridors in Central Asia have private sector participation or PPP potential? CAREC 1b
 road corridor in Kazakhstan has envisaged PPP intervention. In addition, many railway projects
 in Kazakhstan were planned as PPP interventions. With the implementation of the CAREC
 Transport and Trade Facilitation Strategy (the Strategy) and the associated Action Plan
 successfully, constraints or barriers to private sector investment will have been reduced or
 ameliorated.

 45.     In this kind of world, where might the private sector locate and what would enterprises
 produce? Two concepts can be put forward in trying to answer this question. One is the concept
 of a cluster of linked industries, and the other is that of a global production network or a GVC
 chain. These concepts overlap but they are not identical.

A.3.2.2 Industry Clusters in the CAREC Context

 46.    The concept of industry clusters preceded the coining of the phrase and transportation
 has always been at the center of the analysis. Thus, economists, for the most part in Canada
 but also elsewhere, visualized economic development as involving the exploitation of primary
 commodities or staples (fur, fish, lumber, grain, minerals) as being made feasible based at first
 on water transport, and then on rail and road transport. The idea of industry clusters or industry
 hubs relied on their analytical work regarding forward linkages (further processing), backward
 linkages (inputs) and demand linkages.

 47.     This scenario can be illustrated for CAREC with reference to a number of resources
 beginning with minerals and metals (Table A.3.8). The diversity of mineral resources of the
 CAREC countries is extensive, and includes ferrous, non-ferrous and non-metallic minerals.
 Among these, there are basic minerals, and precious minerals including platinum group metals
 and stones (gemstones, marble). Also important in the mix are the energy minerals (coal,
 uranium). At the present time, not all of these minerals are exploited and many are not
 processed in the region. Among the few exceptions to the latter are iron ore and coal which are
 used to produce steel at Karaganda, Kazakhstan. The aluminum produced in Tajikistan relies
 for the raw material (bauxite/alumina) from outside the region even though it is produced in
 Kazakhstan. In fact, little further processing of minerals takes place in the region apart from
 some artisanal products (e.g., jewelry).
                                                                                          69 Appendix 3



                            Table A.3.8: Mineral Resources of CAREC
                Country                          Mineral Potential
                          Copper, lead, zinc, chromium, uranium, iron, PGM, gold,
                  AFG
                          gemstones, barytes, rare earths
                  AZE     Iron, gold, silver, bauxite, non-ferrous minerals
                          Copper, zinc, lead, iron, bauxite, uranium, molybdenum,
                  KAZ
                          gold, chromium, coal
                  KGZ     Gold, silver, lead, zinc, mercury, bismuth, rare earths, coal
                           Copper, molybdenum, tungsten, fluorspar, gold, silver,
                  MON
                           uranium, zinc, rare earths, coal
                           Copper, lead, zinc, iron, gold, silver, molybdenum,
                  TAJ      tungsten, bismuth, antimony, fluorspar, rare earths,
                           phosphorus
                           Lead, zinc, tungsten, molybdenum, copper, gold, uranium,
                  UZB
                           coal
                 XUAR Zinc, lead, iron, gold, silver, copper, tungsten, coal
               AFG=Afghanistan; AZE=Azerbaijan; PRC=People’s Republic of China;
               KAZ=Kazakhstan; KGZ=Kyrgyz Republic; MON=Mongolia;
               RUS=Russian Federation; TAJ=Tajikistan; UZB=Uzbekistan;
               XUAR=Xinjiang Uygur Autonomous Region.
               Source: www.geography.about.com; and “Statistical Yearbook of
               Xinjiang” Urumqi, 2006.

48.     The current situation and future potential of the minerals and metals sector can be
analyzed with the help of Figure A.3.3. At the present time, the minerals sector in Central Asia
consists largely of the extraction and concentration of minerals. For example, copper ore is
mined in Mongolia and then shipped in concentrate form to the PRC for smelting and refining in
order to produce high purity cathode copper. Even so, the industry has important backward
linkages that provide inputs for the extraction and concentration activities. Among these are
exploration (discovery and delineation of ore bodies), geological information services and
mining services. Thus, while the production of mineral concentrates is generally considered a
low value added activity, this is not true for many of the inputs which involve sophisticated
methods and skilled labor. At present, many of these requirements are sourced outside Central
Asia, but with an appropriate policy and program framework, this situation can change over time.
Since mining is location-specific and time-constrained, the free movement of goods and people
within the region will lead to optimal results in strengthening the linkages to related industries.

49.     The mining industry is an energy intensive, capital intensive, and transport intensive
industry. Therefore, the reliable and low cost availability of electricity and transport are key
ingredients to industrial competitiveness. Rail is the most important transport mode and makes
up over 50% of the traffic by volume in traditional mining countries such as Australia, Canada,
and South Africa. While discussing rail transport and traditional mining countries special note
should be made of the energy minerals, namely, coal and uranium. Central Asia contains
important resources of these minerals and rail shipment of coal can be carried out in a highly
efficient manner with unit trains. The obvious markets are the PRC, and also eventually, India
and Pakistan. An alternative is to have mine-mouth power stations which could supply the local
market as well as generating exportable power. The transmission losses to distant markets
pose, however, a constraint. In the case of uranium, the concentrate (U3O8) or yellowcake can
be shipped safely to processing plants where the actual fuel for nuclear reactors is produced.
The challenge is obviously to have the appropriate safeguards in place in the receiving country.

50.     Risk capital for mining projects usually originates in major capital markets such as
London, Toronto, Melbourne and Johannesburg, but local finance can also play a role
depending on the tax regime and the size of project. From an economic perspective, it is
significant that the transport and logistics sector and the financial services sector are important
70 Appendix 3



 users of information technology (IT) services. Again, this linkage can lead to high value added
 activity.


                                      Figure A.3.3: Minerals and Metals Cluster

        Geological Information                      Exploration                            Mining Services
              Systems




   Suppliers of goods and
          services
                                                Extraction and Concentration of Minerals

     Machinery       and                   Non-Ferrous              Ferrous        Non-Metallic                 Electricity,
     Equipment                                                                                                  Utilities


     Consulting      and
     engineering


     Research    and
     development




                                           Primary products – Metallic & Non-metallic

     Copper& other           Iron &      Aluminum            Coal             Precious            Fluorspar           Rare
      non-ferrous             Steel                                            Metals                                Earths




                   Transport                             Information                                Financial
                   Truck, Rail                           Technology                                 Services




Source: Consultant.

 51.    In terms of further processing or forward linkages, the minerals and metals sector
 presents interesting opportunities especially if the focus is on the regional more than the
 national level. Thus, the concentrators located usually at the mine-mouth can be supplemented
 by smelters and refineries that process feedstock (concentrates) from more than one mine. This
 approach is useful given the economies of scale in processing operations. Also the refinery
 operations can be geared to producing valuable byproducts in the case of poly-metallic ore
 bodies. Obviously, intraregional transport efficiency becomes a key. At the present time, mineral
 processing facilities already exist at Karaganda (steel), near Dushanbe (aluminum) and Urumqi,
 but additional facilities can be envisaged (e.g., Oyu Tolgoi, Mongolia) and the forward linkages
 can be extended to fabricated metal products and ultimately autos and parts and aircraft
 components, parts, and related metal intensive industries.

 52.     Another industry cluster which can contribute to the transformation of a transport
 corridor into an economic corridor involves the construction of housing, commercial and
 industrial buildings, and infrastructure (Figure A.3.4). A two-way flow is involved from transport
 infrastructure to the cluster and the reverse.
                                                                                                                                  71 Appendix 3



                                             Figure A.3.4: Construction Cluster

   Resources                                                                Materials
       and
   techniques            Brick              Light           Glass           Cement              Lime           Steel            Cotton
                                           cement
   Research and
   Development
                               Ceramic               Filling           Non-metallic              Wood             Plastics
                               boards               materials             stone                 products



     Training

                                                                          Components

                      Glass,           Concrete         Electrical &        Doors,               Structure      Building           Furniture
     Design           stone                             mechanical          frames and                          exterior              and
                                                                            windows                                               Furnishings




   Consulting
                                                                              Orders




                                                  Construction activities                                                  Real Estate Services

                                 Prefabrication
                                                                         On site construction


                               Renovation and
                                Restoration




                          Housing                               Buildings                            Infrastructure




Source: Consultant.

  53.     CAREC countries have many material resources such as aggregates (sand, gravel),
  stone (granite, marble, limestone) and clays that can be used in the multitude of products
  needed by the construction cluster from filling materials, to cement, to building exteriors, to
  furnishings and fixtures. All construction activities, whether prefabrication, renovation and
  restoration or on-site construction make use of these materials and their transport looms large
  in terms of volume. The construction cluster has many related services including architectural,
  engineering, design, real estate, consulting, and financial. Again, these services involve high
  value added activities related to what may be considered as a low value added industry.

  54.     The petroleum and petrochemicals industries cluster represents another opportunity for
  moving from a transport corridor to an economic corridor (Figure A.3.5). At first glance, this may
  not look like a regional opportunity, but rather an opportunity limited to Azerbaijan and
  Kazakhstan (Table A.3.9). However, this view involves something of a misconception. First, all
  CAREC countries have some potential in hydrocarbon resources from the geological
  perspective. Second, there is an opportunity for downstream industries some distance away
  from the actual resource based on an efficient pipeline and transport system. Skilled labor and
  being closer to the ultimate customer may confer a competitive advantage. Third, petrochemical
  industries can either be based on feedstocks from oil refineries (naphtha, gas oil) or natural gas
72 Appendix 3



  processing plants (ethane, propane, butane). Areas such as Uzbekistan and XUAR have
  important natural gas resources and the geology of other CAREC countries such as
  Afghanistan, Kyrgyz Republic, and Tajikistan may be more natural gas prone than oil. It is true
  that here has been a tendency to move the primary resource (oil, natural gas liquids) to the
  refining centers (e.g. Rotterdam) where they become the basis of chemicals industry clusters
  (Rhine Corridor), but the US Gulf Coast and Persian Gulf area (to a lesser extent) are important
  counter examples. Needless to say, the movement by rail and sea (Caspian, Black, and
  Arabian) of “final” products would need to be very efficient to make petrochemicals production
  competitive since Central Asia would not absorb the large quantities produced in optimal scale
  plants.

                                            Figure A.3.5: Petroleum Cluster

    Backward              Transport         and    Energy and        Research and     Design and         Construction
    Linkages              logistics: air, road,    Utilities         development      engineering
                          rail, pipe




  Geological          Petroleum                        Petrochemical plants         Processing plants
  information         refineries
  systems (GIS)


  Oil and gas             Transport fuels
  field services          Heating fuels
                          Asphalt                                                   Final products
                          feedstocks
                                                                                    Synthetic fibres
  Steel pipe and                                                                    Plastic and rubber
  other               Natural gas                                                   Pharmaceutical
  equipment           processing                                                    Pesticide and
                      plant                            Intermediate                    herbicides
                                                       chemical products            Fertilizers and
  Drilling rigs                                                                       explosives
                          Transport fuels                                           Packaging
                          Heating fuels                                                materials
                          feedstocks                                                Paints and
                                                                                       coatings
  Drilling muds,                                                                    Dyestuffs
  other materials                                                                   Perfumes and
                                                                                       flavoring

  Production
  platforms



  Transport
  vehicles




  Forward
  Linkages

Source: Consultant.
                                                                                             73 Appendix 3



                     Table 2.9: Petroleum and Gas Resources of CAREC, 2006
                                            Oil                              Gas
                                 Reserves       Production      Reserves         Production
        Country Potential
                                  (Billion      (Thousand (Trillion cubic      (Billion cubic
                                 Barrels)      Barrels/day)       meters        meters/year)
       AFG             Yes
       AZE             Yes                7.0            654            1.36                6.3
       KAZ             Yes               39.8           1426            3.00               23.9
       KGZ             Yes
       MON             Yes
       TAJ             Yes
       UZB             Yes                0.6            125            1.87               55.4
       XUAR            Yes                               484                               29.7
       AFG=Afghanistan; AZE=Azerbaijan; PRC=People’s Republic of China;
       KAZ=Kazakhstan; KGZ=Kyrgyz Republic; MON=Mongolia; RUS=Russian Federation;
       TAJ=Tajikistan; UZB=Uzbekistan; XUAR=Xinjiang Uygur Autonomous Region.
       Source: British Petroleum (BP), “Statistical Review of World Energy” London, 2007.

55.    The agrifood and agrifibre clusters of industries pose a considerable analytical challenge
(Figures A.3.6 and A.3.7). The products and production processes are very diverse and there
are many examples of joint production (e.g., mutton and wool). From a transport and logistics
perspective, the volumes may not be large, but often specialized vehicles and wagons are
required (e.g., refrigeration).

56.     In the case of perishables, trade facilitation especially at the border is a must to avoid
delays that can mean a deterioration in the quality of the goods carried and even a total loss of
the cargo. As Table A.3.10 shows, all CAREC countries have some agricultural resources, but
the difficult terrain and the extremes in climate mean that the percentage of the land that is
arable is quite limited, in no case reaching over 20% of the total land area and often requiring
expensive irrigation. Indeed, there is a real question whether irrigation as currently practiced is
sustainable. One can add other challenges related to land ownership and agricultural credit,
and wonder whether a transport corridor that addresses the needs of agriculture can ever be a
viable proposition. And yet in difficult environments such as Africa, the production and
transportation of commodities such as tea and coffee has contributed to corridor success.

57.     With regard the agrifibre cluster, CAREC countries are noted for their production of
cotton and cashmere. To a lesser extent, they are also producers of wool, linen, and silk. All
these products require some processing if they are to reach their customers at acceptable
quality standards. The challenge has always been to go beyond the first stage in processing
and ultimately to produce clothing, apparel, furnishings and even fashion goods. At present, this
industry is quite fragmented in Central Asia and one sees few signs of the emergence of a
center or centers devoted to the clothing and apparel sector. If a more regional perspective was
to emerge with cross fertilization among the various materials (cashmere, wool, cotton, and
leather), then the demand for higher value added services such as design and marketing would
increase.
74 Appendix 3



                        Table A.3.10: Agricultural Resources of CAREC, 2006
                                         Arable Land   Irrigated
     Country          Area (sq.km)                                                  Major Crops
                                           Area (%)  Land (sq.km)
  AFG                647,500           12.1         23,860 opium, wheat, fruits, nuts,
  AZE                 86,600           19.6         14,560 cotton, grain, fruits, tea,
  KAZ              2,717,300            8.0         23,320 grain, cotton, livestock, skins
  KGZ                198,500            7.3         10,740 tobacco, cotton, fruit,
  MON              1,564,116            0.8            840 grain, vegetables, forage,
  TAJ                143,100            6.6          7,200 cotton, grain, fruits, vegetables,
  UZB                447,400           10.8         42,810 cotton, vegetables, fruit, grain,
  XUAR             1,664,900           11.5                 grain, oilseeds, cotton, fruit,
  AFG=Afghanistan; AZE=Azerbaijan; PRC=People’s Republic of China; KAZ=Kazakhstan;
  KGZ=Kyrgyz Republic; MON=Mongolia; RUS=Russian Federation; TAJ=Tajikistan;
  UZB=Uzbekistan; XUAR=Xinjiang Uygur Autonomous Region.
  Source: www.geography.about.com; “Statistical Yearbook of Xinjiang,” Urumqi, 2006.


                                             Figure A.3.6: Agrifibre Cluster
                         Agriculture                Primary               Processing             Finishing
                                                    Materials             operations              plants

      Inputs            Research and              Construction      Machinery             Dyes                Design
                        Development                utilities        (non-farm)                               packaging




    Land                    Raising                 Skins             Curing                            Shoes    and
                            Animals                                                                     boots
                                                    Wool              Spinning
                                                                                                        Gloves and
    Water                   Fertilizer              Cashmere          Weaving                           other leather
                                                                                                        goods
                                                    Cotton            Dyeing
    Fertilizers                                                                                         Hats,
                                                    Silk              Cutting                           handbags
                                                                                                        accessories
                                                    Flax              Sewing
    Veterinary                                                                                          Clothing and
    services                                        Byproducts                                          apparel

                                                                                                        Stockings
    Herbicides
                                                                                                        and
                                                                                                        underwear

    Pesticides                                                                                          Furnishings
                                                                                                        for home and


    Machinery

                            Fodder

    Fuels


                            Growing
    Credit                  Crops



                                                      Commercialization

                                       Trading        Marketing           Distribution

Source: Consultant.
                                                                                                                   75 Appendix 3



                                      Figure A.3.7: Agrifood Cluster
                      Agriculture                Primary                   Processing                Finishing
                                                 Materials                 operations                 plants


      Inputs         Research &       Construction           Machinery      Spices and       Consulting          Packaging
                     Development      utilities              & equipment    additives        services




    Land                 Raising                 Animal              Slaughter               Beef,     veal,
                         Animals                 carcasses           houses                  pork, mutton,
                                                                                             lamb,      goat
                                                 Milk                Dairies                 meat, fowl,
    Water                                                                                    eggs,
                                                 Grain               Flour mills             cheese,
                                                                                             curds,
                                                 Oilseeds            Bakeries                yogurt,
    Fertilizers                                                                              butter, oil
                                                 Fruit               Canneries
                                                                                             Pasta,
                                                 Vegetables          Frozen food             noodles
    Herbicides                                                       plants
                                                 Nuts                                        Bread,
                                                                     Breweries               pastries
                                                 Specialty           wineries
    Pesticides                                   crops                                       Snacks

                                                                                             Juice, beer,
                                                                                             wine, alcohol
    Veterinary
    Services


    Machinery



    Fuels


                         Growing
    Credit               Crops


                             Commercialization                                           Consumption

                      Distribution                 Sale                    On farm       At home        In restaurant

Source: Consultant

  58.    In the case of the argifood industry cluster there are a number of primary commodities
  such as cereals, vegetables, fruits, nuts, and tobacco which through further processing become
  a wide variety of products in the food, beverage and tobacco products industries (Figure A.3.7
  above). Among these there are baked goods, pastries, snacks, pasta, juices, alcoholic
  beverages and cigarettes. Then there are the oilseeds such as rapeseed, sunflower kernels,
  and cottonseed, which provide cooking oils for the hospitality industry and homes.

  59.      At the same time, pastureland and forage crops are the basis of a livestock sector (cattle,
  camels, yaks, sheep, and goats) that produces meat and dairy products as well as inputs for the
  agrifibre industries noted above. Since the agrifood cluster of industries includes slaughter
  houses, flour mills, dairies, feed mills, bakeries, breweries and distilleries many inputs from the
  machinery and equipment industries are required although in the case of Central Asia these
  tend to be imported rather than locally sourced. Packaging is another key input into the agrifood
  cluster as are utility services (water, energy and specialized transport). The agricultural sector
  itself has strong backward linkages to veterinary services, fuel, machinery, fertilizer, herbicides
  and pesticides. In some areas of CAREC, either by choice or necessity, these inputs are used
76 Appendix 3



  only sparingly, which can provide the basis for organic farming. With regard to the
  commercialization of the agrifood products, effective marketing and distribution networks are a
  key requirement for competitiveness in regional and international markets. The same is true in
  terms of meeting the high quality, sanitary, and health standards of the EU, Japan, and North
  America.

  60.     As already explained, agricultural land and forested land is limited in Central Asia, but
  there are evergreens and hardwoods which could be the basis for furniture production. Perhaps
  more significantly, pistachio and walnut trees are native to the region and the production of nuts
  is one of the local specialties. Also, there are many plants with medicinal value and others that
  are a source of natural dyes. These high value products require a sophisticated transport and
  logistics system to preserve quality and freshness, even though their volume will not be large.

  61.      The hospitality and tourism cluster provides considerable opportunity to transform a
  transport corridor into an economic corridor. However, this cluster involves largely passenger
  traffic and the ports of entry (border posts, airports) must be user friendly if tourists are to come
  and return. CAREC countries have the natural attractions to draw tourists, and the beginnings in
  terms of ancillary services have been established. As Figure A.3.8 shows, this cluster
  encompasses accommodation as well as food and beverages. Also, cultural events, tourism
  site visits and media form part of a comprehensive offering for the tourist. Tour operators as
  well as airlines, railroads and bus companies play a central role in the development of the
  cluster. Their marketing activities through promotion and advertising, perhaps in partnership
  with governments, are a catalyst for the development of tourism. The sector and its related
  industries are a labor intensive business where extensive vocational and language training are
  a fundamental requirement for competitiveness. With regard to backward linkages for tourism,
  these are especially strong for construction (hotels, utilities, transport) and various business
  services (marketing, advertising, and consulting).

                            Figure A.3.8: Hospitality and Tourism Cluster

                                 Transport            Utilities               Construction
                                 Air, Rail,           Telecoms
                                   Road




   Consulting
   Services
                                 Accommodation                           Food / Drink
                                 - Hotels                                - Restaurants
   Management                    - Camps                                 - Bars, Clubs
   Services                      - Resorts


   Training
   - Vocational
   - Language


   Marketing                       Tour                 Attractions              Equipment
   - Promotion                   Operators                Events                  Rentals
   - Advertising                                       Museums etc

Source: Consultant
                                                                                               77 Appendix 3



A.3.2.3 Policies to Encourage Clusters of Industries along Transport Corridors

     62.     On the assumption that a reliable and low cost transport and logistics system is
     operating along a corridor what else can be done to encourage the development of an
     economic corridor based on clusters of industries? The importance of trade facilitation and a
     stable and competitive tax regime have already been mentioned.

     63.      Some countries have tried to use local content provisions to encourage backward
     linkages from the exploitation of natural resources (petroleum, minerals). Usually, this means
     that a certain percentage by value of the inputs (construction, machinery, equipment) in an oil
     field or mining project are required to be sourced locally.

     64.      Recently, “local content” rules have come under fire because they cause economic
     distortions and rent seeking activities. The suggestion, therefore, has been made to replace
     content regulations with local supplier development. It should be underlined that the private
     sector and especially the start up and growth of indigenous firms is vital for an economic
     corridor to emerge. Hence, the governments involved and the foreign investors who usually
     initiate large resource projects must create an environment, which leads to the emergence of
     local entrepreneurs. In this regard, some have suggested a number of measures such as: (i) the
     use of open and transparent tenders; (ii) facilitation of joint ventures; (iii) support to firms for
     upgrading local skills; and (iv) the encouragement of outsourcing by the foreign developers of
     the project.17

     65.      The creation of free trade zones or industrial zones may also encourage economic
     activity along a corridor. Such zones may even be sector specific, and hence, be a good fit.
     Given the shortage of innovation, and research and development (R&D) in CAREC, techno-
     parks and incubators may also be a useful component of the policy mix. In any case, the
     linkages between the private sector and the universities and especially their science and
     engineering faculties and research institutes should be strengthened.

     66.     In regard to mining projects, governments often impose further processing requirements
     which are viewed as part of the move forward higher value added products. Again a subtle,
     nimble and farsighted approach by governments is required so that what are commercial mining
     projects are not threatened by the requirement to invest in uneconomic smelters and refineries.
     Also, not all ore bodies are world class with a long lifetime, and in these cases, it may make
     sense, to look at further processing on a regional and corridor basis rather than a national basis.
     Cooperation in an integrated framework may be called for.

     67.     In this section, the examples and issues have been discussed largely in the context of
     petroleum and mining projects but similar challenges can arise in connection with developing
     clusters based on the agrifood, agrifibre and related industries. Thus, further processing of raw
     fibers may be required prior to export, or locally labeled wines may need to have local content in
     terms of grape juice. Again the same cautions apply in order that economically viable activity
     emerges.

     68.      In the context of a global production network (GPN), a country or region may be able to
     capture particular industrial or service activities along a chain that leads from the raw material to
     the finished product. The examples most often cited come from the IT industry, but the concept
     applies equally to other sectors. For example, the Apple iPod is not really “produced” by Apple,
     but is fabricated by a number of Asian enterprises. An analysis based on cost accounting
     methods provides the source of the various components of an iPod as well as the costs
     involved (Table A.3.11).



17
     Pedro Rodriquez, lead author, “Country Economic Memorandum: Kazakhstan,” World Bank, June, 2005.
78 Appendix 3



                            Table A.3.11: Component Sourcing for the iPod
                                                                  Source
               Component              Cost ($)
                                                  Purchase             Production
        Design (Apple)                    80.00 US           US
        Hard Drive                        73.00 Japan        Philippines, PRC
        Display Module                    20.00 Hong Kong    PRC
        Video Chip                         8.00 US           Taiwan
        Controller Chip                    5.00 US           Taiwan
        Other Parts                       34.00              Korea, US, other countries
        Final Assembly                     4.00 PRC          PRC
        Distribution & Retail             75.00 US           US
        Total                            299.00
        PRC=People’s Republic of China; US=United States of America.
        Source: Hal R. Varian, “An iPod has Global Value: Ask the many Countries that Make It,” New
        York Times, June 28, 2007.

 69.     The table clearly shows that several countries are involved in producing the iPod, and
 hence, capture some of the value added within their own borders. In this example, the US
 benefits most because of its role in conception and design and also because the product ends
 up being distributed and sold there. The example also clearly indicates that the role of a
 sophisticated well functioning supply chain management system is crucial in bringing the
 product to market.

 70.      Some analysts have argued the development of global production networks (GPN)
 poses risks as well as benefits. In this regard, the improved competitiveness of the PRC and its
 ability to produce most of the components, and also to do the final fabrication at low cost will
 provide a major challenge to other countries in the region. For them, rapid economic growth and
 job creation will require either a concentration on niche products and components and/or
 moving up the value chain to the conception and design stage. The former may be more
 appropriate for countries like the Philippines and Indonesia while the latter is more feasible for
 Korea or Malaysia. However, in all cases a sophisticated transport and logistics system and a
 nimble and dynamic private sector are the key ingredients for success.

 71.     What does the discussion of GVCs imply for the Central Asia region? In terms of
 industrial competitiveness, the CAREC countries have low wages, and a reasonable level of
 education. As already indicated, the large distances to major markets could be overcome
 through a reliable and low cost transport and logistics system. Just like the transport sector,
 other industries must overcome weaknesses in terms of management and technology. Based
 on these considerations, it would appear that in the near and medium term, the CAREC
 countries will need to rely on their resource base to underpin their very respectable growth
 performance, and then move to related industries and component production as the existing
 challenges are overcome.

A.3.2.4 An Efficient and Reliable Transport and Logistics System

 72.     The need for a reliable and low cost transport and logistics system has been mentioned
 several times in connection with the transformation of a transport corridor into an economic
 corridor, in connection with the facilitation of industry clusters and in connection with
 participation in GVCs. It is important to understand what a reliable and efficient logistics system
 means and what it does not mean.

 73.    On occasion, people boast about the “importance” of the transport and logistics sector
 because it contributes a relatively high percentage to GDP. However, a high transport to GDP
 ratio means a high cost of doing business. For example, in the US the transport and logistics to
 GDP ratio is around 8% while in Canada it is 11%. At the same time, for consumer products
                                                                                                         79 Appendix 3



     these costs represent 32% of total manufacturing costs in Canada and only 23% in the US18
     Over time, these costs have been reduced in both countries, but the pressure and incentive has
     been especially great in Canada leading to the early adoption of new approaches such as
     “piggyback” (truck trailers on railroad cars) and container ships. Thus, the White Pass and
     Yukon Railway ordered the world’s first container ship. Similarly, the eight CAREC countries
     with their high transport and logistics costs must be in the forefront of improvements in
     technology and management given that the basic transport infrastructure is being put in place.

     74.     What does the transport and logistics services industry or in more modern terminology
     the supply chain management industry consist of? First, are the asset based transportation
     services providers that perform their services with their own equipment and infrastructure.
     These include railroads, motor carriers, ocean carriers and air carriers. Second, are the non-
     asset based transportation service providers specializing in freight forwarding and customs
     brokerage. Third, are the non-asset based logistics services that integrate the services of
     different parties (transport, storage, customs clearance and various value adding operations19)
     and coordinate and control the movement through advanced information systems.

     75.    The non-asset based logistics providers also offer management consulting services to
     the supply chain related to a variety of services such as fleet management, shipment
     consolidation and rate negotiation. After the September 11 attack on the US (9/11), consulting
     services have become more focused on security related issues including web-based document
     exchange requirements and new border certification procedures. Also, large corporations are
     now demanding the implementation of supply chain processes and technology across their
     supplier networks. The focus of competition is shifting from being among firms to being among
     supply chains.

     76.    Where does the increasing sophistication of the transportation and logistics sector, and
     the challenge of finding niches in the GVCs leave the CAREC countries? It leaves them with the
     need to play catch up especially in the transport and logistics area. Previous studies and reports
     have documented that logistics costs for exports and imports in the CAREC region are among
     the highest in the world and that the environment for improving the logistics system is
     unfriendly.20

     77.    Naula and Rasulov have examined the Business Environment and Enterprise
     Performance Survey (BEEPS) data base jointly funded by the EBRD and the World Bank. This
     data base shows that average and maximum export and import clearance times are high for
     CAREC countries with direct and indirect cost implications in terms of transport and inventory
     turnover.

     78.     Some of the BEEPS data are based on the views of more than 845 forwarding agents in
     150 countries and are used to calculate a logistics perceptions index (LPI). The components of
     the index include customs clearance, transport infrastructure, international transport costs,
     logistics costs and timeliness of shipments. The only item in which the CAREC countries do
     reasonably well is on domestic or internal logistics costs. On the other items they do quite
     poorly relative to the industrialized countries, but also relative to the PRC and India. Thus,
     among the 150 countries, the overall ranking places the PRC at 30 and India at 39 with Kyrgyz
     Republic at 104, Azerbaijan at 111, Kazakhstan at 125, Uzbekistan at 127, Mongolia at 141,
     Tajikistan at 146 and Afghanistan at 150 or last. The security situation in Afghanistan offers part
     of the explanation for the low ranking and it is believed that the civil war in Tajikistan in the


18
     Data for 2003; www.strategis.ic.gc.ca.
19
     Value added activities include sorting, inspection, packing and labeling for a manufacturer.
20
     See for example, Tapio Naula and Kushnidjon Rasulov, “Study on Simplification of Export and Import Procedures in
     the Republic of Tajikistan” GTZ and Federal Ministry for Economic Cooperation and Development, Berlin, June,
     2007.
80 Appendix 3



     1990s is still impacting on perceptions. However, even taking such factors into account, a
     ranking in the bottom third of all countries has serious implications.

     79.     As already indicated, a reliable transport and logistics system can give access to a GVC.
     By the same token it can preclude a country or region from participation if it does not reduce
     costs or add value to manufacturing and trade. All components of transport and logistics costs
     such as overhead costs (stock-keeping, cost of time, IT maintenance) and functional costs
     (transport or freight, goods handling, warehousing documentation, communication) are
     candidates for cost reduction through more efficient management and improved technology.
     Along with better infrastructure, this comprehensive package will permit CAREC countries to be
     part of value chains and turn a transport corridor into an economic corridor.

A.3.2.5 Improvements to the Transport and Logistics System

     80.     The challenges in the transport and logistics system in Central Asia are fairly clear. In
     the case of Tajikistan, it has been estimated that export logistics represent 20-23% of trade
     value and import logistics 15-18%. Further it is thought that trade facilitation alone (measures at
     the border and before the border) could bring 4-5% savings of trade value. For this country,
     cumulative savings of around US$1 billion to the year 2017 are thought to be possible in the
     logistics area. The potential savings in relation to GDP increase over time and could amount to
     3.5% by 2017.21 The numbers for other countries in the CAREC region are similar. Meeting this
     challenge successfully means that the CAREC countries would have the opportunity to
     participate in GVCs because of improved competitiveness although this is not the only aspect of
     competitiveness that needs improvement. In any case, a well functioning transport corridor
     opens the door to increased economic activity.

     81.      How can the challenge be met? Management and technology is the key along with
     infrastructure. On the management front, the issues related to government officials, especially,
     customs but also other agencies are covered elsewhere. The major watchwords are
     simplification, harmonization, coordination, integration and connectivity. However, there is also
     much to be done in the transport and logistics industry itself consisting of railroading, trucking,
     freight forwarding, warehousing, brokering, and tracking. In this area, some of the key phrases
     are multimodal capability, freight consolidation containerization, electronic commerce and total
     supply chain management.

     82.     How are improvements in the management of logistics to be brought about in Central
     Asia? For the industry itself, this is largely a private sector challenge. Therefore, strategic
     alliances and joint ventures with partners that operate on a global basis and have access to
     capital, technology, and the latest systems management tools are called for. To be sure, there
     will always be room for entrepreneurial types who start a transport business with one used truck,
     but eventually with growth, greater sophistication will be required both because of business
     needs and higher standards in regulatory requirements.

     83.     Education and training and more generally capacity building will be required to improve
     the logistics sector in Central Asia. Past studies have identified some of the needs including
     vocational training of freight forwarders. It may be possible to launch an initiative in this area
     involving training institutions and industry associations as well as foreign partners. Even in
     developed countries, positions in the logistics sector are difficult to fill with trained and
     experienced personnel. This is especially true of managers in the different specializations (such
     as procurement, warehousing, customer service, and international logistics).

     84.    The development and application of intelligent transport technologies (ITT) is another
     important source of increased reliability and reduced costs in the transport and logistics sector.

21
     Tapio Naula, “Simplification of Export and Import Procedures in the Republic of Kyrgyz Republic,” GTZ and Federal
     Ministry for Economic Cooperation and Development, Berlin, March, 2007.
                                                                                        81 Appendix 3



 Many innovations of recent years could be readily applied in the CAREC context if financing
 and trained personnel were available. They would not only deal with the cost and reliability
 challenges, but also with the security and safety challenges. Among these ITT applications are
 tracking devices (such as Radio Frequency Identification [RFID]), smart cards, smart cargo
 seals, biometrics, barcodes, Global Positioning System (GPS) and electronic payment cards.
 On the transport hardware side, innovations such as roadrailers, articulated piggyback and
 adjustable gauge axles promise improvements in efficiency and effectiveness.

A.3.2.6 Global Value Chains & Production Networks

A.3.2.6.1 Growth of Global Value Chains (GVCs)

 85.     A value chain describes the full range of activities in bringing a product from its
 conception to its end use and ultimate disposal. This includes activities such as research,
 design, procurement, production, marketing, distribution, service and recycling. The activities
 that comprise a value chain can be contained within a single firm or divided among different
 firms, depending on the business model.

 86.     Integrating people, processes, and information to design and develop the right goods,
 manufacture them in the most suitable locations, and deliver the goods to where they are
 supposed to go, just in time and at the right price is a powerful business concept. When value
 chain activities are spread over wide swaths of geographic space, they become a "global value
 chain”.

 87.     With elimination of trade barriers and advances in logistics, GVCs have become much
 more prevalent and elaborate in the past 10 to 15 years. The creation of products and services
 now contain activities that take place in widely separated locations. Some of these effects are
 quite straightforward, as when a firm from one country establishes a new factory or engineering
 center in another country. But some are more complex, as when a firm contracts with multiple
 firms around the globe in the design, development, manufacturing, delivery, service and
 ultimate retirement of a product.

 88.      Box 3 provides details on the iPod GVC. Dell, one of the largest computer
 manufacturers in the world, built its business around GVCs. Hewlett Packard (HP) is another
 example of a firm that truly embraces the GVC concept. The components of its products are
 designed and made in the most efficient locations all around the world. Then all the pieces
 come together in the right locations and at the right time to be assembled into final products. In
 a presentation before the Economic Club of Chicago in 2005, Hewlett Packard’s chief executive
 officer (CEO) stated that due to the breadth of HP’s GVC, its logistics cost exceeded 30% of the
 cost of goods. Likewise, Michael Dell stated that the logistics cost in making a Dell computer
 exceeds its labor cost significantly.

 89.      To develop a GVC, advance logistics planning as well as safe, reliable, and affordable
 transportation is critical. In a sense, today’s multi-national corporations compete against one
 another based on the performance of their GVCs. Toyota became the most successful
 automotive manufacturer in the world because it has perfected a far superior GVC than any one
 of its competitors.

A.3.2.6.2 GVC Opportunities for the CAREC Region

 90.    The CAREC region straddles two huge regional production networks that can be
 connected over land to form GVCs: The Asian production network; and the European
 production network. Both of those networks are moving closer and closer towards the CAREC
 region due to the following: (i) PRC’s center of production is moving westward, a result of its
 “Go West” policy; (ii) Western Europe is shifting more and more of its production eastward to
82 Appendix 3



 Central and Eastern Europe as these countries become members of the EU and maintain a
 relatively lower labor cost structure.

                              Box 3: The Apple iPod Global Value Chain

        The 30-gigabyte video iPod entertainment device is conceived, designed and developed in the US
        The entire manufacture of the device is outsourced to a number of Asian enterprises, among them
        Asustek, Inventec Appliances and Foxconn, which assembled the iPod in the PRC.

        Toshiba in Japan supplies the most expensive component - hard drive, manufactured in the
        Philippines or PRC. The next most costly component is the
        display module, made in Korea. The video/multimedia
        processor chip and the controller chip are designed by
        Broadcom and PortalPlayer in the US, but manufactured in
        Taiwan. Then there are many generic electronic components
        and parts that can be manufactured anywhere in the world.

        The iPod production process consists of a sequence of steps,
        each performed by a different company operating in a different
        country. At each step, inputs like computer chips and a bare
        circuit board are converted into sub-assemblies that perform specialized functions. Then all the sub-
        assemblies are carefully scheduled for synchronized delivery to a centralized location according to a
        demand-pulled production plan for assembly into iPods. The finished products are then flown to
        logistics centres in different parts of the world for distribution to retailers.


 91.    The convergence of Asian and European production networks presents significant
 opportunities to CAREC countries in bridging both regional production networks to form a
 Eurasian production network. Potential opportunities include

       (i)      growing a strong transport industry to carry goods from one regional
                production network to another (such as Turkey);
       (ii)     developing a strong logistics industry to meet the needs of both regional
                production networks;
       (iii)    providing transit services for people and goods traveling from one region to
                another; and
       (iv)     supplying the inputs required by both regional production networks.
 92.     To exploit these opportunities, CAREC governments and enterprises must understand
 the concept of GVC and target carefully chosen niches that are suitable for the region. For
 example, the CAREC region is not “landlocked” in providing aviation related services, like pilot
 and mechanic training, aircraft maintenance and repair, engine rebuilding, etc. The planes,
 pilots, mechanics can be flown into the CAREC region just as easily as being flown into a
 location right by the sea, like Karachi. A number of CAREC countries already possess the skills
 to build such an industry (e.g., pilot training center in XUAR, aircraft mechanic training center in
 Uzbekistan, aircraft repair and maintenance in Kazakhstan, etc.).

 93.     Further examples include the construction of refineries, polymer manufacturing plants
 and fertilizer plants to take advantage of the region’s ample supply of crude oil and natural gas;
 as well as the construction of aluminum smelting plants to refine the large amount of aluminum
 ore deposits, utilizing the region’s hydroelectric power.

 94.     Fortunately, CAREC countries have excellent neighbors to benchmark—the PRC in
 manufacturing, Singapore and Hong Kong, China in logistics. Importing their “best practices”
 and learning how they migrate up the value chain, will assist CAREC countries in accelerating
 their development.
                                                                                            83 Appendix 3



95.    Intermodal transportation is the movement of cargo and people using more than one
mode of transportation in a single, seamless journey. An example is the movement of goods in
a cargo container across multiple transport modes (motor, rail, water and air) without any
handling of the goods inside.

96.    The concept of intermodal transportation has been honed by the freight industry for
many years. Today, intermodal transportation is the fastest growing transportation sector
worldwide. A typical intermodal transport chain comprises of the following steps:

      (i)     Freight is first collected from the shipper and consolidated at a terminal into
              an appropriate piece of line haul intermodal equipment. This can be a
              trailer or a container. The quantity and dimension of cargo determine the
              exact size of the equipment used (20 ft, 40 ft, 45 ft, 48 ft and 53 ft
              containers). Because of the versatility of trucking to provide door-to-door
              services, the dominant mode for the consolidation of freight is road
              transport. Value added activities such as packaging and warehousing are
              also included in the consolidation process.
      (ii)    Then the equipment containing the cargo is delivered to an intermodal hub
              (rail intermodal facility, seaport or airport) operated by the line haul carrier
              and placed on the transport equipment (on a rail wagon, the deck of a ship,
              or the belly of a plane). The line haul carrier will take the cargo to a terminal
              close to the cargo’s final destination, where the intermodal equipment is
              unloaded and trucked to a deconsolidation terminal.
      (iii)   At the deconsolidation terminal, the cargo is unloaded and delivered by
              truck to the door of the receiver.
97.    Intermodal transportation is a highly effective and efficient method of transportation that
should be promoted throughout the entire CAREC region. Its benefits include

      (i)     connecting CAREC countries with one another and to world markets;
      (ii)    uniting road, rail, sea, and air networks;
      (iii)   reducing customs clearance, driver visa, police checkpoint and unofficial
              discretion problems;
      (iv)    bridging rail gauge differences;
      (v)     promoting cargo security and safety; and
      (vi)    reducing fuel consumption and contributing to a cleaner environment
98.    While land intermodal transportation is actively used in Europe and Asia, North America
is generally recognized as most advanced in perfecting this transportation concept. About 30 to
40% of the cargo business of Canadian and US railroads is currently derived from intermodal
transportation. In contrast, only a miniscule amount of rail revenue in the CAREC region is from
intermodal transportation.

99.     Being in a landlocked and mountainous region, CAREC countries are highly dependent
on transport infrastructure for their development. However, the transport infrastructure, which
was largely built in the 1960–1980s as part of the integrated FSU transport system, deteriorated
rapidly in the early 1990s because of civil conflict, economic difficulties, and natural disasters. In
addition, the transport system of the CAREC region is poorly integrated. Due to lack of
integrated planning, investments, and operation among each mode of transport, the region’s
roads, rail, and air network are not linked to provide the most efficient transportation to the user.

100. The intermodal terminals across the CAREC region are generally small and handle a
very light amount of traffic. Unlike US intermodal terminals that handle several thousand
84 Appendix 3



  containers as well as hundreds of trailers a day, few CAREC intermodal terminals handle more
  than a few dozens of containers a day (Table A.3.12).

  101. US railroads run scheduled, dedicated, double stack intermodal trains generally over
  1,500 meters long (with some 2,600 meters long). In contrast, CAREC intermodal trains are
  short and single stack and most intermodal traffic is frequently mixed with general wagon traffic.
  This leads to lower level of service (e.g., longer travel times, uncertain delivery times) and
  higher cost to the shipper.

  102. Most intermodal operating companies and intermodal marketing companies are
  invariably privately owned. On the other hand, CAREC railways are state-owned enterprises,
  which often own the intermodal companies that work with them. Private ownership, intense
  competition and market discipline forged the highly effective and efficient US intermodal
  transportation system. This framework is absent in the CAREC region.

                    Table A.3.12: Intermodal Traffic in Selected Uzbek Stations
                                     Maximum Container            Average Number of Containers
           Stations
                                       Storage Capacity              Handled Each Workday
  Chukursay                                                 600                           40-50
  Sergeli                                                   592                           40-45
  Tashkent-Tovarniy                                         250                           35-40
  Karshi                                                    120                           18-30
  Andijan                                                   180                           18-30
  Bukhara                                                   260                           20-22
  Tinchlik                                                  132                           10-12
  Urgench                                                   145                           10-18
  Termez                                                    200                           10-20
  Raustan                                                   385                           20-25
  Nukus                                                     117                           10-12
Source: communication with Uzbekistan officials, 2007.

  103. Even though the old Silk Road traveled through CAREC countries, very little Eurasian
  Landbridge container traffic actually transit through the region. The reasons include the
  following:

         (i)      Sea transportation is more reliable and cheaper.
         (ii)     The complex web of services associated with sea transportation is well
                  developed.
         (iii)    The legal framework covering sea transportation is clear, court tested, and
                  enforceable.
         (iv)     Sea transport is capable of transporting large volumes of freight.
         (v)      Landbridge transportation involves too many parties, each maximizing its
                  self interest.
         (vi)     Landbridge transportation travels through too many borders, and each
                  crossing can cause potential delays and additional cost.
         (vii)    Landbridge transportation has not been able to address empty container
                  management (repositioning, storage, and return, etc) effectively and
         (viii)   Traffic is more difficult to balance.
  104. In a recent presentation to professors and graduate students of Beijing Jiaotong
  University, Mr. Wu Jianhong of China Ministry of Railway’s Economic Research and Planning
  Institute stated that except for a few trains carrying true Eurasian Landbridge (e.g., the twice a
  month container train between Tianjin, Ulaanbaatar and Brest, Belarus) most of the container
  trains running across the CAREC region carry cargo for regional consumption. Save for a few
                                                                                                           85 Appendix 3



     demonstration trains that cleared borders under expedited handling, border delay is a serious
     impediment. For example, Union Internationale des Chemins de Fer (UIC) statistics show that
     trains are delayed an average of 120 hours at the Uzbekistan-Turkmenistan Border (some as
     long as 280 hours), as compared to a few hours at the Lao-Thai border and the Lao-Viet Nam
     border road.

     105. Obviously, the challenges in promoting intermodal transportation within the CAREC
     region are immense. However, China Railway’s recent success in attracting Deutsche Bahn
     (German National Railways), Zim Lines (Israeli ocean carrier), CMA-CGM (French ocean
     carrier), NWS (Hong Kong based port and infrastructure developer), Promisky and China
     Intermodal Container Company (CIMC, the largest container manufacturer in the world) to form
     a US$1.6 billion Joint Venture with China Rail Container Transport Corporation (CRCT) to
     expand its intermodal handling capability demonstrates challenges can be overcome.

A.3.3 CONSTRAINTS AND CHALLENGES

     106. The transport sector and infrastructure of Central Asia have been extensively
     documented in many publications and consultant reports.22 There is no point in replicating the
     assessment conducted by these studies. Issues that have been identified by the different
     authors remain largely valid and often unresolved. They nevertheless need to be updated and
     highlighted again to help the design of the Strategy.

     107. After a brief overview of the transport patterns in CAREC countries, this section reviews
     the current traffic situation on the road and the rail sectors and to a lesser degree the civil
     aviation and maritime transport sectors before concentrating on the main infrastructure issues
     and challenges in the region. These issues are presented from a regional perspective and this
     may be different on how each particular country sees and addresses its own domestic transport
     challenges.

     108. The emphasis of the section is on freight movements. The trade flow patterns and
     freight movements are the basis of the selection of CAREC corridors. Intraregional passenger
     movements on road and rail are still limited, with the exception of passenger trains going to the
     Russian Federation. Of course, air passenger movements are significant and growing in all
     CAREC countries. Later, under the Strategy’s Focus Areas section, arguments are presented
     for the development of “people friendly transport systems” with a focus on passenger transport.

A.3.3.1 Overview of the Transport Sector

     109. With the exception of Uzbekistan and XUAR, Central Asian countries have low
     population levels and density. They have inherited from the FSU quite an extensive road and
     railway network which was built and maintained over the years following Russian standards
     before the breakdown of FSU in 1991. With population centers being scattered over vast
     territories, the road and rail density has remained relatively low over the years with the
     exception of Azerbaijan and Uzbekistan.

     110. Tables A.3.13 and A.3.14 below present an overview of the road and rail sector covering
     both freight and passengers. The total CAREC road network is 271,000 km with the rail network
     being 25,700 km. Not surprisingly for its size, Kazakhstan accounts for 30% of the road network
     and 55% of the rail network. In fact, Kazakhstan ranks number 18 in the world in terms of route

22
     A selected list of reports includes: Central Asia, Increasing Gains from Trade Through Regional Cooperation in
     Trade Policy, Transport and Customs Transit, Chapter 5, ADB 2006; Seneviratne Prianka, Transportation
     Facilitation in Azerbaijan, Kyrgyz Republic, Tajikistan and Uzbekistan, ADB 2003; Priority Investment Needs for the
     Development of AH sections, UN ESCAP 2006; Parkash, Manmohan, Connecting Central Asia, a Road Map for
     Regional Cooperation, ADB 2006; Eurasia Regional Transportation Sector, Definitional Mission, USTDA 2006;
     Transit Transport Issues in Landlocked and Transit Developing Countries, Part B chapter VI, UN ESCAP 2003;
     Jenkins, I. and Pezant, P., Reassessment of the Regional Transport Sector Strategy, ADB 2003.
86 Appendix 3



 length and 7th for the total ton per kilometer (TKM) carried per year. Uzbekistan and XUAR have
 also sizable road and rail networks. In 2005, a total of 2,512 million and 370 million tons were
 carried, respectively on the road and rail networks of CAREC, accounting for 96 billion and 260
 billion TKM.

 111. For passenger traffic, 5,200 million passengers were carried on the road network in
 2005 and 56 million by rail, giving respectively 157 and 28 billion passenger-km (PKM).
 Passenger trips are large because the statistics include urban transport. Passenger rail
 transportation has only some significance in Kazakhstan and Uzbekistan and to a lesser extent
 in Azerbaijan.

                Table A.3.13: Overview of Transport Sector (freight) in CAREC Countries, 2005
                             Road          Rail      Rail-elect       Road          Rail            Road           Rail
                              km            km          km        Million Tons Million Tons     Million TKM   Million TKM
 Afghanistan                   17,700         0.00        0.00
 Azerbaijan                    25,000        2,122   1,269.50          69.50           18.72          7,536       9,524
 Kazakhstan                    81,300    14,205.30   4,136.60       1,378.00          198.81         40,160     171,900
 Kyrgyz Republic               18,642       417.20        0.00         27.20            5.50         835.10         660
 Mongolia                      11,219        1,400        0.00          7.60           15.60            282       9,929
 PRC XUAR                      59,910        2,925         800          330               54         32,500      47,500
 Tajikistan                    13,800       616.70        0.00         26.10           12.00            571       1,070
 Turkmenistan                  22,000        2,523        0.00                         11.08                      9,700
 Uzbekistan                    43,500     4,014.20     593.90         668.50           55.00         14,100      18,090
 Total with Turkm            293,071     28,223.40       6,800      2,506.90          370.71      95,984.10     268,373
 Total w/o Turkm             271,071     25,700.40       6,800      2,506.90          359.63      95,984.10     258,673
 Total w/o Turkm & XUAR      211,161     22,775.40       6,000      2,176.90          305.63      63,484.10     211,173


       Table A.3.14: Overview of Transport Sector (passengers) in CARECcountries, 2005
                                 Road          Rail          Road            Rail             Road             Rail
                                  km            km           Million        Million       Million PKM     Million PKM
 Afghanistan                       17,700         0.00
 Azerbaijan                        25,000        2,122                           5.31            10,893          877.90
 Kazakhstan                        81,300    14,205.30                          14.26            81,500          12,129
 Kyrgyz Republic                   18,642       417.20        444.80             0.26          5,921.30           46.10
 Mongolia                          11,219        1,400        207.60             4.20               435           1,234
 PRC (XUAR)                        59,910        2,925           317            11.30            19,500          10,610
 Tajikistan                        13,800       616.70        397.20             0.70             6,013           46.10
 Turkmenistan                      22,000        2,523                           4.94                             1,329
 Uzbekistan                        43,500     4,014.20         3,830            15.13           39,000            2,099
 Total with Turkm                293,071     28,223.40      5,196.60            56.10          163,262        28,371.10
 Total w/o Turkm                 271,071     25,700.40      5,196.60            51.16          163,262        27,042.10
 Total w/o Turkm & XUAR          211,161     22,775.40      4,879.60            39.86          143,762        16,432.10
 PRC XUAR=People’s Republic of China Xinjiang Uygur Autonomous Region; Turkm=Turkmenistan.
 Sources for Tables A.3.13 and A.3.14: (a) Railway statistics from Railway authorities; (b) Uzbekistan Transport
 Master Plan; (c) Data from "Railroad of the CIS, Latvia, Lithuania and Estonia in 2006"; published by Directorate of
 the Railroad Union of the CIS Countries, Moscow, 2007; (d) Railway Gazette for Tajikistan; (e) Azerbaijan, Mongolia,
 Tajikistan data from ADB-TA; (e) Data for XUAR are from 2002.

 112. Within each CAREC country, road transportation continues to be the dominant mode of
 transportation both for freight and passengers varying from 70 to 90%. However, for
 international freight transport the situation is reversed with the rail sector being by large the
 dominant sector (see Table A.3.15).

 113. Commodities moved by rail (international movements) are mostly oil and oil products,
 minerals and metals (coal. copper), construction materials (mostly cement), cotton and general
 goods in containerized and non-containerized form. Oil and oil products are estimated to
 represent at least 30% of the total freight movements.
                                                                                                               87 Appendix 3



                         Table A.3.15 Rail Share of International Freight Movement
                                                      % of Rail Share    % of Rail Share
                           CAREC Country             in Freight Export     in Freight
                                                                             Import
                   Azerbaijan                                       95                 72
                   Kazakhstan                                       88                 81
                   Kyrgyz Republic                                  86                 84
                   Tajikistan                                       92                 87
                   Uzbekistan                                       89                 82
                   Total Five                                       89                 81
                  Source: WB, Trade and Transport Facilitation in Europe and Central Asia
                  Region and East Asia and Pacific Region, 2005.


A.3.3.2 Trade Flows

     114. Central Asian foreign trade took time to pick up during the first decade following the
     collapse of the FSU. However, by 2000 external trade was booming in the region. Exports are
     still largely concentrated in primary commodities (oil and gas, metals and cotton fibers). World
     prices 23 for these commodities have recently substantially improved and this has helped to
     increase export earnings considerably. With income per capita growing, imports of finished
     products are also on the rise.

     115. Therefore, external trade now contributes a larger share of GDP. The ratio of exports
     plus imports to GDP in Central Asia varies between 80% and 110%.24 Trade patterns however
     have largely remained the same over the years. This means a relatively low volume of intra-
     regional trade25 and concentration of exports and imports from and to neighboring countries
     such the Russian Federation, Turkey, Iran, PRC, and Europe.

     116. For the purpose of designing a strategy, details on external trade are required in order to
     understand corridor-based traffic flows. Using a combination of sources, the Consultant has
     constructed 26 a trade matrix of CAREC countries expressed in volumes (Table A.3.16).
     Information, even in value terms, is incomplete between certain major countries and Central
     Asia. Therefore, the matrix tends to underestimate the overall volume of trade activity but
     remains a useful step for traffic allocation and traffic forecast. The matrix could subsequently be
     improved if and when detailed customs data become available.

     117. For 2005, the total estimated volume of exports from Central Asia (minus XUAR) is 88.1
     million tons with the imports reaching 36.9 million tons. The high volume of exports is due to oil

23
    “Indeed, the rise in world prices for primary commodities was a major factor that contributed to the rapid growth of
   exports in the CAR in 2000 – 2004. It is estimated that 128% of the 289% increase in Azerbaijan’s exports and 102%
   of the 242% increase in Kazakhstan’s exports were due to the rise in world prices for crude oil; 20% of the 58%
   increase in Kyrgyz Republic’s exports were due to the rise in world prices for gold; 17% of the 33% increase in
   Tajikistan’s exports were due to the rise in aluminum and cotton fiber; and 18% of the 46% increase in Uzbekistan’s
   exports were due to the rise in world prices for gold and cotton fiber.” Central Asia Increasing Gains from Trade
   Though Regional Cooperation, in Trade Policy, Transport and Customs Transit, ADB, 2006, p.14.
24
   Central Asia, ADB 2006, p. 20, Table 2.5.
25
    This low volume can easily be explained because except for oil products, Central Asian countries have almost
   identical industrial structures.
26
   In order to obtain trade flows expressed in volume, the following information has been used: Central Asia, ADB 2006,
   Appendix 1, “Merchandise Trade Statistics of the Central Asian Republics”; China Statistical Yearbook 2004, 2006;
   Michael Sims, Harmonization and Simplification of Transport Agreements, Cross Border Documents and Transport
   Regulations, ADB Report, 2005; and Trade flows from China in value come from the Chinese Statistical Yearbook for
   years 2004 and 2005. Trade flows up to year 2004 for CA are in Appendix 1 of the ADB (2006) publication. The
   volume for trade flow (Sims, 2006) data have been combined with the value data in order to obtain an average typical
   $/ton for each typical trade flow (export, import) for each country or grouping of countries. Using these per ton values,
   estimated volumes (in tons) of trade have been estimated for year 2005. In addition for China, detailed information on
   trade in volume is also available for year 2005 from China and Mongolia and has constituted a major source of
   reference.
88 Appendix 3



     products and minerals to the PRC, Russian Federation, and Europe, mostly from Kazakhstan.
     Intra-regional trade as expected is relatively low at 4.9 million tons.

     118. In terms of potential traffic for the CAREC corridors, it is important to note that the total
     trade in volume between the PRC and Eurasia in 2005 was 226.4 million tons (145.5 million as
     exports and 80.9 million as imports). This trade is growing at a very fast pace and constitutes
     one of the key potential traffic sources for the CAREC corridors.

     119. Comparison with 1999 numbers provides a general sense of trade displacement, though
     caution 27 should be exercised, since the estimation method and data sources are different.
     Exports have almost tripled and imports almost doubled in six years and Central Asian
     countries seem to have shifted import volumes from the Russian Federation to Europe and the
     PRC. In fact Europe and the PRC are becoming much more significant trade partners and this
     has certainly an impact for the selection of the main CAREC corridors.

                                Table A.3.16: Summary of Trade Flows by Volume
                                                               2005            1999
                                                           Million Tons    Million Tons
                     Total CA imports                                 36.9             13.7
                     Total CA exports                                 88.1             42.3
                     Total CA intraregional                            4.9              4.7
                     Russia export to CA                              16.6             26.3
                     Russia import from CA                             7.3              6.3
                     Export to CA                                      1.2              0.2
                     PRC import from CA                                7.2              3.4
                     EU export to CA                                   4.5              1.5
                     EU import from CA                                26.2              4.2
                     PRC export to Eurasia                           145.5              N/A
                     PRC import from Eurasia                          80.9              N/A
                    CA=Central Asia; PRC=People’s Republic of China; EU=European Union.
                    Note: CA refers here to Central Asian countries including Mongolia,
                    Turkmenistan and Afghanistan but not Xinjiang because of difficulties to
                    isolate data from the rest of the PRC.
                    Source: Consultant’s estimate for 2005, TRACECA data base for 1999
                    quoted from ADB Central Asia: Reassessment of the Regional Transport
                    Sector Strategy, September 2005, Table 2.3, p. 9.


A.3.3 Current Traffic

     120. Traffic allocation along the six proposed CAREC corridors is an important step in the
     preparation of the Strategy. Traffic allocation (current and forecast) is required to evaluate and
     compare the relative performance of the corridors. Such an allocation as well as a detailed
     profile has been realized in the road sector, using UN ESCAP data base. Profile details are part
     of Appendix 4: Presenting the Corridors. As background information, aggregate information on
     modal share of freight movements is presented in Table A.3.17.

     121. Aggregate export, import and transit freight traffic (in tons) have been obtained from
     country reports or estimated from the trade matrix. Modal share data included in Table A.3.15
     has also been used for this purpose. Details are provided in Table A.3.17 and summarized in
     Table A.3.18 (note: figures may not be exactly comparable in A.3.17 and A.3.18 because of
     rounding and estimation methodologies). Figure A.3.9 graphically indicates the trade flows
     based on Table A.3.18.


27
     The two sets of figures are based on different methodologies. Afghanistan is included in the 2005 figures, though its
     trade is still limited.
                                                                                                                                                                                                                                                                      89      Appendix 3




                                                                                                   Table A.3.17: Overview of freight traffic in CAREC for 2005 (Million Tons)
                   Road        Rail       Total       Total      Total     Total       Total      Total       Total     Total      Total        Total   Total       Total      Total        Total       Total       Total      Total     Total      Total        %            %
                    Km         Km         Rail       Export     Import      Rail       Rail        Rail       Rail       Rail       Rail        Road    Road        Road       Road         Road       Transit       Rail      Road       Rail      Road      Internat     Internat
    Country
                                                                           Export     Export     Import      Import    Trade      transit               Export     Export     Import        Trade      Trade       transit    transit    Local      Local       Rail        Road
                                                                          base TM     YB/MP     Base TM YB/MP                                          base TM YB/MP
  Afghanistan      17,700         0                   0.4         1.25                                                                          5.00     0.40                  1.25            1.65      0.00        0.00       0.00       0.00      3.35                   1.00
  Azerbaijan       25,000       2,122     26.52       6.40        7.50       6.10                  5.75                 11.85                   69.50    0.34                  0.90            1.24      7.73        7.33       0.40       7.34     67.86      0.72         0.02
  Kazakhstan       81,300      14,205    222.70      60.10       18.10      58.62                 14.90                 73.52                 1,511.00   1.50                  3.20            4.70      5.40        4.80       0.60      144.38   1,505.70    0.35         0.00
  Kyrgyzstan       18,642        417       5.50       1.58        2.73       1.40        1.00      2.30       2.20       3.70                   27.20    0.20        1.70      0.30            0.50      0.18        0.00       0.18       1.80     26.52      0.67         0.03
   Mongolia        11,219       1,400     15.60       2.53        1.33       2.86        1.50      1.20       1.15       4.06                   7.60     0.16                  0.10            0.26      5.30        5.30       0.00       6.24      7.34      0.60         0.03
   Tajikistan      13,800        617      12.00       3.83        2.03       1.50                  1.80                  3.30                   7.00     0.13                  0.30            0.43      7.00        7.00       0.00       1.70      6.57      0.86         0.06
  Uzbekistan       43,500       4,014     55.00       5.50        4.68       4.90        4.70      3.80       4.00       8.70                  668.50    0.60                  0.80            1.40      8.80        8.00       0.80       38.30    666.30     0.30         0.00
 Total CAREC 211,161 22,775              337.32      79.93       37.62      75.38                 29.75                105.13                 2,295.80   3.33                  6.85           10.18     34.41       32.43       1.98      199.76   2,283.64    0.41         0.01
  China - CA       59,910       2,775     54.00       1.12        6.77       0.90                  6.09                  6.99                  330.00    0.22                  0.68            0.90      0.00        0.00       0.00       47.01    329.10     0.13         0.00
 Total CAREC 271,071 25,550              391.32      81.05       44.38      76.28        0.00     35.84       0.00     112.12                 2,625.80   3.55        0.00      7.53           11.08     34.41       32.43       1.98      246.77   2,612.74    0.37         0.00
TM=trade matrix; YB=yearbook; MP=Master Plan; CA=Central Asia.
Source: various Statistical Yearbooks and Master Plans for the respective countries; the Consultant developed the trade matrix based on estimated figures drawn from explicit and imputed values and converted to tons for comparative purposes.
Note: Consultant estimates based on the estimated trade matrix; modal share is according to WB "Inter-Regional and Transport Facilitation in Europe, Central Asia, South Asia Region and East Pacific Region, June 2005.
Numbers have been adjusted when information was readily available; Transit was first estimated from the trade matrix and subsequently adjusted.
90 Appendix 3




                                                                                          F ig ure A.3.9: Trade F lows , 2005




                                                                                                      AZ E


                                                                                   AF G              X UAR           K AZ
            NO N-C AR E C C O UNTR IE S (R F ,                                                                                                                  NO N-C AR E C C O UNT R IE S (R F ,
               J P N, S K , MIDDL E E AS T ,                                                                                                                       J P N, S K , MIDDL E E AS T,
                                                                                    KGZ               MO N           T AJ
                  E UR O P E , US A, E TC )                                                                                                                           E UR O P E , US A, E T C )

                                                                                                       UZ B



                                                                                                 Million T ons
                                                       INT R A-C O UNT R Y
                                                        (WIT HIN C AR E C
                                                          ME MB E R S )
                                                                                   =               2,859.5

                                                                                                      +
                                                             Trans it
                                                                                   =                 34.4
                                                 NO N-C AR E C vs NO N-C AR E C
                                                                                                      +
                                                         Import/E xport
                                                                                   =                 91.2
                                                    C AR E C vs NO N-C AR E C
                                                                                                      +                     123.2 Mil.T ons
                                                         Import/E xport
                                                                             (*)                     32.0
                                                     C AR E C vs C AR E C

                                                                                                      =
                                                                                                   3,017.1

  AF G =Afghanis tan; AZ E =Azerbaijan; P R C =P eople’s R epublic of C hina;J P N=J apan; K AZ =K azakhs tan; K G Z =K yrg yz R epublic; MO N=Mong olia; R US =R us s ian F ederation; S K =S outh K orea;
  T AJ =T ajikis tan; US A=United S tates of America; UZ B =Uzbekis tan; X UAR =X injiang Uygur Autonom
                                                   (*)
  S ource: C ons ultant.                               All 56 black arrows are not depicted in the diagram.
                                                                                                       91 Appendix 3


                   Table A.3.18: Overview of Share of International Freight by Mode (2005)
                                                        Total
                                                                     Total
                                       Total CA        Export                 International
                                                                   Transit
                                        (million    and Import                as % of Total
                                                                   (million
                                         tons)        (million                     CA
                                                                     tons)
                                                        tons)
                     Road (a)             2,625.8           11.1          2.0         0.5 %
                     Rail (b)               391.3          112.1         32.4        36.9%
                     Total                3,017.1          123.2         34.4         5.2 %
                    CA=Central Asia.
                    Source: Consultant’s estimates (a) estimates for all CAREC countries; (b)
                    excludes XUAR.

     122. International freight traffic (tons) accounts for a high proportion of the total volume being
     carried by rail in CAREC countries. Road corridors are by and large used for local traffic with
     international freight traffic representing only a small portion of the total freight activity.

     123. Transit traffic for both road and rail is estimated at 28% of the total international traffic or
     8% of the total CAREC rail traffic. In Uzbekistan, rail transit accounts for 15% of the total rail
     traffic. 28 In Kazakhstan, rail transit traffic data from the Ministry of Transport and
     Communications gives a lower figure of 4.8 million tons. This compares29 with 5.6 million tons
     estimated for year 2000. Azerbaijan has by far the highest rail transit level (27%). In Table
     A.3.19, details of rail freight by type of service (domestic, import, export, and transit) are given
     for major transit CAREC countries.

                      Table A.3.19: Rail Freight Transit Volume, 2005 (million tons)
                          Domestic          Imports          Exports        Transit                   Total
       Azerbaijan                  7.3              5.7             6.1           7.3                      26.5
       Kazakhstan                144.4             14.9            58.6           4.8                    222.7
       Mongolia                    7.6              1.1             1.5           5.4                      15.6
       Uzbekistan                 38.3              4.0             4.7           8.0                      55.0
       Total                     197.6             25.7            70.9          25.5                    319.8
       Source: ADB, WB National Transport Sector Development studies, CA country reports;

     124. Oil products account for a large part of transit traffic, estimated at 30% in Central Asia.
     On the Caspian Sea, there is a large movement of tankers bringing Kazakh oil to Baku
     (estimated at 9 million tons in 2005). Part of this is put on the Azerbaijan Railway system for
     Black Sea ports.

     125. On average, transit traffic is carried 95% by rail, roughly the same proportion than for
     exports. For imports the share of the road sector tends to be higher. Transit through the CAREC
     corridors is still relatively limited and is largely concentrated in, Azerbaijan, Kazakhstan, and
     Uzbekistan.

     126. In Azerbaijan total transit is estimated at 7.3 million tons per year. The Georgia rail
     border currently accommodates 10 million tons of oil from Baku to Black Sea ports. Most of this
     traffic is transit coming from Kazakhstan (Atyrau port is estimated to ship to Baku for transit 7
     million tons of oil). There is also substantial transit traffic coming by ferry from Aktau and
     Turkmenbashi. In the case of Turkmenbashi, goods coming to Baku are mostly oil products and
     cotton while goods to Turkmenbashi are general cargo.

     127. In Uzbekistan, total transit by rail per year is 8 million tons, with export and import being
     4.7 and 4 million tons, respectively. Transit goods and directions are as follows:



28
     This figure is confirmed by findings of the ADB Uzbekistan Transport Master Plan 2006s
29
     ADB Central Asia: Reassessment of the Regional Transport Sector Strategy, September 2005, Table 2.4, p.12.
92 Appendix 3


       (i)        general goods imported coming from Azerbaijan through Turkmenistan and
                  destined to, Kazakhstan, Kyrgyz Republic, Russian Federation, and
                  Tajikistan;
       (ii)       wood products from the Russian Federation and metal ores from
                  Kazakhstan destined to Iran;
       (iii)      PRC goods destined to Tajikistan passing Chukursay border; and
       (iv)       Kazak grain products for Black Sea ports.
 128. Transit products on the Samarkand-Karshi rail line are estimated to be 3 million tons and
 2-3 million tons on the Navoi-Alat line. There is also currently approximately 7 million tons which
 transit through Tajikistan to the Ferghana valley.

 129. For Kazakhstan transit goods are largely carried by rail. Road transit goods come mostly
 from XUAR-PRC and are destined to Azerbaijan, Russian Federation, and Uzbekistan.

 130. Ala Shankou in XUAR received in 2005 more than 9 million tons from Kazakhstan and
 exported approximately 2 million tons. Of the 2 million tons, it is estimated that 60% terminates
 in Kazakhstan and 40% is transit freight to other Central Asian countries and Europe.

A.3.3.4 Traffic Forecast

 131. Based on economic growth and population forecasts described before, an aggregate
 traffic forecast was carried out for all CAREC countries. What has been forecasted is the total
 volume of freight and passenger movements by country. The GDP, GDP per capita and
 population growth rates by country used in the forecast are summarized in Table A.3.20.

       Table A.3.20: GDP, GDP/Capita and Population Annual Growth Rates, 2008–2017 (%)
                               Population Growth                             GDP/Capita Growth
               Country                                GDP Growth Rate
                                     Rate                                          Rate
   Afghanistan                                0.7                     7.8                   7.1
   Azerbaijan                                 1.2                    10.5                   9.3
   Kazakhstan                                 0.9                     7.3                   6.4
   Kyrgyz Republic                            1.1                     6.7                   5.6
   Mongolia                                   1.2                     8.0                   6.8
   Tajikistan                                 1.4                     7.1                   5.9
   Uzbekistan                                 1.3                     6.9                   5.6
   XUAR                                       1.4                     8.9                   7.5
  XUAR=Xinjiang Uygur Autonomous Region.
  Source: Section A.3.1. Annual average growth rates correspond to high growth scenario.


 132. Besides the above growth rates, traffic forecasts require estimates of the income
 elasticity for freight and passenger transport. All studies have confirmed that the passenger
 elasticity is greater than the freight elasticity and above +1.0. The freight elasticity is, however,
 generally close to +1.0. Price elasticities are available for Azerbaijan, Mongolia, and Uzbekistan.
 Traffic forecast is based on the following equation:

      PTG = (GDPCAG X Ei) X (POPG +1)

      Where:
      PTG = Average annual growth rate of passenger traffic;
      GDPCAG = Average GDP growth rate per capita;
      Ei (passenger) = Elasticity of transport demand for passenger traffic in relation to income
      expressed as an index normalized to income = 1.00;
      POPG = Population growth rate.
                                                                                                                                                                                 93 Appendix 3


               Freight traffic growth is only related to GDP growth and income elasticity:

               FTG = GDPG X Ei

               Where:
               FTG = Freight traffic growth rate;
               GDPG = GDP annual average growth rate;
               Ei (freight) = Income elasticity of freight traffic.

     133. Table A.3.21 presents the traffic forecast for 2017 of aggregate transport indicators in
     CAREC countries. The forecast is derived based on the elasticity equations described above.
     The forecasts are presented for road and rail in million passengers and million PKM and for
     freight in million tons and million TKM. Because of expected high economic growth in all
     countries, the total number of road passengers will increase from 5.2 billion to 13.6 billion and
     PKM from 163 billion to 517 billion. Freight demand by road is expected to increase from 2.5
     billion tons to 6.1 billion tons and TKM from 98 billion to 255 billion. The rail transport demand
     shows a similar growth pattern. It should be noted that these projections are based on the
     scenario of high economic growth which assumes sustained growth rates with economic
     reforms and efficient transport systems.

                                                                                      Table A.3.21: Traffic Forecast, 2017
                             2005-Passenger                                 2005 -Freight                               2017 Passenger                                      2017 Freight
                                      Road          Rail       Road        Rail     Road       Rail                              Road           Rail       Road        Rail       Road         Rail
     Country    Road          Rail                                                                        Road          Rail
                                     Million       Million     Million    Million Million     Million                            Million       Million     Million    Million     Million     Million
                Million      Million                                                                      Million      Million
                                      PKM          PKM         Tons       Tons      TKM       TKM                                PKM           PKM         Tons       Tons        TKM         TKM
Afghanistan                                                        0.00
Azerbaijan            0.00     5.31    10,893.00      877.90      69.50     18.72 7,536.00    9,524.00                   26.88    55,161.75     4,445.65 239.93         64.63     26,016.32    32,879.43
Kazakhstan            0.00    14.26    81,500.00   12,129.00   1,378.00    198.81 40,160.00 171,900.00                   44.78   255,889.17    38,081.96 3,320.77      479.09     96,779.38   414,252.36
Kyrgyz
                   444.80      0.26     5,920.30       46.10      27.20      5.50    835.10      660.00     1,269.24      0.73     16,893.68      159.15      58.02      11.73     1,781.21     1,407.73
Republic
Mongolia           207.60      4.20       435.00    1,234.00       9.60     15.60    311.00   9,929.00       716.69 14.50           1,501.74    3,783.20    26.11        42.43     845.80      27,003.14
Tajikistan         397.20      0.70     6,013.00       46.10      26.10     12.00    571.00   1,070.00     1,217.74   2.15         18,434.68      442.40    62.90        28.92     905.01       2,578.53
Uzbekistan       3,830.00     15.13    39,000.00    2,099.00     668.50     55.00 14,100.00 18,090.00      9,229.71 36.47          93,983.96    5,058.26 1,425.86       117.31 30,074.29       38,584.67
XUAR               317.00     11.30    19,500.00   10,610.00     330.00     54.00 32,500.00 47,500.00      1,231.00 43.88          75,723.96   41,201.60 999.72         163.59 98,456.82      143,898.43
Total            5,196.60     51.16   163,261.30   27,042.10   2,508.90    359.63 96,013.10 258,673.00    13,664.38 169.38        517,588.94   93,172.23 6,133.30       907.69 254,858.82     660,604.30
XUAR=Xinjiang Uygur Autonomous Region.
Source: Consultant.

A.3.3.5 Road and Rail Issues

A.3.3.5.1 The Network Issue

     134. Under the FSU, the rail and road network was oriented towards Moscow. Little trade was
     going on with border countries like Iran, Afghanistan and the PRC. When the Central Asian
     countries decided to expand trade with these countries they realized that road and even rail
     access were either poor or nonexistent. Therefore, the rail and road network had to be
     expanded and adjusted. Access routes30 (rail and road) were built at high cost. Building proper
     access roads to neighboring countries is still needed. The road projects in Kyrgyz Republic to
     connect with Kashi in Xinjiang through Torugart or Irkeshtan are typical examples.

     135. Another major network problem is the fact that after the collapse of the FSU, CAREC
     countries were faced with many cases of railways and roads crossing back and forth borders of
     the newly independent states. These crossings were sometimes only for short distance but,
     they created unnecessary delays and service disruptions. To reduce the number of “irritating”
     border crossings, the countries have, at high cost built road and rail “network31detours”. For

30
   In Kazakhstan, the Druzbah (Dostyk) – Alanshankou connection completed in 1991; in Turkmenistan, the rail
   connection with Iran (Sarakhs) was completed in 1996.
31
   Kazakhstan has built the Kyzylasker-Kirovkiy road to connect South Kazakhstan to the rest of the country bypassing
   Uzbekistan. Kyrgyz Republic has upgraded the Jalal Abad - Uzgen road for better connection with Osh at a cost of
   $12 million. Uzbekistan has built the Uchkuduk-Misken-Karauzak highway for $10 million to avoid passing through
   Turkmenistan connecting Bukhara with Nukus via Navoi.
 94 Appendix 3


     example, there are Uzbek and Tajik enclaves in Kyrgyz Republic and recently the EU and the
     World Bank have agreed to finance road detours32 (road from Osh to Isfana) to bypass the
     enclaves. However, many of these geographic network peculiarities remain and the issue is
     whether bilateral agreements and enforcement for easy cross border movements is a practical
     substitute to the construction of costly bypass infrastructure.

A.3.3.5.2 Capacity Issue

     136. The land size of the member countries and the low population density imply that the
     transport network remains still sparse, with few double track railroads, limited electrification and
     only a few four lane-highways. Traffic remains low on most of the roads except near the capital
     cities. This means that almost all the paved road network in Central Asia is of Class II and III,
     consisting mostly of two-lane highways with a few hundred kilometers of four lane highways in
     Azerbaijan and Uzbekistan (Table A.3.22).

                       Table A.3.22: Status of Selected Asian Highways in Central Asia (km)
                      Country      Primary     Class I   Class II Class III Below III    Total
                  Afghanistan                       621        77    3,549                 4,247
                  Azerbaijan                         82     1,012      348        228      1,670
                  Kazakhstan                         72       767   10,004      2,346     13,189
                  Kyrgyz Republic                             464      511        720      1,695
                  Tajikistan                                  389      603      1,033      2,025
                  Turkmenistan                                       2,180         24      2,204
                  Uzbekistan                        255       765    1,618        328      2,966
                  Total                   0       1,030     3,474   18,813      4,679     27,996
                  Source: Asian Highways, UN ESCAP, Bangkok, 2006.

     137. Roads classified as Asian Highways (AH) need to conform to some minimum standards.
     Participating countries of the AH development program have endorsed the following
     classification of UN ESCAP:

           (i)        Primary: 4 or more lanes, AC33 pavement, design speed up to 120 km, 50m
                      right of way;
           (ii)       Class I: 4 or more lanes, AC pavement, design speed up to 100 km, 40m
                      right of way;
           (iii)      Class II: 2 lanes, AC pavement, speed up to 80 km, 40m right of way;
           (iv)       Class III: 2 lanes, Double bituminous surface treatment (DBST), speed up
                      to 60 km, 30m right of way;
           (v)        Below Class III: 2 lanes, gravel or earth road.

     138. When urban and suburban traffic are excluded, the maximum annual average daily
     traffic (AADT) on Asian Highways forming the road corridors is of the order of 6,000 to 7,000
     vehicles per day. This number is more representative of the main corridors between major cities.
     Elsewhere, AADT is more in the order of 1,500 to 2,000 vehicles per day. In mountainous
     countries like Kyrgyz Republic and Tajikistan, the daily traffic drops considerably on border
     crossing roads connecting with the PRC or Afghanistan. There, traffic could sometimes be in
     the order of 100 vehicles per day or less. This implies that the problem on the road network is
     not yet a serious capacity problem34 but more of road network rehabilitation and maintenance.


32
   Total length of detour roads to be constructed amounts to 162.4 km (14.7 km for Koktaala - Pulgon detour road, 29.7
   km for Batken – Akturpak detour road, 23.5 km for road along Toktogul reservoir and detour road sections along
   Shamaldysai – Uchkorgon Hydroelectric Power Station – Chatkal).
33
   AC: Asphalt-Concrete pavement.
34
   Criterion for road congestion on a two lane highway is when daily traffic exceeds 8,000-12,000 vehicles/day for 80-
                                                                                                        95 Appendix 3


     139. In 2005, the Government of Kazakhstan in a report to the UN Economic and Social
     Council35 stated: “The criterion for a bottleneck is where the traffic volume on two-lane roads
     exceeds 8,000-12,000 vpd for 80-120 days per year. An analysis made applying this criterion
     indicates that there are no bottlenecks on public roads; [for rail network] an analysis of the
     throughput capacity of single and double track sections of the mainline network of the Republic
     of Kazakhstan Temir Zholy JSC has established that the rated capacity exceeds actual volume
     of train movements on average by 40-50% on single track and by 80% on double track
     sections.”

A.3.3.5.3 The Maintenance Issue

     140. Road and railway infrastructure is expensive to maintain because of difficult terrain and
     severe winter and summer conditions. Faced with pressing social and other issues, insufficient
     funding has been systematically allocated to the maintenance of transport infrastructure.

     141. For instance, in Kyrgyz Republic and Tajikistan, the road asset is quickly deteriorating.
     Full stretches of road are in danger of being lost for good. Once lost, the reconstruction cost is
     roughly five times the cost of maintenance. In Kyrgyz Republic,36 based on survey data of 2005,
     two-thirds of the main road network was in critical condition. One-fifth of the surveyed roads
     were at such stage of degradation that the rehabilitation of asphalt pavements was impossible.
     The situation is equally serious in Kazakhstan where it is estimated that up to 1,500 km of roads
     are being damaged beyond repair every year. There, the backlog of roads requiring repair is
     19,000 km. With 2,000 km being on average repaired, it will take 35 years to catch up. The
     situation is also alarming for road bridges.37 It is therefore not surprising that Central Asian
     countries do not rate high in terms of road condition (Table A.3.23).

                 Table A.3.23: Selected Road Conditions in CAREC Countries (2005-2006)
                             Azerbaijan        Kyrgyz Republic         Tajikistan    Kazakhstan (a)
       Good                            10%                   22%                  0%           15%
       Fair                             6%                    6%                20%            38%
       Poor                            56%                   11%                48%            47%
       Bad                             28%                   61%                32%
      Sources: Azerbaijan: Yearbook 2005; Kyrgyz Republic: Road Sector Development Strategy, MOTC
      2007; Tajikistan: ADB TA; Kazakhstan: Road sector Development 2006-12; (a) three categories
      (good, satisfactory and unsatisfactory) are provided by the source document.

     142. In 2006, in Kyrgyz Republic, $10 million was allocated for road maintenance including
     road repair. The large bulk of this funding went to maintain the newly built Bishkek-Osh road
     corridor with only the equivalent of $200/km spent on the rest of the road network. In reality,
     except for emergency repairs and winter maintenance, very little routine and periodic
     maintenance is being carried out on the rest of the network. The situation is of course
     aggravated by the lack of a clear funding mechanism. The Road Fund has never been fully
     developed as a functional source of funds for road maintenance, which is similar to the situation
     in most CAREC countries. The funds allocated to the transport sector largely go to construction
     of new roads or debt service of MI loans. This is a common feature in Central Asia. New roads
     are needed to establish proper road corridors, but a balance has to be found between
     maintenance and new investments.

     143. In reality, funds for road maintenance come from budget allocations and represent only
     a portion of the revenues collected for the road fund. Attempts to properly structure and finance
     the road funds have not yet been successful. In consequence the little funding allocated for road

   120 days per year.
35
   UN Economic Council TRANS/WP.5/2005/16/Add.1, 16 June 2005.
36
   From the Road Sector Development Strategy for 2007-2010, Kyrgyz Republic MOTC 2007.
37
   In Kyrgyz Republic, according to findings of the ADB-TA 6309, ¼ of the bridges in the south road network are due for
   replacement; in Kazakhstan 32% of the bridges were either in need of emergency repair or major repair (Kazakhstan
   Road Sector Development Plan 2006-12).
 96 Appendix 3


     maintenance does not provide for preventive maintenance 38 and can only cover marginally
     periodic maintenance needs.

     144. Vehicle overloading aggravates the situation by accelerating pavement deterioration.
     Overloading is frequent in Central Asia though it is not properly documented because of the lack
     of reliable statistics. After paying a fine (or unofficial payments) overloaded vehicles are
     permitted to continue their journey and continue to cause harm to road pavement.

     145. The poor situation of road maintenance is not only due to the scarcity of funds. For
     instance in Kyrgyz Republic, road maintenance units have limited usable equipment and are
     over-staffed. Technical assistance projects over the years in Central Asia have all come to the
     same conclusion: the only sustainable solution is to change the system of road maintenance
     delivery. This means introducing user pay mechanisms and progressively passing the
     responsibility for road maintenance to the private sector39 through performance-based contracts.

     146. The maintenance situation is perhaps less dramatic for the railways, largely because
     traffic on the network is still much lower to what was the case during the FSU. However, railway
     operations in, Azerbaijan, Kyrgyz Republic Tajikistan, and Uzbekistan are reporting numerous
     speed limitations because of poor bridge and track conditions. The rail line between Bishkek
     and the Kazakh border was built in 1924, and the average speed is less than 40 km/h. In
     Azerbaijan there are sections where average speed is 20 km/h and at least 30% of the rail
     network is in need of repair.

     147. Reduction in speed has affected negatively the competitiveness of the rail sector in
     terms of short distance domestic passenger traffic. Under-funding and poor management are
     the principal reasons for decline in the condition of rail infrastructure and rolling stock.

A.3.3.6 Transport Cost and Transit Time on Major Routes

     148. Transport costs and travel times are reputed to be high in landlocked countries and
     especially in Central Asia.40 Therefore, the natural transit corridors through Central Asia from
     the Pacific to Europe are not yet in a position to compete fully with sea routes or the Trans-
     Siberian Express Railway Service (TSES). There are many reasons which explain this situation.
     One reason is the lack of competition in the rail sector.

     149. In the rail sector in the CIS countries, freight tariff ceilings (MTT) are negotiated and
     endorsed by the Organization for Cooperation of Railways (OSZhD). Countries are free to offer
     discounts and they do; sometimes up to 50%. 41 The ceiling tariffs are certainly above the
     operating costs. But, in addition, it is common practice for CIS countries to have a two-tier tariff
     structure, a tariff for international movements and one largely discounted for domestic
     movements (sometimes only 1/3 of the international tariff). Railway authorities have not been
     able to maintain adequately their infrastructure and renew their fleet. Capitalizing on captive
     markets, they have not shown great enthusiasm to innovate and improve productivity. They all
     are candidates for major restructuring.

     150. Road transportation has been largely deregulated. The sector is now almost exclusively
     in the hands of private operators with tariffs following market conditions except in the PRC,
     where large operators are still state owned enterprises. Share of own account transport is very


38
   In 2004, in Kyrgyz Republic, $1,300/km was spent on maintenance of the Bishkek-Osh corridor while only $240/km
   was spent on the rest of the road network.
39
   In Kyrgyz Republic, ADB TA 6309 and ADB TA 4444 are looking at this issue, proposing an implementable road
   maintenance program with first corporatization of the local public work units before full privatization.
40
   For example, Panalpina Beijing charged RMB 9 million to ship 130 tons of project cargo (power generator) from
   Changshu, Jiangsu Province to KAZ, a journey of 7,000 km. This is about 10 - 20 times higher than the cost of
   comparable transportation services in more developed countries, like the US
41
   In CIS usually varying between 30% and 50%.
                                                                                                       97 Appendix 3


     high. 42 In most Central Asian countries, local operators have not been able to enter in a
     significant way into the potentially growing transit market. The trucking fleet is old; most vehicles
     do not meet EU vehicle emission standards and therefore are not eligible to acquire TIR carnets.
     Within Central Asian countries freight traffic demand is relatively low and competition stiff.

     151. Long haul road freight transport costs are also high because of the lack of reliability of
     the service, expressed mainly by the waiting time at borders that cannot be planned properly.
     Another reason is the high unofficial payments encountered by drivers along the road corridors
     in Central Asia before reaching Europe. Road transport costs between Europe and Central Asia
     are unbalanced because of empty returns more likely from Central Asia to Europe than the
     reverse. Finally, the lack of organized logistics industries implies that shipments have difficulty
     to be consolidated and tracked easily, hence putting pressure on the cost.

     152. Table A.3.24 presents information on the transport cost and transit time on selected
     major routes in Central Asia. The information comes from different sources and therefore
     comparisons have to be considered with caution.

     153. A clear conclusion is that unofficial payments and waiting time at borders constitute a
     serious hindrance, increasing the overall cost of goods and adversely affecting competitiveness.
     For instance, on the northern route to Europe by road, more than 50% of the time consists of
     waiting at border crossings.

     154. As expected, transport by rail takes longer but is cheaper than road transport. Also on a
     per km basis, shipping goods from Chinese ports to Central Asia is cheaper than the Europe-
     Central Asia route. Delays can be reduced significantly. A container block train from Shanghai
     or Lianyungang can take half the time of a regular train to reach Almaty with practically no
     waiting time at the Chinese-Kazakhstan border. On average, by road it takes 14 to 20 days to
     send goods from Central Asia to Europe and up to 30 days by rail. By rail, freight forwarders
     quote a figure of 30 days from Central Asia to Lianyungang. It is clear that with these times,
     Central Asia is not yet competitive with shipping routes for the PRC–Europe trade. In Central
     Asia, rail rates for containers are high and limit container traffic.

     155. A study by the Transport Research Institute of Kazakhstan 43 also provides some
     interesting highlights on the breakdown of transport costs. The study found that the total
     transport cost could be split as follows:

           (i)     60% for true transport cost,
           (ii)    6% for custom charges or duties,
           (iii)   9% for charges at the loading or unloading point,
           (iv)    5% for insurance,
           (v)     3% for road tax,
           (vi)    9% for border-crossing charges, and
           (vii)   8% for undocumented charges (rent or informal payments).

A.3.3.7 Transport Safety

     156. Vehicle fleets have been growing at a rate of 10% or more in Central Asia and
     unfortunately road traffic accidents are also growing. Attempts have been made to curb the
     problem but the situation remains serious as illustrated in Table A.3.25. The ratio of fatalities per

42
   ADB, “Central Asia: Increasing Gains from Trade Through Regional Cooperation in Trade Policy, Transport and
   Customs Transit,” 2006.
43
   Larisa Guseva, “Transit Potential of Transport Facilities in the countries of the CA: Railways and Road Transport,”
   Kazak Institute of Strategic Studies, 2002.
98 Appendix 3


10,000 vehicles for Nordic countries in Europe is below five and average 25 in Central Asia.
This places Central Asia among the worst countries in the world in terms of safety. Pedestrians
are the predominant victims of traffic accidents.

                             Table A.3.24: Total Transport Costs and Time for Selected Origin – Destination Pairs
                                                                                       Time                    Time                            Time
     Origin            Destination           Km         Road rate      Rate type                $/Ton Rail                $/container
                                                                                       days                   (days)                          (Days)
                                                                                                                            1,800 rail (rl)
     Almaty               Baku                  4,090
                                                                                                                          5,300 road (rd)
     Almaty              Istanbul               5,200                                                                        2,000 (40) rl          22
                                                                                                                            3,350 (40) rd
     Almaty              Moscow                 4,390
                                                                                                                              1100 (40) rl          17
     Almaty           Kostryn-Kassel            6,570                                                                        6580 (40) rd           14
     Almaty              Urumqi                 1,340
      Baku               Istanbul                        4000 4200              20T
      Baku                 Poti                   900         1,200             20T
      Baku            Bandar Abbas              2,000         2,800             20T
      Baku              Frankfurt               5,000         7,000             20T
    Frankfurt              Baku                  5000         7,500             20T
                                                              2,300
      Baku               Moscow                 2,500                           20T
                                                              2,800
    Bishkek               Almaty             250/576                                                     30          3           795 (20)          3
    Bishkek             Tashkent             579/706                                                     18       4–5            725 (20)        4–5
    Bishkek             Kashgar                                                                          30        7-8
    Bishkek              Urumqi                 1,915                                                    27        7-8      2000 – 2500        14 - 21
    Bishkek              Istanbul                              1,740            14T
                                                                                                                                3200 (20)
    Bishkek             Hamburg
                                                                                                                               6,000 (40)           14
    Bishkek              Moscow            3640/3756                                                    139         23          2285 (20)      14 - 23
    Bishkek           St Petersburg        4335/4659                                                                           2750 (20)           25
                                                                                                                               1810 (20)           10
    Bishkek           Bandar Abbas              3,470                                                48– 56         10         3000 (40)        16–20
                                                                                                                             5000 (40) rd          10
    Bishkek            Novossibirsk          1980/2266                                                                         1400 (40)             7
    Bishkek               Druzbah             966/1453                                                                         1030 (20)          7--8
    Bishkek            Lianyungang                                                                                              6000(40)           30
    Tashkent               Almaty              815/855             93             $/T           4          23          5
    Tashkent              Bishkek              579/706             83             $/T           3          18          5
    Tashkent             Dushanbe             365/1076            127             $/T           5          27        6-8
    Tashkent               Urumqi                                 116             $/T           7          50         15
    Tashkent              Kashgar                                 250             $/T          10          76         30
    Tashkent                Baku                                  317             $/T          12          57       9-12
    Tashkent               Batumi                                 400             $/T          18          85     12-15
    Tashkent              Hamburg                                 450             $/T     20-22           100         30
    Tashkent                Berlin                                                                                          7,050 (40) rd         20
    Tashkent              Moscow             3307/3360            270             $/T      6–8             69    10– 15
    Tashkent              Istanbul                                350             $/T    20 – 22           86    20– 25
    Tashkent          Bandar Abbas                2,770           215             $/T          20          58    20– 25
    Tashkent           Novossibirsk                               180             $/T     7 – 10           48         12
    Tashkent           Lianyungang                6,300           370             $/T          30          95         30
Source: Interviews with freight forwarders in Tashkent , Baku and Bishkek; Transit Transport Issues in Land Locked and Developing Countries, Part B
Chapter VI ESCAP 2003; ADB "Central Asia Increasing Gains from Trade Through Regional Cooperation in Trade Policy, Transport and Customs
Transit," 2006.


                              Table A.3.25: Road Safety Situation in Central Asia (2005)
                                   Azerbaijan       Kyrgyz Republic         Tajikistan                                        Mongolia
    Number of
    reported                                       2,388                           3,717                       1,400                     4,654
    accidents
    Number of
                                                        811                           893                         421                         177
    fatalities
    Number of injured                              2,766                           4,568                       1,620                          661
    Ratio of fatalities
    per 10,000                                          17                            31                            23                        22
    vehicles
   Source: Azerbaijan 2005 Statistical Yearbook; Kyrgyz Republic 2006 Year book; Tajikistan: from ADB TA 6924
   Facilitation of Transport Cooperation among CAREC countries, 2006; Mongolia: ADB Transport Sector Strategy,
   2007.

157. In all of Central Asia, there is a zero tolerance for driving and drinking. “Road transport is
at the moment characterized by a complete lack of basic discipline in terms of driving habits and
                                                                                                      99 Appendix 3


     conformance to traffic laws, while vehicle maintenance standards and goods vehicle loading
     standards are largely ignored”.44

     158. Traditionally rail is perceived as the safest method of transport, whether measured by
     fatalities or accidents per passenger kilometer. This is certainly true of Azerbaijan and PRC
     where rail accident figures are very low. However, Kazakhstan reported, for 2005, some 58
     traffic accidents occurring at railroad crossings.45

A.3.3.8 The Missing Links and Infrastructure Investments

     159. In order to make the corridors and transit routes (rail and roads) functional, CAREC
     countries need to make relatively substantial investments to rehabilitate deteriorated roads or
     widen congested roads or even to build new roads to establish efficient linkages. Profiles of the
     road and rail corridors included in Appendix 5 illustrate this point. Among the main road
     investments required to make transit corridors effective, one can list the following:

                In Kyrgyz Republic, rehabilitation of the road between Balykchy and Torugart
                (border with the PRC) to provide better access to/from the PRC (Kashi) for
                the corridor passing through Almaty-Bishkek-Tashkent at an estimated cost of
                $100 million. This is part of AH 61.
                In Kyrgyz Republic, rehabilitation of the road between Sary Tash and
                Karamik (Tajikistan border) which will provide better access to Tajikistan. This
                stretch of road is part of the Almaty-Bishkek-Dushanbe-Afghanistan-Pakistan
                (Karachi/Gwadar) corridor or alternatively Almaty-Bishkek-Dushanbe-Termez-
                Turkmenistan-Iran (Bandar Abbas). This road is part of AH 65.
                In Tajikistan, many road projects are ongoing or planned. Probably the most
                important is the corridor Tursunzade (Uzbekistan border)-Dushanbe-
                Dzhirgatal-Kashat (Kyrgyz Republic border). This is also part of AH 65.
                In Afghanistan, road construction projects financed by MIs are being carried
                out on the western part of the Ring Road between Andkhuoy and Al Khaman
                (AH 76).
     160. Many new railway connections are being constructed in Kazakhstan, Uzbekistan, and
     XUAR. In Kazakhstan, construction has started on the ambitious east-west link between Mointy
     and Beyneu. Another project is a new rail line from Almaty to Khorgos (PRC border). This line
     will reduce the distance between Urumqi and Almaty by more than 400 km and will help reduce
     the congestion at the Druzbah border, probably serving as the main gateway to Europe. Traffic
     on this line is expected to increase to 15 million tons by 2015. PRC is also building the
     connecting link in XUAR expected to be completed in 2009.

     161. There are also projects envisaged in Uzbekistan. Feasibility studies are being carried
     out for the rehabilitation of the Nukus-Karakalpakya road leading to Beyneu in Kazakhstan, the
     Caspian Sea and the route to Europe. Two rail projects are at the feasibility study stage: the
     Uchkuduk-Kyzyl Orda connection which will lead to the main railway line in Kazakhstan
     connecting Europe to the PRC and extension of the railroad from Agren to Pap in the Fergana
     Valley in order to avoid transiting through Tajikistan. The completion of the new railroad
     Tashguzar-Kumkurgan will avoid passing through Turkmenistan and thus paying high transit
     fees.46 Important road and rail projects are also being planned or are ongoing in Turkmenistan
     (double carriage road between Turkmenbashi and Ashgabat, and the rail connection between
     Ashgabat and Dashoguz near Urgench in Uzbekistan).



44
   ADB, Draft Overview of the Azerbaijan Transport Sector, Transport Sector Development Strategy Project, 2006.
45
   Information provided by the Kazakhstan Ministry of Transport and Communications.
46
   According to sources from the Uzbek Railway this could be up to $20 million.
 100 Appendix 3


     162. To handle the surge in Urumqi traffic, the XUAR Development and Reform Commission
     believes the Ministry of Railways (MOR) of PRC should electrify the line from Lanzhou to
     Urumqi and add a second track all the way. Currently, it is double track from Lanzhou to Jia Yun
     Guan, but single track thereafter to Urumqi. MOR is constructing a second track from Jinghe to
     Urumqi. This should be completed in one year and will greatly increase capacity to Ala Shankou.

     163. In all these investment projects, especially in Kyrgyz Republic and Tajikistan, traffic is for
     most cases currently low, and normal traffic growth cannot justify the projects. Justification
     relies entirely on generated and diverted growth of transit traffic. These investments are
     definitely justifiable over a certain time horizon. The question is how to ensure that countries like
     Kyrgyz Republic and Tajikistan are not going to be in a position to finance projects where the
     main beneficiaries are the countries with originating or terminating transit traffic.

     164. This overview of infrastructure investments would not be complete without mentioning
     multi-modal interfaces and cross border facilities. Container traffic has been slow in penetrating
     Central Asian markets. For instance in 2005, only 75,000 containers 47 were transported in
     Uzbekistan representing a small fraction of the rail and road traffic volume. However, it is now
     growing. Containerization is more advanced in Kazakhstan and this explains the presence of a
     growing logistics industry there. Multi-modal interfaces and logistics centers have been built in
     Kazakhstan and more are being considered. Other CAREC countries are moving in the same
     direction (especially Uzbekistan). Increasing intermodal transport and building the proper
     facilities have been receiving the full support of international organizations.48

     165. Cross-border physical facilities in Kyrgyz Republic and Tajikistan, for example, are
     inadequate at some points to meet the requirements of moving efficiently the growing traffic
     through the borders. In Kyrgyz Republic through the ADB support program to the Directorate of
     Customs, funding is being provided to carry out improvements at the most busy border
     crossings.

A.3.3.9 Civil Aviation

     166. Aviation is a very dynamic sector of transport that eagerly adapts to changing
     environments, no matter how drastic those changes may be. Historical and traditional
     approaches, however, are also not uncommon, and many of today's challenges CAREC
     countries are faced with are rooted in the past.

     167. The FSU fell apart in the summer of 1991, and quite unexpectedly the countries that
     gained independence had to create a national civil aviation sector from scratch, mainly based
     on the existing assets left over after the only national carrier of the FSU, Aeroflot departed.

     168. As the evolution of independent aviation sectors continued in the FSU countries, new
     challenges related to their integration into the international aviation community emerged.

     169. XUAR and, to a lesser degree, Mongolia, followed the evolutionary path without any
     political disturbances over the last decades, capitalizing on the rapid growth of the economy and
     expanding capacities in both infrastructure and fleet to meet booming market demands.
     Mongolia, however, did suffer from a mass exodus of Soviet aviation specialists that formed the
     bulk of country's aviation professionals during the Soviet times, as well as from discontinued
     support of Aeroflot in terms of aircraft leases and maintenance. Afghanistan, on the other hand,
     has only recently started to actively rebuild its infrastructure from a civil war that destroyed


47
     From Uzbekistan Transport Strategy, ADB TA 4659, December 2006.
48
     The Busan declaration signed by ESCAP participant countries during a TAR Ministerial meeting in November 2006
     contains a statement supporting the need to put in place more intermodal facilities. Also the EU Commission is
     conducting a study ($5 million) on the need and optimal location of inland container depots or logistic centers in
     Central Asia.
                                                                                        101 Appendix 3


much of its aviation industry. The international community and MIs are actively assisting the
country in its recovery efforts.

170.     Most CAREC countries experience the following common challenges in civil aviation:

       (i)      institutional/management transformation and de-regulation;
       (ii)     safety and compliance to International Civil Aviation Organization (ICAO)
                standards;
       (iii)    regulatory framework harmonization;
       (iv)     governmental subsidy reform;
       (v)      competition from the global players and neighbors;
       (vi)     ageing infrastructure in need of rehabilitation;
       (vii)    financing problems;
       (viii)   obsolete flying assets;
       (ix)     high maintenance costs; and
       (x)      shortage of qualified personnel.
171. It is obvious though that all the above challenges, if considered from a different
perspective, are capable of bringing new opportunities and drastic improvements for the
regional aviation industry in the CAREC region, boosting its growth, income flows and
expanding the horizons for better services, wider market outreach, and, most importantly, safer
skies. Table A.3.26 illustrates that for each challenge there are several alternatives that are
beneficial to (i) the industry itself in terms of lower costs, higher profits and overall safety, and
expanded operations; (ii) to the public in terms of cheaper, better, more convenient and diverse
services; and (iii) to the government in terms of clearer rules and transparent environment, less
subsidies and better GDP growth.

172. The table clearly demonstrates that reversing the challenges and turning them into
opportunities for the most part requires no more than a change of mindset within the sector
management of the CAREC countries. There is no need to devise new strategies and plans; all
of the above have already been successfully utilized worldwide with a proven track record. It
takes vision and determination to identify, select and implement changes in a way that creates a
win-win situation for the industry players, the government, and for the customers.

173. A highly competitive nature of the aviation sector will encourage every player to
implement changes in a cost-efficient manner acceptable to the customer, while proper Civil
Aviation Authority (CAA) oversight will ensure all practices are safe for everyone. Financial
resources from MIs, local or national governments, and the private sector will line up to compete
for financing projects with a sustainable future and benefits to all the stakeholders.

174. There are 41 international airports in CAREC countries. Some of these handle only one
or two international flights per week, while others handle a wide range of carriers to numerous
destinations. There are many other airports and airstrips scattered throughout the CAREC
region, and in some countries air travel is one of the primary modes to move passengers and
considerable high value/low volume freight.

175. Because of the important role airports play in the CAREC region, it is understandable
that the countries are targeting more investments in upgrading facilities as the improvements for
the road and rail networks are completed. In addition to serving national and regional traffic, the
airport network will facilitate the development of the international tourism industry in the CAREC
region.
 102 Appendix 3


              Table A.3.26: Challenges and Opportunities in the CAREC Aviation Sector
Challenges                                             Opportunities
   • Institutional reforms                                  • Lean, professionally-managed and profit-
   • Management transformation                                  oriented airlines and airports
   • De-regulation                                          • Competent aviation authorities
                                                            • Checks and balances within CAAs
                                                            • Clear rules of the game
   • Safety concerns, black lists                           • New safety-conscious mindset for all
   • ICAO compliance                                            industry players
                                                            • Improved maintenance practices
                                                            • Responsible safety oversight from CAAs
   • Regulatory framework harmonization                     • Reasonable and safety-oriented restrictions
                                                            • Internationally-acceptable rules and
                                                                regulations
                                                            • Integration into global regulatory framework
   • Governmental subsidy reform                            • Governmental money spent only where
                                                                absolutely necessary
                                                            • Cross-subsidizing replaced by targeted
                                                                Governmental assistance
                                                            • More funds left to improve fleet, expand
                                                                coverage
   • Competition from the global players and                • Smarter and safer operations
        neighbors                                           • Improved fleet and ground asset utilization
                                                            • Better rates for the customers
                                                            • Business-oriented management
   • Aging infrastructure in need of rehabilitation         • Construction of new facilities meeting ICAO
                                                                standards
                                                            • MI/private funding of key projects
                                                            • Expanded capacity on rehabilitated airfields
   • Financing problems                                     • Privatization of loss-making entities
                                                            • Private-public partnership schemes
                                                            • Lease shopping worldwide
                                                            • Smarter and flexible service marketing
   • Obsolete flying assets                                 • Flexible fleet to meet customer needs in
                                                                target niches
                                                            • Unification of fleet to reduce maintenance
                                                                overheads
                                                            • Newer aircraft with less maintenance
                                                                downtime and higher utilization capacities
                                                            • New fleet preferred by customers
   • High maintenance costs                                 • Outsourcing maintenance to 3 party
                                                                                               rd

                                                                service providers
                                                            • Economies of scale achieved by merging
                                                                several maintenance shops
                                                            • Turning maintenance from cost center to
                                                                profit center
                                                            • Specialized or diversified maintenance
                                                                targeting client requirements
   • Shortage of qualified personnel                        • Creating self-sustainable regional training
                                                                facilities
                                                            • Outsourcing of key professional staff
                                                            • Shopping for training resources worldwide
CAA=Civil Aviation Authorities; ICAO=International Civil Aviation Organization; MI=Multilateral Institution.
Source: adapted by Consultant.
                                                                                          103 Appendix 3


A.3.3.9.1 Airlines

     176. Airline connections in Central Asia are still heavily oriented towards the FSU. However
     changes are taking place. Travel agents report on the rapidly growing demand to Central,
     Western and Southern Europe, and to the Middle East. Changes in per capita income, activity
     and prices in the oil and gas sectors, and migrant labor demand and wages strongly influence
     air travel patterns.

     177. Tourism targeting the Central Asian countries has been slow to develop, though there is
     longer term potential, especially in Kyrgyz Republic, Tajikistan, and Uzbekistan and, to some
     extent responding to rising incomes and education in Central Asia, PRC, India, Iran, Turkey and
     the Gulf areas. Mongolia has been benefiting from increased international tourism, especially in
     2008.

     178. State-owned airlines dominate the market for air transport services in most CAREC
     countries. Potential competition from non-CAREC operators is strong, and the local authorities
     are trying to regulate market access in varying degrees. For instance, XUAR has adopted a
     hybrid model of state-owned airlines and smaller but more flexible airlines owned by local
     governments, to bring a reasonable level of service and competition.

     179. Over the past 5 years, there have been different rates of growth in air traffic among the
     CAREC countries: around 12%-15% per year for Azerbaijan and XUAR, around 8%-10% in
     Kazakhstan and Uzbekistan, and 3%-6% elsewhere.

     180. There has been significant re-organization and modernization in some airlines, airport
     management companies and CAAs. Consequently, most countries took steps to get closer to
     compliance with ICAO Standards and Recommended Practices (SARPs), yet there is still a
     substantial degree of non-compliance that needs to be addressed on the national and regional
     levels. Some major investments have been accomplished in CAREC countries based on
     national strategies. Therefore, the scope and desire for regional cooperation is limited mainly to
     the common needs in air navigation control, weather, risks, and incidents.

     181. Cooperation is still advanced, though slowly, in bilateral agreements between
     governments and between operators (such as code-sharing) and services (catering,
     maintenance, inspection, fuelling). The mechanisms for wider multilateral cooperation are
     available through the major organizations (International Air Transport Association or IATA, and
     ICAO), pilots, shippers, tourism establishments, etc.

A.3.3.9.2 Afghanistan

     182. Afghanistan has several airlines including Ariana, Kam Air (the first private Afghan
     airline), Pamair, and Safair. As well, there is a carrier PACTEC used by non-government
     organizations (NGOs), and a UN carrier. There is also a helicopter company.

     183. Ariana is the national flag carrier for Afghanistan stationed in Kabul, with eight aircraft
     currently in service49 and four additional planes on order. Kam Air has a fleet of four aircraft
     stationed in Kabul. The airlines fly a wide variety of aircraft including Boeing, Antonov, and
     Beechcraft on foreign and domestic routes. There have been safety concerns about the planes
     of some of the airlines expressed by IATA. International carriers flying into Kabul are few and
     include Indian Airlines (subsidiary of Air India) and Pakistan International Airlines (PIA).

     184. The major domestic destinations include Kabul, Kandahar, Herat, Mazare-e-Sharif and
     Kunduz while internationally Dubai (Kamair, Pamair), Delhi, Islamabad, Ankara, Istanbul,
     Tehran, and Dushanbe are among the destinations. Traffic has been increasing, and is
     especially high during the Hadj. Future connections may include Frankfurt and London since
49
     "Directory: World Airlines", Flight International, 2007-03-27, p. 77.
 104 Appendix 3


     some airlines are improving their equipment (purchase or lease of jets) and are upgrading other
     equipment (e.g., baggage and passenger scanners).

     185. A serious challenge for the air sector is the limited expertise at the Ministry of Transport
     which has been further reduced by the departure of specialists from ICAO. The plan is to have
     them return as a new project receives funding. As well, Civil Aviation is to become governed by
     an independent authority to oversee airlines and airports properly. One difficulty involves
     financing because the Government makes only limited funds available—about $3 million per
     year, which is not enough. ICAO believes that funds received from overflight fees should be put
     back into the sector as should landing fees, but Afghanistan is not doing this in contrast to other
     countries including some in Central Asia. However, over time, the budgetary situation is likely
     to be improved and capacity building by ICAO and the US Federal Aviation Administration (FAA)
     will assist in strengthening institutional capacity.

A.3.3.9.3 Azerbaijan

     186. In the past five years, Azerbaijan’s GDP growth has been impressive, averaging over
     10.5% a year. A wide-ranging Government reform program and the surge of its oil and gas
     industry have driven this growth.50

     187. The country has three international airports located in Baku, Ganja and Nakhchivan.
     After a US$64 million upgrading, Baku International Airport reopened in 1999 with new runways
     capable of serving jumbo jets and the ability to handle 1,600 passengers an hour. The US$32
     million reconstruction project of Ganja Airport is now completed as is the overhaul of
     Nakhchivan International Airport. Lenkaran Airport which has been closed for many years is
     now under renovation and expansion. Charters and Air Cargo to the Russian Federation have
     been mentioned as rationale for the project. Ganja and Lenkaran can also serve as emergency
     airports for Baku traffic. In 2005, Azerbaijan reported a total of 1.2 million air passengers.

     188. Azerbaijan has regular flights to FSU countries, United Kingdom, Germany, France,
     Austria, Italy, Czech Republic, Israel, Iran, Turkey, UAE, India, Pakistan, and Afghanistan. A
     number of the flights are operated by Azerbaijan Airlines (AZAL), the national airline. AZAL
     since 2000 has started an ambitious program of fleet renewal with the acquisition of four Airbus
     and four Boeings.

     189. AZAL was established in April 1992 as a state company, and a number of civil aviation
     entities were transferred under its jurisdiction. It holds a monopoly in Azerbaijan on the control
     of which airlines are given routes and the rates to be charged. AZAL owns shares or a
     controlling interest in other airlines and air services in Azerbaijan. It also owns or participates in
     the ownership of airfields and other aviation service providers, including AZAL Avia Cargo, a
     wholly-owned subsidiary covering cargo operations.

     190. In early 2006, the Azerbaijan Civil Aviation Authority was established under the Cabinet
     of Ministers to provide the separation of the regulator and the operator. However the regulatory
     function still has not been formally separated from the operational function and is currently
     performed by AZAL. The Government intends to establish either a separate State Agency as an
     Aviation Authority or transfer the regulatory powers directly to the Ministry of Transport.

     191. AZAL has a total of 37 aircraft.51 The airline also renewed its air craft fleet with the
     acquisition of four Airbus during 2005-2006, and four Boeings since 2000, and another five
     Boeings are on order. In addition to AZAL, there are several other Azerbaijan airlines, including
     Baku Airways, Forair, Imair and Turan Air.


50
     Sources: Scott Wilson, 'Overview of the Azerbaijan Transport System and Transport Sector Development Strategy'
     report, Aug '06, ADB; and AZAL's official website.
51
     Flight International, Directory: World Airlines, p.83, 27 March 2007.
                                                                                        105 Appendix 3


A.3.3.9.4 Kazakhstan

 192. The aviation sector has been a dynamically growing industry ever since the breakup of
 the Soviet Union, apart from a short period between 1998 and 2000 due to a major slump in the
 Russian economy that adversely affected all FSU countries.

 193. Dramatic economic changes and international and local business expansion fuel the
 demand for local and long-distance air transportation, and the sector seems to be capable of
 responding to the challenges adequately by upgrading its infrastructure, procuring new aircraft
 and expanding passenger and cargo services both domestically and internationally.

 194. The Civil Aviation Authority (CAA) of Kazakhstan, which is under the Ministry of
 Transport and Communications (MOTC), is the regulatory agency responsible for civil aviation.
 Kazakhstan has a reasonably large aircraft fleet (589 aircraft total, including 91 helicopters), but
 a relatively high portion of it is aged and obsolete, with an average aircraft age is between 26
 and 27 years.

 195. In 1998-2005, KAZ airlines moved 8.7 million people. The number of air passengers
 decreased from 1998 to 2000 due to overall decrease in incomes and people’s welfare.
 However, Kazakhstan has enjoyed more than a two-fold increase in passenger growth from
 2000 to 2005, and future growth is anticipated to be at a double digit rate in 2008.

 196. Even though cargo transportation is on the rise, the relative volume of air cargo in the
 total freight shipped is tiny. In 1998-2005, Kazakhstan airlines moved 117,000 tons of cargo.
 The cargo tonnage rose from 14,500 tons in 1998, to 21,200 tons in 2005. In 1998, Kazakhstan
 airlines cargo volume was 40.7 million ton-km, and increased to 101.12 million ton-km in 2005.

 197. Airlines are trying to cope with the demand by expanding their operational fleet and
 phasing out the old assets. Air Astana, one of the largest Kazakhstan airlines, intends to expand
 its fleet with 19 additional aircraft. Other airlines, such as SCAT, for example, entered into a
 private-public partnership with the Kazakhstan MOTC to lease seven AN-48-100Bs. Overall, the
 total fleet increased by 21 aircraft in 2007 and there will be an additional 26 aircraft in 2008.

 198. The airport infrastructure requires some attention since it was largely built during the
 FSU times and is close to capacity. The Kazakhstan Government with external loans and
 assistance and private participation, has already rehabilitated seven airports. Plans are to
 continue rehabilitation efforts for other regional airports that will be funded by a variety of
 financing sources, including concessions. The goal is to ensure compliance with ICAO
 standards for all major Kazakhstan airports by 2009.

 199.     In the next three years, the Kazakhstan government’s aviation plans provide for

        (i)     development of air transport industry;
        (ii)    aircraft fleet expansion and replacement;
        (iii)   addition of new international and domestic routes;
        (iv)    development of airports;
        (v)     modernization of air traffic control system;
        (vi)    aviation law reforms to meet international standards; and
        (vii)   improvement in aviation personnel training.
 200. Kazakhstan's air traffic control/air traffic management (ATC/M) service provider,
 Kazaeronavigatsia (established in 1995), is a joint-stock company, which is wholly owned by the
 Government and is under the CAA. Kazakhstan has 12 Flight Information Regions (FIRS) that
 include 84 Air Traffic Service (ATS) routes and over 72 air corridors with a total length of
106 Appendix 3


 approximately 60,000 kilometers. The main corridor is from Arisa to Sarin (through Aktyubinsk –
 Arkalyk – Karaganda - Ayguz), which handles more than 70% of transit traffic. There is full radar
 coverage along this route above 9,000m.

A.3.3.9.5 Kyrgyz Republic

 201. The aviation sector of Kyrgyz Republic, unlike other CAREC countries, is not
 monopolized by one company that provides all services, from airfield management to ATC, to
 airline management. Instead, the country's civil aviation sector is divided into three independent
 subsectors: airlines, airports and air traffic control/management (ATC/M).

 202. 'Kyrgyz Republic Aba Joldoru' was the first national airline company that subsequently
 underwent a number of reorganizations. Other airlines appeared shortly, and currently there are
 27 airlines in Kyrgyz Republic, of which, paradoxically, only eight possess aircraft operator's
 certificates. 'Kyrgyzaeronavigation', the company in charge of ATC/M, is a Government-owned,
 but an independent and self-supporting entity. All airports in the country are managed by JSC
 Manas International Airport, which acts as the airport authority for Kyrgyz Republic.

 203. The Department of Civil Aviation (DCA) is beginning to make reasonable efforts to
 ensure compliance with ICAO SARPs, but requires external assistance to complete the
 preparations. It should be noted that the aviation sector of the Kyrgyz Republic has received a
 surprising lack of involvement in institutional or capacity building efforts by the MIs. Only quite
 recently, EU and the Directorate on Energy and Transport have displayed interest in specific
 mutual cooperation efforts.

 204. There are 30 airports in the Kyrgyz Republic, of which 18 have paved runways. Manas
 International Airport is near Bishkek and serves most international traffic. Osh is also an
 international airport.

 205. In Kyrgyz Republic, there are 27 registered airlines overall, with only 8 airlines operating
 at the moment. There is a mix of governmental interests and private ownership in the big four
 airlines of Kyrgyz Republic. Other airlines are mostly privately owned.

 206. The older airlines, such as Kyrgyz Republic Airlines and ITEK, generally operate aged
 fleets of TU-154s and An-24s, whereas ESEN Air leases two B-737s, and ITEK one B-737. The
 remaining 19 airlines do not operate or own a single aircraft.

 207. A 10% annual growth rate of international flights and passengers and a 25% annual
 increase in international cargo transportation between 2000 and 2005, occurred primarily due to
 activities related to the Coalition air base stationed at Manas in support of Operation Enduring
 Freedom. At the same time, domestic cargo transportation volumes almost halved in the last
 five years, with the number of domestic passengers unchanged.

A.3.3.9.6 Mongolia

 208. Due to the vast space that separates populated areas and the low development of road
 infrastructure, aviation sector development is particularly important. Mongolia is served by 23
 airports, with the majority having unpaved runways that are frequently grass. Its largest airport,
 Chengghis Khan International Airport, is served by seven carriers.

 209. MIAT flies to destinations including local towns, cities in neighboring Russian Federation,
 PRC, Japan, South Korea and to some seasonal destinations in Italy and Japan. The MIAT fleet
 consists of Airbus, Boeing, and Antonov aircraft. In addition to MIAT, there are also other
 airlines, including Eznis Airways, Aero Mongolia, Hangard and Trans-Ulgii.
                                                                                             107 Appendix 3


A.3.3.9.7 Tajikistan

     210. Shortly after Tajikistan gained its independence, Tajik Air, the national flag carrier was
     formed in 1992, representing the entire aviation industry at that time. In 2004, the airline was
     transformed into State Unitary Aviation Enterprise Tajik Air (TSA), a self-supporting entity under
     governmental ownership.

     211. The institutional scheme in Tajikistan is characterized by a concentration of functions in
     two different entities: the Department of Civil Aviation (DCA) and TSA. The process of
     separating the national carrier, the airport and air traffic management began in 2007 and
     will be completed in 2008.

     212. Passenger traffic passes mainly
     through the Dushanbe airport to Khojand,
     Khorog, Kurgan Tyube, and international
     destinations. Flights through the other 10 local
     airports are not as frequent. Thirteen carriers,
     including China Southern and Turkish Air
     serve Dushanbe Airport. Tajik Air covers
     destinations such as, Bishkek, Istanbul-Ataturk,
     Moscow-Domodedovo, Novosibirsk, Samara,
     Tehran-Mehrabad and Yekaterinburg.                               A 'Tajik Air' TU-134

     213. Currently, Dushanbe airfield stations Tu-
     154s and 134s, Yak-40s AN-28s, An-26, and MI-8 MTV rotary wing aircraft. In May 2007, a
     B737-200 was leased by Tajik Air from Eastok-Avia, to become a first Western aircraft leased
     by the airline.

     214. Tajik Air shares the international market that equaled 646,000 passengers in 2006 with
     23 airlines, including 16 Russian, 52 creating a competitive market. The domestic market
     accounted for 164,500 passengers in 2005, or 20.3% of the total passengers carried by all
     airlines on domestic and international routes.

     215. The Tajik aircraft fleet is composed of 22 aircraft, most of them are Soviet-built airplanes
     inherited from Aeroflot at the breakup of the Soviet Union, and 4 leased Boeing 737s. The
     average service life for the entire fleet equals to 21 years. Most of TU-154Bs owned by TSA are
     expected to be retired to avoid conducting a complex and comprehensive overhaul
     maintenance works (D check). For each aircraft, the cost of such maintenance is between
     US$ 1.5 million to 2 million per year.

     216. As for the cargo operations, they are quite limited due to lack of cargo aircraft or cargo
     transportation capacity of TSA.

A.3.3.9.8 Uzbekistan

     217. Uzbekistan is strategically located at the crossroads of the ancient Silk Road between
     the PRC and Europe. Double landlocked, air transportation is Uzbekistan’s fastest and most
     direct link to world markets.

     218. After Uzbekistan's independence, Uzbekistan Airways National Air Company (NAC) was
     established in 1992 to operate not only its national airline but also the country’s 12 airports. It
     also had a regulatory function, but the majority of these regulatory functions were transferred to
     the Civil Aviation Authority, which was formed in 1998. Since then, CAA is responsible for
     regulatory, safety and oversight issues, such as licensing and airworthiness certification,

52
     Source: the official 'Tajik Air' website.
 108 Appendix 3


     whereas NAC is involved with operational aspects. Uzbekaeronavigatsia, the Uzbek air traffic
     services (ATS) provider is a wholly owned subsidiary of NAC.

     219. Until recently, Tashkent Airport was the only airport with international status. Now, a total
     of 12 airports have been given either an ICAO or IATA rating, and most of these airports can
     handle granted international status and are able to receive large aircraft such as Boeing 767s
     and Airbus 300s.53 Total air passengers in 2005 were estimated to be just over 2 million.

     220. In recent years, large investments have been earmarked to develop the country’s
     airports and aviation infrastructure. Several European companies provided modern ATC and
     ground equipment and Lufthansa assisted in runway improvements at Tashkent Airport.
     However, Tashkent terminal suffers from congestion because of design and concentration of
     international departures and arrivals at the same time.

     221. Uzbekistan Airways with a fleet size of 55 aircraft, a mix of Soviet-made fleet and
     Western aircraft, including Boeings, Airbuses and RJ-85s, serves almost 50 destinations
     worldwide and domestically from Tashkent. Uzbekistan Airways is not part of any partnerships
     or alliances.

     222. Uzbekistan Airways Technics, an aircraft maintenance company owned by Uzbekistan
     Airways, provides maintenance services for Soviet-made aircraft and engines, as well as A-, B-,
     C-, D-, IL-Checks for Boeing 767, Boeing 757, Airbus 310, and RJ-85 aircraft. It has established
     partnerships with a number of major worldwide maintenance service providers and aircraft
     manufacturers, including Boeing, Airbus, Lufthansa Technik, British Aerospace, OKB Ilyushin,
     OKB Antonov, and is capable of performing up to 12 C checks and 215 А checks on Western
     aircraft per year.

     223. The Government of Uzbekistan has confirmed plans to offer a 49% share in the airline to
     foreign investors as strategic partners with full management control. The full terms of the
     privatization will be confirmed and a preferred bidder selected in 2008. Russia's leading airlines
     are expected to be the most likely bidders54.

     224. Another major issue in Uzbekistan, common to many Central Asian countries, is the lack
     of institutional separation between airline operations and regulatory activities since they come
     under the same management umbrella, Uzbekistan Airways Holding.

A.3.3.9.9 Xinjiang Uygur Autonomous Region (XUAR)

     225. The PRC’s aviation sector has made impressive gains in the last twenty years. Today it
     ranks among the most advanced aviation nations in the world. The PRC has 36 international
     airports and hundreds of regional airports. Some of its airports - Hong Kong, Beijing, and
     Shanghai are key international gateways.

     226. XUAR is one of the least densely populated parts of the PRC. Due to the long distance
     separating its population and economic centers, air transportation is important to the economy
     of XUAR.

     227. XUAR has 13 airports, with its main international airport at Urumqi, and a second
     international airport at Kashi. The Urumqi-Diwopu International Airport covers an area of 4.84
     million square meters. Its newly built 3600m runway can accommodate large jumbo jets and the
     110,000 square meter apron can accommodate over 30 planes.


53
   Source: DM for CNS/ATM Projects – Central Asia Regional Report, TERA International Group, Inc. The 12 airports
   with either ICAO or IATA status include: Tashkent, Navoi, Nukus, Urgench, Termez, Andijan, Bukhara, Samarkand,
   Namangan, Karshi, Fergana, and Zarafshan.
54
   Source: Airliner World, January 2007.
                                                                                           109 Appendix 3


     228. The Government of PRC liberalized its policy regarding airport ownership, allowing
     greater participation of the private sector in airport investment and management. Following the
     completion in 2004 of the transfer of ownership and control from the central Government to local
     provincial governments of some 90 airports across the PRC. This evolution towards diversified
     ownership of the PRC’s airports is accelerating.

                                               229. Eighteen different carriers serve Urumqi Airport,
           Urumqi Airport
                                               covering most major cities in the CAREC region. The
                                               largest carrier - China Southern Airlines flies to Aksu,
                                               Almaty, Altay, Baku, Beijing, Bishkek, Changsha,
                                               Chengdu, Chongqing, Dalian, Dushanbe, Guangzhou,
                                               Hangzhou, Islamabad, Kashi, Kunming, Lanzhou,
                                               Moscow-Sheremetyevo, Novosibirsk, Qingdao, Shanghai-
                                               Hongqiao, Shenzhen, Shijiazhuang, Tashkent, Tehran-
                                               Imam Khomeini, Xiamen, Xi'an, Xining, Yinchuan and
                                               Zhengzhou.



     230. XUAR has benefited from the long, phenomenal economic growth of the PRC. Its
     passenger growth surged nearly three-fold from 2000 to 2005, leading to a three-fold increase
     in the number of passenger flights. In 2006, the number of landings and takeoffs increased by
     38 percent. The number of passenger trips is forecasted to increase to 6.5 million in 2007, with
     5 million of that through Urumqi airport.

     231. Current combined Chinese fleet contains 853 aircraft, but in anticipation of substantial
     growth in domestic demand, the PRC is expanding its total fleet to 1,580 aircraft by 2010 and to
     4,000 by the year 2025.55 Further, in anticipation of double digit future growth, and in support of
     the “Go West” initiative, the XUAR 11th Five Year Plan provides for the following airport
     construction projects, plus a number of smaller aviation projects:

           (i)     Urumqi International Airport 3rd Phase Improvement & Expansion -$350
                   million;
           (ii)    construction of the new Korla Airport -$79 million;
           (iii)   improvement and expansion of the Kashi Airport -$22.5 million;
           (iv)    improvement and expansion of the Hami Airport -$21 million;
           (v)     improvement and expansion of the Aksu Airport -$28 million;
           (vi)    improvement and expansion of the Turfan Airport -$63 million; and
           (vii)   improvement and expansion of the Yining Airport -$26 million.
     232. The bottleneck limiting air transport capacity between the PRC and other CAREC
     countries is the shortage of trained pilots and mechanics. The PRC is currently hiring foreign
     pilots and outsourcing pilot and mechanic training to foreign airlines (e.g., US and European
     airlines). To support further growth, the Civil Aviation Authority of China (CAAC) is subsidizing
     Air China, China Southern, and China Eastern in building additional pilot and mechanic training
     centers.

     233. Similar shortages also occur within the CAREC region. Chinese airlines frequently carry
     their own mechanics to inspect and sign off for takeoffs when flying to other CAREC countries.




55
     Source: http://news.xinhuanet.com/english/2006-05/06/content_4513609.htm.
 110 Appendix 3


A.3.3.10 Maritime Transport

     234. Shipping and port services are changing very rapidly to cope with the needs of global
     customers and the complexity and volume of trade, growing at 10-15% across the region. Each
     of the ports assessed has a busy agenda of expansion and modernization of management and
     equipment, some of them based on annual growth forecasts of more than 20% for the next
     decade (Baku, Aktau, Bandar Abbas, Batumi). Caspian Shipping Co of Azerbaijan still
     dominates shipping traffic on Caspian Sea, but heavy competition is now coming from the
     Kazakh, Russian, Turkmen, and Iranian fleets.

     235. Aktau is vital port for regional strategies as a provider and as a competitor. Demand
     now exceeds its capacity of 12.5 million tons, and capacity will be expanded to 23 million tons
     by 2015. South of Aktau, a new port, Kuryk is being developed for oil exports, including a new
     oil terminal of 20 million ton capacity. Bautino is also being upgraded. Kazakhstan is rapidly
     upgrading road and rail links to Aktau and Kuryk , investing in grain facilities in Azerbaijan,
     Georgia and Iran, attracting private investors in the port’s Economic Zone (FEZ), port facilities,
     freight insurance companies and a transport and logistics center for trans-border cooperation.
     Kazakhstan’s fees for transit and trade are low. The Astana-Aktau corridor and Aktau-Caspian
     services will gain in competition with the existing east-west, north-south and east-south routes.

                                                           236. Baku, with 15 million ton capacity, has
                        Baku-Dubendi Terminal
                                                           focused overwhelmingly on the oil industry. Baku
                                                           receives Kazakh oil by tankers from the port of
                                                           Atyrau and Aktau and Turkmen Oil from
                                                           Turkmenbashi.

                                                      237. Three terminals are currently being used:
                                                      Baku city, Dubendi and the converted log
                                                      terminal. Baku terminal is now mostly a ferry
                                                      terminal. Dubendi terminal which is a large bulk
                                                      liquid terminal with a capacity of 12 million tons
     is located 25 km from Baku. The terminal has space for expansion and is environmentally
     friendlier because it is located away from the city.

     238. In the future, pipelines will service most new growth in oil and gas. Recent investments
     have been made in Baku’s transit services to Black Sea and the Russian Federation, as well as
     to Iran which is reputed to have low-cost transit trades. Baku’s fees, taxes and tariffs are
     generally the lowest of the Caspian Sea ports.
     Transit cargo is untaxed. Faced by increasing         Baku-Passenger Terminal
     competition, Baku should be able to retain its
     key role.

     239. From Baku there are two ferry services56
     in operation. One goes to Aktau in Kazakhstan
     and the other to Turkmenbashi in Turkmenistan.
     The total freight movement by ferry on the
     Caspian Sea varies between 1.5 million and 2
     million tons per year. Passenger movements on
     ferries are on the decline with only 18,000 per
     year for 2005. Crude oil, oil products and
     general goods are the most common
     commodities being carried by ferry services.
     Detailed port statistics are given in Table A.3.27.


56
     Ferry to Aktau from Baku is once a week and three times a week to Turkmenbashi.
                                                                                                                                                 111 Appendix 3


                                                                    Table 3.27: Baku Port Statistics
                                                       Throughput                                                 Ship calls by category (Number)
                                                                               General
                      Thruput       Liquid   Dry Bulk                                                                                               General
          Year                                                 Containers       Cargo     Passengers    Total      RO/RO     Passenger
                    (Thousand     (Thousand (Thousand                                                                                  Tankers       Cargo
                                                                (Number)     (Thousand     (Number)     Ships      Ships       Ships
                       tons)         tons)     tons)                                                                                                 Ships
                                                                                tons)
          2000              4,593        3,430           408                          755       7,482     1,561                    512       523         24
          2001              4,562        3,185           322            49          1,055       6,854     1,631                    709       416         33
          2002              4,766        3,331           144           338          1,292      10,341     1,845                    918       319        112
          2003              5,938        4,103           133           470          1,702      10,960     2,347         21       1,068       507         34
          2004              5,707        3,452           346         1,010          1,909      18,397     2,498          7         987       567         63
          2005              5,721        3,606           138           960          1,977      17,947     2,368          1         907       550         52
          2006              6,033        3,714           119           807          2,200      17,600     2,167          2         921       510         39
        Source: data supplied by Azerbaijan officials, 2007.




     240. Other ports important to the Central Asia region are discussed below and include
     Batumi in Georgia that expects its current throughput of 5 million tons to grow at 40-50% per
     year in 2005-2010. The railway ferry connects to all Black Sea states, and its fully automated
     terminal (700,000 tons capacity) is being developed to accept West European gauge rail cars.
     Poti, on the other hand, has capacity of 6 million tons, and more than half of its cargo is in
     transit trade (cargo). The port is being reorganized, with most of its terminals now leased.
     Container transport costs however, remain high. 57 Congestion in Georgian ports has been
     affecting negatively transit traffic from and to Central Asia. Congestion and delays are also
     reported in other Black Sea ports.

     241. Turkmenbashi serves the gas and oil industry (70% of its total cargo of 15 million tons)
     and Trans Caspian general cargo trades. The rail ferry serves Baku and Makhachkala in the
     Russian Federation. Rail links have enhanced traffic via Ashgabat to Afghanistan and Iran in
     addition to the more traditional route to Uzbekistan and Central Asia. Turkmenistan is
     considering a rail line along the Caspian coast to join Kazakhstan near Kuryk and Aktau in order
     to access directly the Russian Federation market. There is a plan to expand the nearby
     Ekarem port, and to create a free trade zone, but there are significant obstacles to the project
     due mainly to non-financial barriers, and it is certainly not as conducive as the competing free
     trade zones in Aktau, Baku, and Bandar Abbas.

     242. Bandar Abbas (BA) is a vital transport hub, handling 15 million tons, of which more
     than half is transit traffic. Upgrading at nearby Shahid Rajei will add capacity for 5.75 million
     TEUs (20 ft equivalent container units). Container management software and systems have
     been improved, and congestion has been reduced by use of inland container depots. Iran’s rail
     network is being upgraded to 100 km/h for freight, 25-ton axle-loads and grade separation at all
     road crossings. The recently built link from Mashhad to Bafgh, the doubling of the capacity of
     Sarakhs bogie-transfer facility to 400 wagons per day, and a proposed rail link to Herat, make
     BA more competitive on trade routes with Central Asia, Siberia and PRC. Low transit costs
     along the route add to the competitiveness of the port and the corridor.

     243. Chabahar is being expanded to a capacity of 6 million tons. Iran has made large
     concessions for services with Afghanistan, where the Zaranj highway link is being upgraded. A
     595-km rail link to Chabahar from Bam (2007-12) will improve connectivity to Pakistan, Central
     Asia, and PRC.

     244. In Pakistan, there are two international seaports, Karachi and Muhammad bin Qasim,
     located within 100 kms of each other. A third port (Gwadar) is newly opened to service with the
     completion of Phase I at an estimated cost of $248 million with funding of $200 million from
     PRC (mixed loan and grant) and $48 million by the Government of Pakistan. Largely built by
     Chinese contractors, Phase I is already open for commercial activities. Phase II is now
     proceeding. Currently over 95% of Pakistan’s international trade goes through Karachi and
     Qasim ports, with Port Karachi handling roughly 75% of the total. While security measures in

57
     In an agreement with Kazakhstan and Azerbaijan, Georgia charges US$0.22/km per container, which is about double
     the trans-Kazakhstan rate.
112 Appendix 3


 Port Karachi’s container terminals have met international standards and Port Qasim only needs
 to implement several key additional measures to comply, performance in other areas has been
 less positive. Port Qasim, established in 1983, is about 50 km southeast of Karachi and
 accessed through a 45-km long navigational channel accommodating vessels up to 85,000
 Deadweight Ton (DWT). Since 1997 its yearly throughput is about 15 million tons, with about
 600 vessels per year. The ports are considered expensive and inefficient according to the World
 Bank, with shippers annually paying about $310 million in “extra” charges that are passed-on to
 the consumers.

 245. Karachi has an overall capacity of 25 million tons. Container clearance is reputed to be
 slow and congestion is rampant. Port Qasim has specialized berths for minerals, a
 multipurpose terminal of 9 million tons, an oil terminal of 9 million tons, and a bulk liquid terminal
 of 4 million tons. There have been significant reforms and investments to improve services; but
 its relevance to Central Asia depends on the transport and transaction costs and perceived risks
 through Pakistan and Afghanistan.

 246. Tianjin and Lianyungang are the gateways for northern PRC to/from Japan, Korea,
 Central Asia, Russian Federation, and Europe, and serve a domestic hinterland area of 47% of
 the PRC. Tianjin has special experience in container terminal business, and its facilities now
 offer capacity of 3.5 million TEUs, with an additional 1 million TEU capacity to be built by 2009.
 Low cost, low delay services at these two ports improve the competitiveness of transcontinental
 routes.

A.3.3.11 Infrastructure Challenges and Opportunities, Some Conclusions

 247. CAREC countries have so far only captured a small portion of the potential trade flows
 between Europe and Asia. Preliminary information points to the fact that transit traffic through
 CAREC countries (Azerbaijan, Kazakhstan, Mongolia, and Uzbekistan) is already taking place,
 but still constitutes a small portion of the large Eurasian trade. Less than 1% of the PRC–
 Eurasia trade presently transits through Central Asia. By improving the performance of the
 corridors in terms of transport cost and time, CAREC countries can increase their share of this
 trade and reduce the cost of trade within the CAREC region.

 248. Because of a combination of reasons (connectivity problems, delays at border crossing,
 high unofficial payments and a poorly organized logistics industry) the cost of shipping goods
 (containerized or not) from and to Europe and the PRC is high and not competitive. Delivery
 times are frequently unreliable explaining the low transit traffic on the corridors. This also
 partially explains the low level of intra-regional trade (passengers and freight).

 249. But probably, intra-regional trade is more constrained by border crossing costs and
 delays and also the fact that CAREC countries have relatively similar industrial structures.
 Trade consists mostly of oil and other raw materials that countries like Kyrgyz Republic and
 Tajikistan are missing. Should the border crossing costs be reduced, there will be more
 exchanges in terms of fresh vegetables and fruits among neighboring countries. Intraregional
 passenger transportation by land transport, which is practically non-existent, also has a great
 potential.

 250. For export, import and transit, rail is the dominant mode. There are definite reasons for
 this. The region’s economies are largely resource based. Its exports comprise a high proportion
 of low unit value bulk goods such as coal and raw materials transported over long distances.
 These circumstances will always favor rail over road transport. Also, border crossing problems
 and unofficial payments are reported to characterize road more than rail transportation.

 251. The region has a quite well developed map of linear infrastructure. In certain sections of
 the corridors the initial standard of construction was inadequate for today’s needs. Furthermore,
 problems can often be attributed to lack of maintenance over many years. The present
                                                                                          113 Appendix 3


 economic rebound that CAREC countries are enjoying with the forecast annual traffic growth of
 7%, is unfortunately accelerating the decline of its transport infrastructure. The road sector has
 already felt this acutely. In much of the region, road asset values are declining faster than
 rehabilitation works can compensate. Rail has been less affected but the same problems will
 plague it sooner or later unless preventive measures are taken now. In many CAREC countries
 close to one-third of the network needs rehabilitation.

 252. With increased vehicle ownership and declining road infrastructure quality, a road safety
 crisis is confronting the region. Again rail operations have been much less, if at all, affected until
 now. This good record cannot be sustained without maintenance and modernization. Demand
 for air transport is growing rapidly. The sector’s facilities and its human resources are straining
 to cope with the increasing load. Safety will be jeopardized if considerable efforts are not made.

 253. Overall, the region’s transport sector regulations and its procedures are highly disparate.
 They are only slowly being aligned with best world practices. Operations and regulatory
 activities are often not separate. Monopoly behavior is common in the rail and aviation
 subsectors.

 254.     In aviation, the main issues are to decide on the proper balance between private and
 public intervention, to continue the process of sector liberalization, to ensure financial viability
 without compromising on passenger safety, and provide the air fleet and airport infrastructure in
 response to demand increases.

 255. It is more probable that regional cooperation in aviation will come from financial and
 business pressures and market opportunities rather than from multi-lateral forums such as
 CAREC, and changes are most likely to be implemented by means of bi-lateral concessions
 and agreements.

 256. State-owned airlines also dominate the market for air transport services in all the
 CAREC countries. In Azerbaijan, Tajikistan, and Uzbekistan, state-owned airlines also
 effectively control major airports. The lack of competition has resulted in inefficiencies in
 transport services, poor management of operations, and underinvestment in infrastructure.

 257. Besides the above, there are other infrastructure questions which merit attention. They
 concern border crossing facilities, intermodal facilities, ferry facilities and port expansions on the
 Caspian Sea to respond to demand pressures and contribute to performance improvements of
 the corridors.

 258. To perform properly, corridors need adequate infrastructure, but this is probably not the
 main reason why the corridors have not reached their potential. As described in this report,
 management questions and the lack of technology improvements may contribute largely to the
 modest performance.

 259. Corridors are in competition and will continue to be in competition. But, at the “end of the
 day” it is the shippers who will decide on which corridor to use and reliability will be as important
 as cost competitiveness in their corridor choice.

A.3.4 POLICIES, LEGAL FRAMEWORK AND REGULATIONS ON CROSS BORDER
      TRANSPORT

A.3.4.1 CAREC within the Global Regulatory Context

 260. Prominent among the CAREC Program’s objectives are the increase of trade and
 integration of the region with global markets by reduction of costs of transport and facilitation of
 transit. To these ends, the CAREC Regional Transport Sector Roadmap and the Strategy place
 emphasis on legal frameworks and regulations on cross border transport. Hence, policies and
 114 Appendix 3


     outline strategies for regional transport integration have been endorsed within the CAREC
     Program by its participating countries. Implementation has proven more complex than the policy
     declarations.

     261. The most well established and globally recognized instruments to achieve transport
     integration are the International Conventions registered with the UN and its affiliated bodies
     (notably UN ECE, UN ESCAP, World Customs Organization or WCO, International Maritime
     Organization or IMO, and ICAO).

     262. Many, though certainly not all of these conventions, were developed in Europe to
     overcome the very fragmented trading and transport regimes that prevailed there half a century
     ago. In certain cases, the EU no longer uses these instruments internally, because it has
     developed still more open and technologically advanced regulations to ensure safety and
     competitive performance. Thus, newer parts of the EU transport regulatory regime are
     sometimes adopted by non-members. The European Commission (EC), which is the EU
     administration, is a model of successful (though hardly perfect) transport sector strategic
     management at regional level.

     263.     The European Council of Ministers of Transport (ECMT)58 is a forum in which Ministers
     responsible for transport can cooperate on policy. That policy is implemented by the national
     governments and by operators associations such as the International Road Transport Union
     (IRU).59 The ECMT addresses practically all transport issues brought to its attention, including
     contentious ones. It issues reports, technical papers, resolutions and other documents. They
     are not obligatory, and they are sometimes slow to evolve, but once issued, they do represent a
     very high level of expertise and judgment based on experience and consensus. They are very
     widely accepted and adopted, even well outside of Europe.

     264. Other regional groupings and forums exist elsewhere in the world, such as the North
     American Free Trade Agreement (NAFTA), Association of South East Asian Nations (ASEAN),
     and the GMS. These bodies also establish trade and transport regulations.

     265. An overview of the structures adopted and the challenges and opportunities that have
     been faced by other regional groupings is provided in the following subsections. CAREC could
     easily and advantageously draw on the experience of these longer established groups. In doing
     so, it may gain confidence in the viability of such initiatives and reinforce commitment to its own.

A.3.4.2 Established Models for CAREC to Consider

     266. While transport and trade facilitation issues have definite country- and region-specific
     characteristics, there is still a vast accumulation of useful experience available to CAREC from
     other regions of the world. In recent decades, European, North American, and other countries
     have adopted integrationist trade and transport strategies, and have then developed simplified
     border crossing procedures and efficient transportation systems in support of them. Valuable
     knowledge has been gained in those countries about transportation and infrastructure
     technologies, logistics services, systemic improvements in the entire supply chain network, and
     efficient customs processing.

     267. In fact much of the world’s economic activity is managed under regional trade and
     transport groupings. These cover much of the world’s population, and most of its wealth. Four
     cases, in various stages of development, are considered: EU, NAFTA, ASEAN, and GMS.

58
      The ECMT is an intergovernmental organization established in 1953. It comprises forty-four member countries of
      Europe and Asia (including CAREC member Azerbaijan), and seven associate member countries (including major
      economies in America, Asia, and Oceania).
59
      http://www.iru.org/ The IRU, through its national associations, represents the entire road transport industry world-
      wide. It speaks for the operators of coaches, taxis and trucks, from large transport fleets to driver-owners. In all
      international bodies that make decisions affecting road transport, the IRU acts as the industry's advocate.
                                                                                                   115 Appendix 3


A.3.4.2.1 European Union

     268. The European Union is the oldest and most highly evolved of the regional trading blocs
     that have developed in the second half of the twentieth century. It comprises 27 member
     countries, and has about 450 million inhabitants - the world's third largest population
     concentration after the PRC and India.

     269. The origins of the EU lie in a successfully implemented accord between six countries
     concerning iron and steel production and commerce. Over the years, the scope and degree of
     cooperation increased, and the Union expanded geographically. It has achieved a much higher
     level of economic integration than has any other trading block. EU member states must
     relinquish jurisdiction over a broad range of issues. Given the large number of national borders
     within the EU area, the integration of transportation markets and infrastructure and the
     harmonization of transportation policies have been recognised as important preconditions for
     achieving free movement of goods and people.60

     270. A distinguishing feature of the EU is that it possesses very powerful supranational
     institutions. Principally, the EC has strong administrative and executive powers. The EU also
     has its own independent judicial institution, the European Court of Justice, which on occasion
     has played a crucial role in bringing the goals expressed in the EU treaties to fruition. This is
     especially true in the case of transport policy.

     271. Creating an integrated transportation system within the EU area requires progress on
     three interrelated objectives: interoperability, free market access, and interconnection.
     Interoperability refers to the harmonization of technical standards for infrastructure elements
     ranging from rail gauge to air traffic control systems, as well as rules applying to service
     providers such as truck size and weight restrictions. Free market access refers to the removal of
     restrictions that prevent providers of transportation services based in one member state from
     operating in another. Interconnection refers to the problem of linking up national infrastructure
     networks. Connections among these networks were relatively sparse because many borders
     coincide with physical barriers such as mountains, rivers, and seas. The lack of connections
     also reflects the fact that national networks have been developed primarily to meet the domestic
     needs of member states.

     272. Progress in achieving these goals continues, even though delays have occurred. The
     reasons for these delays have varied. Similar situations may be found in CAREC countries. For
     example, all national governments have an undisputed mandate over transportation policy.
     However, they are often unwilling to relinquish authority over commercial matters. Just as in
     CAREC today, EU national governments were (and in some cases still are) owners of major
     transportation service suppliers, including railways and airlines. These were major employers,
     with unionized workforces, and voting power. Strong vested interests resisted change. The role
     of local governments in transportation complicated the process of harmonization further.

     273. Eventually, EU public and commercial interests brought political and judicial pressure on
     the EC to take action. In 1985 the European Court of Justice ruled that the EC had failed to act
     appropriately to implement the Common Transport Policy required under its founding Treaty of
     Rome. This marked a major turning point after which the EC became more active in promoting
     coordinated development, harmonized regulation and open markets.

     274. Internally, borders have disappeared. Community goods moving within the community
     do so without customs control. The Community Customs Code recognizes the paramount
     importance of external trade for the Community,61 and stipulates that customs formalities and
     controls should be abolished or at least kept to a minimum. Customs authorities are granted
60
     European transport policy for 2010: Time to decide – EC White Paper summarizing current transport policy and
     challenges to its realization.
61
     EC 2913/92.
     116 Appendix 3


     considerable powers, but these are counterbalanced by traders’ clear rights of appeal, and
     mechanisms to ensure that goods are not blocked unnecessarily while disputes are resolved.
     The EU has adopted a Single Administrative Document (SAD) for customs declarations. It
     conforms to the UN Key Layout for Trade Documents. Computerised clearance and control
     systems have been implemented to avoid paper documentation, to speed up processing, and to
     avoid fraud.

     275. The body of laws and regulations on EU transport is voluminous, extending to many
     thousands of pages. A listing of the titles of the transport sector regulatory instruments extends
     to 56 pages. Regulations from outside of the transport sector also strongly influence
     governance within the sector. These include environmental and procurement rules. However,
     the imposition of a comprehensive regulatory regime on a regional basis, even one as
     voluminous as that of the EC, does not stifle development of the private sector. On the contrary,
     uniformity and wider market access leads to a competitive environment, efficient management
     and economies of scale. Companies then make sufficient profit to invest in improved equipment
     and to pay taxes and tolls in order to build and maintain good quality infrastructure.

     276. The ongoing expansion of the EU includes countries that have relatively low economic
     development compared to the older members. Also, they have very different existing regulatory
     regimes. In spite of these differences, and the formidable volume of work and investment
     required to harmonize, progress has been excellent. This may be attributed to a very strong
     willingness at all levels to make the transformation work, and limited vested interest in
     preserving the status-quo.

     277. The EU may have been slow in commencing regionalization of its transport sector, but it
     has now achieved much, quite possibly more than observers thought possible two decades ago.
     Despite many difficulties such as entrenched vested interests in the transport sector, diverse
     languages across the region, and histories of conflict between member states, it is a role model
     of what can be achieved in transport and trade liberalization and integration.

A.3.4.2.2 North American Free Trade Association (NAFTA)

     278. Created in 1994, NAFTA includes the US, the largest trading nation, and its two heavily
     trading neighbors, Canada and Mexico. In the case of Canada and the United States, NAFTA is
     the outcome of a sector-based trade agreement, the Auto Pact of 1965; while in the case of
     Mexico and the United States, it is the outcome of policies by both governments facilitating the
     development of the “Maquiladora” system of cross-border industrial production (see Box 2 in
     Section 2 of this Report).

     279. NAFTA is the world’s largest trade bloc62 with a GDP of more than US$11 trillion, about
     one-third of the world’s total. The US accounts for the largest share of both population and GDP,
     as well as having the highest GDP per capita. Canada, while having a slightly lower GDP per
     capita is only about one-ninth the size in terms of population and one-eleventh for GDP while
     Mexico, having a slightly smaller GDP than Canada, is about three times as populous and posts
     a standard of living about one-third that of Canada. $1.9 billion of goods and services crosses
     the Canada-US border every day making the Canada-US trade relationship the largest in the
     world.

     280. NAFTA is a comprehensive trade area agreement. It covers not only tariff elimination but
     also a number of contentious issues, including non-tariff barriers, direct foreign investment,
     trade and services, government procurement, and intellectual property rights. There remain
     restrictions to full integration in the transport sector, including trucking and air transport.



62
     http://www.dfait-maeci.gc.ca/eet/pdf/NAFTA@10-2003-en.pdf. Whether the EU or NAFTA is the world’s largest
     trading block is open to interpretation of statistics. Both blocks are immense.
                                                                                          117 Appendix 3


     281. Under NAFTA, manufacturing and transportation firms in the United States, Canada,
     and Mexico have begun to rationalize their production and logistical systems to suit a single
     North American market. This drive for rationalization and increasing trade have generated, in
     turn, demand for more economic harmonization and fewer obstacles to free trade. Some
     aspects of transportation, however, still impede free flows.

     282. NAFTA has a less-than-perfect record in common technical regulations, especially for
     road transport. The three partners have adhered to a few of the related international
     conventions. The excuse may be that their roads are not contiguous to Eurasia where many of
     the conventions were developed, but neither has NAFTA developed its own common standards.
     In both the US and Canada, state and provincial regulations apply to much of the network. In
     spite of being the least economically well endowed of the three partners, Mexico has the most
     homogenous road transport regulations.

     283. On the other hand, nearly all NAFTA rail services are owned and operated by the private
     sector. These companies have tended to maintain common technical standards on their own
     initiative. They thus benefit from interoperability, and from competition and economies of scale
     among distributors and manufacturers. Furthermore, rail companies’ operations often straddle
     borders, and it has been relatively easy for them to implement cross border ICT systems.

     284. A NAFTA Secretariat with balanced representation of the three partners is responsible
     for the administration of the agreement and dispute resolution.

     285. The high volume of trade in North America has evolved over three decades due in large
     part to policies that have promoted the development of border spanning industrial complexes,
     resulting in intra-industry trade. NAFTA moves huge volumes of freight at highly competitive
     prices. An effective cross-border transit facilitation system has been paramount to its success.

     A.3.4.2.3 Association of South East Asian Nations

     286. ASEAN 63 was established in 1967 by the five
     original Member Countries, namely, Indonesia, Malaysia,
     Philippines, Singapore, and Thailand.              Brunei
     Darussalam joined in 1984, Vietnam in 1995, Laos and
     Myanmar in 1997, and Cambodia in 1999. The ASEAN
     region has a population of about 500 million, a total area
     of 4.5 million square kilometers, a combined gross
     domestic product of US$ 737 billion, and a total trade of
     US$ 720 billion.

     287. The aims and purposes of the Association are: (i) to accelerate the economic growth,
     social progress and cultural development in the region through joint endeavors in the spirit of
     equality and partnership in order to strengthen the foundation for a prosperous and peaceful
     community of Southeast Asian nations; and (ii) to promote regional peace and stability through
     abiding respect for justice and the rule of law in the relationship among countries in the region
     and adherence to the principles of the United Nations Charter.

     288. A series of steps have been taken since its founding. An ASEAN Free Trade Area or
     AFTA was launched in 1992. In 1997, an ASEAN Vision 2020 was defined including the ASEAN
     Partnership in Dynamic Development, aimed at forging closer economic integration within the
     region. The vision statement resolved to create a stable, prosperous, and highly competitive
     ASEAN Economic Region, in which there is a free flow of goods, services, investments, capital,
     and equitable economic development and reduced poverty and socio-economic disparities.


63
     http://www.aseansec.org/64.htm.
 118 Appendix 3


     289. In addition to trade and investment liberalization, regional economic integration is being
     pursued through the development of Trans-ASEAN transportation network consisting of major
     inter-state highway and railway networks, principal ports and sea lanes for maritime traffic,
     inland waterway transport, and major civil aviation links.            ASEAN is promoting the
     interoperability and interconnectivity of the national telecommunications equipment and services.

     290. ASEAN has achieved greater regional integration. Within three years from the launching
     of AFTA, exports among ASEAN countries grew from US$ 43.26 billion in 1993 to almost
     US$ 80 billion in 1996, an average yearly growth rate of 28.3 percent. In the process, the share
     of intra-regional trade from ASEAN’s total trade rose from 20% to almost 25%. Tourists from
     ASEAN countries themselves have been representing an increasingly important share of
     tourism revenue in the region. In 1996, of the 28.6 million tourist arrivals in ASEAN, 11.2 million
     or almost 40% came from within ASEAN itself.

     291. The highest decision-making organ of ASEAN is the Meeting of the ASEAN Heads of
     State and Government. It is convened every year. Ministerial meetings are held regularly
     according to sector agendas. Supporting them are multiple committees of senior officials and of
     technical working groups. These include arrangements promoting inter-governmental and NGO
     cooperation in various fields.

     292. ASEAN has a forty year record of progress in establishing a regional transport regulatory
     framework.64 It is borrowing from the established transport international conventions. This is
     recognition of their wide applicability, and it will align ASEAN with other regions.

     293. A legal unit in the ASEAN Secretariat provides advice on trade disputes. An enhanced
     Dispute Settlement Mechanism issues binding rulings based solely on facts and provisions in
     the relevant ASEAN agreements.

A.3.4.2.4 Greater Mekong Subregion (GMS)

     294. The GMS Program is the result of a 1992 economic cooperation and integration
     agreement between Cambodia, the Lao People's Democratic Republic (Lao PDR), Myanmar,
     Thailand, Viet Nam and Yunnan Province of the People's Republic of China (PRC).65 About 255
     million people inhabit the sub-region, of which three- quarters live in rural areas and depend on
     agriculture. Many lack access to basic educational and health services, and suffer from growing
     environmental, population, and commercial pressures on their habitats. Trade in natural
     resources, drugs, and people further aggravate these challenges.

     295. The GMS is an ADB program that commenced several years before CAREC. Its
     components, successes and the lessons learned by its participants are well documented. They
     draw heavily on broader and earlier international experience of trade and transport facilitation.
     While the GMS does not share an identical geographic and socio-economic background with
     CAREC, its experiences can provide an invaluable source of strategies to implement within
     CAREC.

     296. The ADB’s overarching objective in the GMS is poverty reduction. This is to be achieved
     through the implementation of the GMS vision for enhanced connectivity, increased
     competitiveness, and a greater sense of community. Greater connectivity will help to physically
     integrate the region through a network of transport, power, and telecommunications facilities.

     297.     The ADB strategy for the GMS has four “thrusts”:

            (i)    strengthening connectivity and facilitating cross-border movement and
                   tourism;
64
     http://www.aseansec.org/7365.htm.
65
     The GMS Beyond Borders – Regional Cooperation Strategy and Program 2004-2008.
                                                                                                     119 Appendix 3


           (ii)    integrating national markets to promote economic efficiency and private-
                   sector development;
           (iii)   addressing health and other social, economic, and capacity-building issues
                   associated with sub-regional linkages; and
           (iv)    managing the environment and shared natural resources, especially of the
                   watershed systems of the Mekong River, to help ensure sustainable
                   development and conservation of natural resources.
     298. In support of these thrusts, ADB is providing considerable investment and grant
     financing. Technical assistance has played a particularly important role in harmonizing the legal
     and regulatory frameworks to create a GMS market, supporting community participation and
     human resource development to offset potential negative externalities, and supporting
     development of the private sector.

     299. The GMS countries signed a cross-border transport agreement at a ministerial meeting
     in 2003. Substantial steps still remain to implement it.

     300. GMS countries are developing from somewhat exceptional economic and political
     circumstances. Myanmar has an economic system that includes a highly managed foreign
     exchange regime and a plethora of controls on exports. On the other hand Thailand has a well
     developed market economy. It is a transport and communications hub and a base for foreign
     investors in the region.

     301. The region has enjoyed strong economic growth in recent years. However, significant
     differences remain among GMS countries in terms of economic development, information
     technology capabilities, and trade facilitation commitments. 66 Difficulties were found in
     implementing actions on trade facilitation at the regional level as long as countries did not
     coordinate at the national level. Indeed, because of the absence of national trade facilitation
     bodies, effective policies and actions are not easily discussed at the regional level because not
     all of the parties involved in trade facilitation are represented. Countries have been urged to
     create, with support at the highest level, a leading national agency for trade facilitation. The lead
     agency should then create a national trade facilitation body (NTFB), making sure that all parties
     involved, including the private sector, are fairly represented. This NTFB can then design an
     effective national trade facilitation plan to be integrated into an overall trade development
     strategy. Chairs of the NTBFs, with full knowledge of the issues, could also develop concrete
     and more complex trade facilitation activities at the (sub)-regional level such as

           (i)     regional alignment and standardization of customs formalities;
           (ii)    full-scale implementation of single stop inspection systems and other trade
                   facilitation measures requiring bilateral or multilateral cooperation;
           (iii)   sharing of intelligence and information among relevant agencies for
                   improving risk profiling;
           (iv)    joint adoption of international conventions and/or joint collaboration on the
                   negotiation or development of new agreements or conventions;
           (v)     development of an integrated subregional Electronic Data Interchange (EDI)
                   system for trade; and
           (vi)    subregional customer service and incentive programmes.




66
     Trade Facilitation Handbook for the Greater Mekong Subregion, United Nations Economic and Social Commission
     for Asia and the Pacific (UN ESCAP), 2002 (Chapter 9, Section 7, Conclusion).
 120 Appendix 3


A.3.4.2.5 Other initiatives

     302. Of the various multilateral initiatives within or overlapping CAREC, the EU Transport
     Caucasus Europe Central Asia (TRACECA)67 program has been well-financed (by the EU) in
     terms of technical assistance, and is focused on transport institutional issues. It maintains a
     permanent secretariat in Baku and a network of representatives in every participating country.

     303. TRACECA put considerable effort into establishing a multilateral basic agreement on
     transport, signed at Head of State level in 1998. It has conducted numerous technical
     assistance projects, parallel to and afterwards in direct support of that basic agreement. It
     convenes frequent assemblies of member country representatives for workshops and ostensibly,
     decisions on management of the TRACECA transport system.

     304. The TRACECA program certainly has had a very positive effect in technical know-how
     transfer, familiarization with international norms and practices, and in maintaining some level of
     dialogue between representatives of the program’s member countries. However, even though
     well financed, and having engendered a high-level transport agreement, it has not had a
     noticeable direct effect in changing conditions at border crossings. TRACECA and the EU are
     cooperating with ADB to develop infrastructure in the CAREC region.

     305. The preceding multilateral groupings present a spectrum of the world’s best efforts
     towards trade and transport integration. Other regional integration initiatives elsewhere include

           (i)      Bay of Bengal Initiative for Multi-Sectoral Technical and Economic
                    Cooperation (BIMSTEC);
           (ii)     The Brunei Darussalam, Indonesia, Malaysia, the Philippines East Asean
                    Growth Area (BIMP-EAGA);
           (iii)    Central and South Asia Trade and Transportation Forum (CSATTF);
           (iv)     South American Common Market (MERCOSUR);
           (v)      Southern African Development Community (SADC); and
           (vi)     South Asian Association for Regional Cooperation (SAARC).

A.3.4.3 Legal Frameworks

     306. Regional transport systems cannot be effectively managed without a solid legal
     framework. Regional systems are particularly complex, technically to some extent, but also
     because geopolitical issues invariably arise. In CAREC, these political issues can be
     significant. 68 Transportation planning and its implementation can be thwarted by parallel
     activities unrelated to transport (for example, border demarcation, river and canal water usage,
     energy, security).

     307. Although CAREC has made progress in establishing legal and regulatory frameworks for
     the transport sector, much remains to be done. The existing frameworks are not transparent.
     National transport regulations differ significantly from those of neighbors, and create obstacles
     to cross-border and transit traffic.

     308. Distribution of information on changes and amendments is often limited. Assembling
     information on all relevant laws and regulations can be difficult.




67
     http://www.traceca-org.org/.
68
     "Infrastructure and Regional Cooperation in Asia" Presentation by Liqun Jin Vice-President, Asian Development Bank
     at the Annual Bank Conference on Development Economics, 29 May 2006 Tokyo, Japan.
                                                                                                           121 Appendix 3


     309. Laws and regulations concerning competition in the transport sector in some cases allow
     state-owned companies to perform both regulatory and commercial functions. This is
     particularly true of railways and to a certain extent in aviation.

     310. The legal status of regional transport can be even more ambiguous, without any clear
     anchor in national laws, nor any regional legal framework in which it fits. In theory, there may be
     a legal obligation behind some of the cross–border transport agreements entered into by
     CAREC participating countries. In practice, their implementation is voluntary and the terms of
     the agreements are interpreted on a unilateral basis.

A.3.4.4 International Transport Conventions

     311. The international transport conventions are legal and normative instruments to promote
     road safety, facilitate traffic flows, and coordinate technical standards. A list of international
     transport related conventions registered at the UN is provided in Annex A.3-A at the end of this
     Section. A record of the current status of CAREC adherence to important conventions is shown
     in Table A.3.28. It includes the priorities recommended by UN ESCAP Resolution 48/11.

     312. The Secretary General of the UN has designated the UN ECE 69 as the principal
     administrator of the land agreements. In fact, these regulatory instruments are most fully applied
     in Europe and Asia. All of the agreements are however widely applicable. Their list of adherents
     is expanding. All CAREC countries are members of the ICAO and adherents to the Convention
     on Civil Aviation (the Chicago Convention).

     313. In 1998, ICAO established a universal safety oversight audit program in relation to
     personnel licensing, operation of aircraft, and airworthiness to regularly track the
     implementation of relevant ICAO Standards and Recommended Practices, associated
     procedures, guidance material and safety-related practices by ICAO member states.

     314. EU imposed a ban 70 on flying operations on some CAREC airlines and members
     because of non-compliance of the flight safety oversight and maintenance practices on a
     national level with ICAO's Standards and Recommended Practices.

     315. The international conventions are sometimes prescriptive, while others do little more
     than record normative practice in each signatory state. Where they are prescriptive, they often
     impose rules that might be highly effective, but require training and a well developed
     enforcement capacity to achieve anything useful. If the conventions are signed and then not
     applied, there are very few sanction mechanisms. Be that as it may, the country itself, and the
     region, are the losers from non-respect of such engagements, by loss of credibility, and by lack
     of standardization with the rest of the world.

     316. The utility of the conventions as regional regulatory tools is progressively enhanced by
     the geographic breadth of their application, and by uniform application. The reverse can also be
     true. If for example one country in isolation adheres to the ATP (perishable foodstuffs) the
     disruption of regional traffic in foodstuffs could have a net negative social effect. There is an
     obvious interest for CAREC to accept the international agreements as common regulatory
     instruments, and in a careful, coordinated manner.


69
     http://www.unece.org/ UNECE strives to foster sustainable economic growth among its 55 member countries. To that
     end, UNECE provides a forum for communication among States; brokers international legal instruments addressing
     trade, transport and the environment; and supplies statistics and economic and environmental analysis. Current
     information on the status of ratification of the international conventions is to be found on
     http://www.unece.org/trans/conventn/legalinst.html. Copies of many conventions can be downloaded from this site.
     Details are also to be found on http://www.unescap.org/ttdw/Publications/TFS_pubs/pub_2034/pub_2034_ch2.pdf.
70
     As for a similar program run by the Dept of Transportation of the USA, International Aviation Safety Assessment (IASA)
     Program, that inspects airlines intending to, or operating in the US, the results indicate that only two CAREC
     countries are approved by FAA to fly to the USA, namely, China and Uzbekistan.
122 Appendix 3


        Table A.3.28: Accession Status to International Agreements and Conventions




                                                                      Afghanistan




                                                                                                 Kazakhstan




                                                                                                                                      Uzbekistan
                                                                                    Azerbaijan




                                                                                                                         Tajikistan




                                                                                                                                                   Mongolia
                                                                                                              Republic
                                                                                                               Kyrgyz




                                                                                                                                                              PRC
 International Agreements and Conventions



 Convention on Road Traffic (08/11/1968)*                                           X            Х              X        Х            Х            X          X
 Convention on Road Signs and Signals (08/11/1968)*                                              Х              X        Х            Х            X          X
 Convention on the Contract for the International Carriage of
                                                                                    X            Х              Х        Х            Х            X
 Goods by Road – CMR (19/05/1956)*
 Customs Convention on the Temporary Importation of Commercial
                                                                      X             X                           Х                     Х
 Road Vehicles (18/05/1956)*
 Customs regime for pool containers (21/1/1994)                                                                                       X
 Customs Convention on the International Transport of Goods
                                                                      X             X            Х              Х        Х            Х            X
 Under Cover of TIR Carnets (14/11/1975)*
 International Convention on the Harmonization of Frontier Controls
                                                                                    X            X              Х                     Х
 of Goods (21/10/1982)*
 Customs Convention on Containers (02/12/1972)*                                     X            X                                    Х                       X
 European Agreement concerning the Work of Crews of Vehicles
                                                                                    X            Х                                    Х
 engaged in International Road Traffic (AETR) (01/07/1970)
 Customs Convention on the Temporary Importation of Private
                                                                      X
 Road Vehicles (04/06/1954)
 European Agreement concerning the International Carriage of
                                                                                    X            Х
 Dangerous Goods by Road (ADR) (30/09/1957)
 Agreement on the International Carriage of Perishable Foodstuffs
 and on the Special Equipment to be Used for such Carriage (ATP)                    X            Х                                    Х
 (01/09/1970)
 European Agreement on Main International Traffic Arteries (AGR)
                                                                                    X            Х
 (15/11/1975)
 European Agreement on Main International Railway Lines (AGC)
 (31/05/1985)
 European Agreement on Important International Combined
                                                                                                 Х
 Transport Lines and Related Installations (AGTC) (01/02/1991)
 Agreement concerning the Adoption of Uniform Prescriptions for
                                                                                    X
 Wheeled Vehicles (20/03/1958)
 Agreement Concerning Global Technical Regulations for Wheeled
                                                                                    X                                                                         X
 Vehicles (25/06/1998)
 Revised Kyoto Customs Convention                                                   X
 International Ship and Port Facility Security Code
 Convention on Civil Aviation (the Chicago Convention)                X             X            X              X        X            X            X          X
PRC=People’s Republic of China.
Source: United Nations Economic Commission for Europe – Transport Division, April 2007. (*) -
Conventions recommended by UN ESCAP Resolution 48/11.

 317. Generally, national legislative systems allow that international agreements, once duly
 ratified, take precedence over pre-existing national legislation. In principal this simplifies
 harmonization of national legislation, but in practice there may be many grey areas where it is
 not clear if the international obligation is applicable or not (or obligatory rather than advisory).

 318. To achieve the desired effects in terms of public benefit, it is not sufficient to sign the
 conventions. Enforcement requires expertise and resources that are not uniformly available
 across CAREC. Implementation of the conventions should be done by revision of national
 legislation, ensuring that there is no conflict or gap between the two, and that the operating
 regulations of the enforcement agencies conform to the convention. Again, this attention to
 detail is not always an easy task. Putting ticks in boxes alongside a list of transport conventions
 will not in itself achieve anything useful.
                                                                                       123 Appendix 3


 319. There are other regulatory instruments that have no legal status beyond the jurisdiction
 that developed them, but have considerable influence on transport regulation elsewhere,
 including the CAREC. These include EC Directives concerning international transport that are
 obligatory within the EU, and at the same time have taken on a normative status outside the EU.
 Certain of the international conventions, the EC Directives, and EU member states’ national
 legislations are intertwined (for example, the Convention on the Contract for International
 Carriage of Goods by Road or CMR, the European Agreement Concerning the Work of Crews
 of Vehicles Engaged in International Transport by Road or AETR, and the European Agreement
 Concerning the International Carriage of Dangerous Goods by Road or ADR). These
 instruments embody a wealth of experience around which many countries are formulating their
 national regulatory frameworks, including some in CAREC. The following instruments are noted:

       (i)     EC 96/53 on weights and dimensions of vehicles;
       (ii)    EURO 1, 2, 3, 4, 5 concerning vehicle emission controls and standards;
               and
       (iii)   Operator licensing as imposed by EC 96/26.

A.3.4.5 Bilateral and Multilateral Agreements

 320. A veritable noodle bowl of trade agreements is to be found linking some CAREC
 countries and their trading partners. A schematic of CAREC Regional Trade Agreements is
 shown in Figure A.3.10. Accompanying these trade agreements is a similarly tangled bowl of
 transport agreements.

 321. In transport matters, the bi-lateral agreements predominate. These establish cross
 border and transit traffic rights. The multilateral agreements act mostly as framework statements.
 Agreements are typically developed by the Ministries of Transport and Communications
 (MOTC), then signed at the intergovernmental level. If they are applied and maintained in
 practice, this is done by occasional contacts between MOTC officials of each country.

 322. A majority of CAREC officials responsible for developing and applying transport
 agreements have expressed preference for the bilateral arrangements as working mechanisms.
 Although their limitations have been recognized, they are relatively easy to manage at MOTC
 officials’ level. On the other hand, the multilateral forums have to bring together representatives
 from several countries. The meetings are more cumbersome to organize, the number of
 interests to be satisfied is larger, and dissent on any issue slows down the whole proceedings.

 323. When proposals for new agreements have arisen they have been seen as innovative, as
 if being created where nothing exists. Agreements have not been cross-referenced, neither to
 the regional framework, nor to the international conventions. Old agreements are rarely
 annulled. This leaves serious ambiguity in implementation, and even ambiguity of intentions. In
 reality some multi-lateral agreements are almost forgotten and lie dormant. Many of these
 agreements would be better classified as “Memorandum of Understanding”.

 324. Multi-modal agreements are rare. Road transport agreements tend to proliferate. Road
 transport is the most problematic mode in this context. The core objectives of the agreements
 are to open up routes and modes for cross border and transit operations. There are no
 operating transit agreements between the PRC and other CAREC countries.
124 Appendix 3


Figure A.3.10: The “Spaghetti Bowl” of Regional Trade Agreements Involving Central Asia
                                (as of 31 January 2006)




    Source: “Central Asia: Increasing Gains from Trade through Regional Cooperation in Trade Policy,
    Transport, and Customs Transit,” Asian Development Bank, Manila, 2006.

325. All multilateral initiatives remain theoretical (discussions, declarations, signatures,
status-quo) in the sense that none of these agreements are utilized for transport operations.
Few operators know of their existence. Discussions for two new agreements have momentum
at present:

      (i)        European Economic Community (EURASEC): Byelorussia, Kazakhstan,
                 Kyrgyz Republic, the PRC, Russian Federation, Uzbekistan (recent
                 adherent) and Tajikistan. Negotiations focus on a customs union, a “unified
                 transport system” and other ambitious fields of economic integration.
                 Similar initiatives date to an agreement in 1998 on customs and transport
                 unions. A common background and language favor this forum.
                                                                                                    125 Appendix 3


           (ii)    Shanghai Cooperation Organization (SCO) negotiations on a transport
                   agreement are said to be progressing well. In December 2006, a
                   Memorandum of Understanding was signed. There have been further
                   discussions in January and July 2007. The SCO agreement will be open to
                   other (non-SCO) countries.
     326. A tri-lateral agreement between the Russian Federation, Mongolia, and the PRC has
     been under discussion for years. The main text is mostly agreed. Several important appendices
     are planned to be completed in 2007/8. As is often the case, the text of the agreement is
     unexciting, but the appendices are to contain the important application mechanisms.

     327. Of the various multilateral technical assistance initiatives, the EU TRACECA program is
     among the best financed. It initiated a multilateral basic agreement on transport, signed at Head
     of State level in 1998. It has conducted numerous technical assistance projects, parallel to and
     in direct support of that basic agreement. The TRACECA program certainly has had a very
     positive effect in technical know-how transfer, and in familiarization with international norms and
     practices. However, it has not had a remarkable effect in establishing agreements that provide
     working rules for government officials and transport operators.

     328. Typically the agreements mention safety, the environment and other such public
     interests, but these are not prominent features. Issues such as vehicle emissions and vehicle
     weights and dimensions are dealt with by allowing each country to impose its own national
     standards. This is a serious shortcoming. A further defect of the road agreements is that they do
     not make any special provision for the visa issue. Where required, the need to obtain visas is a
     handicap to cross-border traffic in all directions.

     329. In aviation, regional cooperation has made progress. Bilateral agreements between
     governments and between operators (such as code-sharing) and services (catering,
     maintenance, inspection, fuelling) have been signed. Bilateral agreements are more likely to get
     acceptance but they may contain restrictive measures on foreign carriers’ operations.

     330. Protectionism and barriers in aviation are being slowly replaced with a competition-
     based approach, and in the long run it is very likely that Open Skies agreements will be
     considered between either individual CAREC member states or between all of them, especially
     since one of the members is already testing the effectiveness of this approach.

A.3.4.6 Rule of Law, Enforcement, and Fighting Corruption

     331. In principle, the Agreements and International Conventions in which countries engage
     themselves are binding until a country gives due notice of withdrawal. In reality the jurisdiction
     under which they would fall, and could be enforced, is nebulous.

     332. Even in Europe, where there are well developed regional legal mechanisms, it has been
     recognized that one of the most serious failures of road transport policy has been in
     enforcement of rules. This situation has never been fully resolved but governments and
     operators are making efforts to rectify it, including greater self-enforcement by the transport
     industry.71

     333. In the absence of an ability and intention to enforce the obligations implied by
     agreements or commonly accepted regulations, a blend of skepticism and disrespect for the law
     can develop. This can be manifest at central government level by reservations, and a lack of
     whole-hearted commitment to further inter-regional discussion. Along the physical arteries of
     regional commerce regulations are sometimes abused by enforcers.


71
     Jack Short, Secretary General of the European Conference of Ministers of Transport (ECMT) at the IRU congress
     Bucharest, 2002.
 126 Appendix 3


     334. Tariff regimes, internal subsidies, taxes, and restrictions on export/import increase
     incentives for smuggling, and under-invoicing.72 They create opportunities for rent-seeking and
     corruption. Traders sometimes bribe government officials to obtain licenses for lucrative exports
     and imports. They are reported to bribe border guards and customs officials to turn a blind eye
     on smuggling or under-invoicing.

     335. The certification and control of technical requirements for vehicles and conditioning
     (packaging) can require sophisticated equipment and training in their use. If regulations precede
     the capacity to enforce then again, useless delay and corruption rather than any public benefit
     results. Persons charged with enforcement should be qualified and adequately paid.

     336. Surveys of freight forwarders have stated that corruption is a major disincentive to
     trade,73 and by extension FDI. It is insidious at all levels. Any foreign truck crossing CAREC
     borders is prey to rent-seeking on the other side. Unofficial payments made by truck drivers
     between CAREC members and Russian towns in Siberia, typically carrying Central Asian fruit
     and vegetables, have been quoted as being US$ 1,500 or more. Verbal reports of cross border
     payments for trucks from the PRC into Central Asia quote amounts much higher than this.

A.3.4.7 Permit and Fee Systems

     337. Just as CAREC has developed a complex web of transport agreements, so can the
     accompanying permits and payment systems are equally intricate. The permit systems grant
     free entry where they apply, and on presentation of a permit. The non-permit bilateral
     agreements also allow free entry74 in principle. They do not exempt vehicles from tolls and fuel
     taxes.75

     338. Permits and infrastructure use fees should be distinctly separate issues. In fact, fee
     systems are often claimed not to be a payment for right of entry or of transit. These rights are
     granted by the agreement under which a permit can be issued. The fees are justified as road
     user charges destined for infrastructure maintenance, or administrative charges. Ostensibly,
     permit systems arose so that two countries could equally split the transport market between
     their national operators. Road transport fees can be very contentious, taking a disproportionate
     share of transport sector negotiating time and effort between governments.

     339. The effect of the permit and fee systems on cross-border transport operators, their
     clients, and regional trade is that they are confronted by chaotic cost structures. The present
     systems have engendered regional animosity rather than integration. There is resignation in
     face of the status quo, and lack of confidence in bilateral or multilateral processes to resolve the
     specific differences, at least in the short term.

A.3.5 REGIONAL INSTITUTIONS AND SYSTEM MANAGEMENT

A.3.5.1 Coordination, Information Management, Transparency

     340. Intra-governmental collaboration for management of regional transport issues is not well
     developed. Internally, governments and their agencies have not reconciled policies for regional
     and international integration, trade and industry protectionism, national security, and collection
     of revenues. Customs, border security services, police and other authorities tend to
     compartmentalize their activities. Sometimes there is even deliberate insularity. While

72
    Increasing Gains from Trade Through Regional Cooperation, in Trade Policy, Transport, and Customs Transit,
   Central Asia, ADB 2006 – Chapter 3 is particularly specific.
73
   Transport and Trade Facilitation Issues in the CIS 7, Kazakhstan and Turkmenistan - Eva Molnar, WB, Lauri Ojala
   (WB Consultant), 2003.
74
   To quote Article 11 both of the Uzbek-Kyrgyz and the Tajik-Kyrgyz agreements simply as typical examples and
   without any particular selectivity: “освобождаютcя от платежеи и сборов” = exempt from payments and fees. The
   conditions of applicability of this exemption are fairly broad.
75
   See also http://www.adb.org/Documents/Reports/CAREC/Transport-Sector-Reports/CAREC-harmonization.pdf.
                                                                                            127 Appendix 3


     coordination is not evident at the national level, it is even more difficult to establish at the
     regional level. Broad inter-governmental collaboration by the way of MOTC alone is thus
     tenuous.

     341. National associations of transport operators, freight forwarders, chambers of commerce
     do not at present play a sufficient role in the development of transport policy, agreements,
     regulation, or cross-border facilitation measures. Such organizations are however growing in
     stature and influence within the CAREC, partly by way of their increasing affiliation with
     international professional associations,76 and partly by the growing globalization of trade.

     342. Access to texts of agreements and to the legal instruments for transport in general is
     difficult. Publication (in newspapers, trade journals, internet, etc) is developing but is still not
     common. Specialized transport sector journals and government official gazettes are not
     common.

     343. Language differences aggravate problems of communications across the PRC–FSU-
     CAREC borders. This applies both at governmental and commercial level.

A.3.5.2 Complementarity of Modes

     344. Development and management of the four principle transport modes, road, rail, water,
     and air, are often insular. MOTC rarely (or never) have sufficient knowledge of and influence
     over all of them. Even in cases where they have all-mode nominal responsibility, in practice
     policy and administration may only come together at the level of the Minister or higher.

     345. Full trans-modal operations across inland borders is a relatively recent phenomenon,
     developed by a few international companies who have seen the opportunity along specific links
     and had the capacity to exploit it.

     346. Transport infrastructure is by its cost, duration and impacts, slow to develop and modify.
     Even if opportunities for multi-modal investment are identified, their development requires
     additional coordination effort between the parties involved. Modal complementarity has
     consequently lagged.

     347. The preceding remarks focus on infrastructure, but they apply equally to vehicles and
     rolling stock. There is for example no known capacity in the CAREC participating countries for
     road trailer-on-flatcar (TOFC) or “piggy back” service such as in North America, even though the
     geography of some CAREC participating country regions would favor such operations.

     348. Larger national railways are divided internally into regions or operating zones for
     management purposes (e.g., PRC, Kazakhstan), rather than line of business. This may be
     changing, but while geographic divisions exist internally, they obscure cross border and transit
     perspectives. They reinforce the limited perspective of operational responsibility to just taking a
     wagon at one border and delivering it to another, rather than sharing responsibility for logistics
     chains between global production and distribution centers.

     349. Given the lack of full transport sector cohesion at the national level, regional integration
     faces difficulties in assembling the interests and attitudes necessary to fully realize the
     opportunities.

A.3.5.3 Market Access

     350. World-wide, rules of market access for transportation services have often been
     contentious. Likewise, state transport monopoly operators have clung tenaciously to their
     exclusive rights.
76
     For example, International Federation of Freight Forwarders Associations (FIATA).
128 Appendix 3


 351. Most CAREC countries have several airlines with largely or fully private ownership.
 Internationally, nearly all of the so-called “heritage” airlines or state “flag-carriers” have
 disappeared under competitive pressure from more efficient private operators. State-owned
 airlines typically face operating losses which need to be subsidized heavily or aviation revenues
 from non-airline operations (such as airport facilities rental and over-flight navigation fees) are
 redirected as the airline’s financial resources. Those CAREC countries that resist private
 participation in their domestic and international air transport markets should question
 themselves whether they are going to follow the example of the rest of the world, or, unusually,
 make the state monopoly system work.

 352. Open access to the railway market has been slow but is now in progress. CAREC
 countries are introducing legislation allowing private investment in rolling stock. Train operations
 by private operators are said to be planned.

 353. Road transport services are in principle fairly open across CAREC borders, except for
 those of the PRC and Afghanistan. In practice, operators complain of multiple difficulties in
 carrying out cross border transport, due to the regulatory regimes and how they are applied.
 Transshipment is the rule at PRC borders and within CAREC there is very limited penetration by
 trucks from either side, beyond border zones. The reason for this is not wholly a problem of the
 bilateral agreements that allow what traffic there is. Over and above these, there is distrust of
 the enforcement of the regulatory regimes on both sides, and there are physical security
 concerns.

 354. Cabotage is generally forbidden within CAREC. This may be regrettable but it is a
 common problem worldwide. The lifting of cabotage restrictions in the EU several years ago did
 cause some controversy but no transport market imbalances have been proven.

 355. Slow border crossing procedures and restrictions on lengths of time that vehicles may
 remain in other countries frequently cause trucks to return empty to their home base, rather
 than carry a return load. This is a waste of the region’s transport resources.

 356. No regulatory problems of market access have been reported for Caspian Sea transport.
 However, the Azeri ports are under common ownership with the state shipping company (which
 is the largest on the Caspian Sea).

 357. In the sphere of market access, as elsewhere, the EU model provides straightforward
 principles of regulation in the public interest, without limitation on competition. The core
 requirements to register and obtain a license as an operator (firm, owner-operator, or freight
 forwarder) are proof of professional capacity, good repute, and financial capability.

 358. The basic principle for qualification as an operator is thus overall assurance of quality of
 service. There are no quota limitations on entry to the transport market place. This ensures
 technical and commercial regulation without limiting competition among those who can comply.

 359. Full cross-border rail operations are rather limited in many parts of the world (North
 America being an exception). In the majority of countries rail transport is a state monopoly so
 the cross-border licensing of operators is excluded. The EU is now imposing an open market for
 rail transport services, including cross-border operations. The three core principles to obtain a
 rail operator’s license are the same as above.

A.3.5.4 Project Conception and Development

 360. The majority of CAREC transport projects for MI funding have been developed by
 national institutions. This is now changing with the realization that regional trade integration
 requires commensurate transport connections.
                                                                                                       129 Appendix 3


     361. Heavy, linear, transport bearing infrastructure, with the vehicles, rolling stock, or craft
     that run or dock on it, has long been identified with transport development. Intelligent Transport
     Systems (ITS) and other systems, and the full knowledge of their use, have tended to grow in
     parallel without being fully appreciated as systems capable of contributing to the same ends.
     Indeed, they can sometimes achieve these same ends at lesser cost, and multiply the effect of
     other investments.

A.3.5.5 Interoperability

     362. Interoperability in transportation systems involves two related tasks. The first is to see
     that all new infrastructure incorporate a common set of design standards. The second is to
     ensure that equipment and personnel operating on the network meet a common set of
     technology and safety standards. In the modern approach to interoperability, the goal is to
     establish only those common standards that are necessary to achieve a smooth interface
     between systems, rather than stifle innovation by insisting on a full set of common specifications.
     This is just as useful as full common technical specifications and much easier to obtain.
     Development of standards should be led by representatives from transport related industries, as
     well as officials and academics.

     363. An unexplored domain for regional collaboration between transport agencies is relief
     activities following disasters and exceptional natural occurrences. The possibility has not been
     mentioned in the studies and literature produced to date. It has the advantage that preparative
     actions are uncontroversial, and can cut across political differences that may be hindering cross
     border collaboration in other areas. The necessary preparations for mutual regional support
     could be a useful vector for better cross-border understanding.

A.3.5.6 Rail Networks and Operations

     364. Rail networks carry the bulk of the region’s trade volume, and are likely to continue to do
     so. Throughout the region they are state owned.77 They are all members of the OSZhD78 and
     adhere to its rules.

     365. Within the OSZhD there is a Central Council of Railways of the CIS and Baltics (CSZhD).
     The CSZhD railways have inherited the advantage of common operating standards, both for
     infrastructure and rolling stock. This provides a very high level of technical inter-operability
     (superior to that of European networks of 20 years ago). Continued membership of the CSZhD
     sustains these benefits. Commonly cited disadvantages of the CSZhD system are a lack of
     commercial influence in operations, 79 and a lack of modern technology such as
     telecommunications and computerized data processing. Modern rail developments elsewhere
     in the world, both for bulk and for unitized 80 freight, have eclipsed the technical and
     organizational capacity of the CSZhD.

     366. Complaints were heard that delivery of services from the railways sometimes requires
     illicit payment, for example to obtain tickets, and to have wagons made available. Also CSZhD
     operating procedures have been criticized by outside consultants for losing too much time in too
     frequent re-marshalling of wagons, and too many changes of locomotives, 81 even within
     national borders. This introduces randomness into the times of passage of any particular wagon.

     367. Electronic tracking and data management is now slowly taking over from paper systems.
     This will speed up processing and reduce the opportunity for fraud and corruption, by reducing


77
   Excepting a very few short lines and sidings.
78
   www.osjd.com.
79
   This criticism is often heard concerning any state-run enterprise, East or West.
80
   E.g., containerized, swap-bodies etc.
81
   Locomotives and their crews operate on a hub and spoke system, limiting their range of operation.
 130 Appendix 3


     person-to-person contacts. Wagon tracking systems are occasionally improved but are still not
     fully automated.

     368. The railway systems use different waybills.82 If goods cross from one zone to another,
     there must be two waybills. The freight liability regimes for each waybill are different. SMGS
     waybills are not so widely accepted by banks handling international commerce. This is an
     inconvenience on operations, but should not severely handicap development of regional trade.
     Any inefficiency could be alleviated by greater computerization and the development of an
     interface to reformulate waybills automatically.

     369. In North America nearly all railway operations are in full private ownership. Cross border
     ownership and commercial liaisons are very common. Likewise advanced border crossing
     Information and Communication Technology (ICT) systems have developed.83 Hence, without a
     heavy body of obligatory technical regulations, endless series of meetings of working groups
     and government intervention, North American railways have always maintained fairly
     homogenous and safe technical standards. This has been achieved, among other ways, by
     supporting the American Railway Engineering and Maintenance of Way Association (AREMA).84

     370. The North American railways have at the same time become very profitable, while
     selling their services below CAREC rates, and while paying their management and staff far
     higher salaries than CAREC railway personnel. Furthermore, they have well rewarded their
     shareholders with rising asset values and regular dividend payments. This is indeed a multiple
     win-win model. CAREC railway authorities and managers should seriously reflect upon whether
     their existing institutions are leading them towards such success. As explained in the first two
     subsections of this appendix, the present economic situation in Central Asia could hardly be
     more opportune to make strategic changes.

A.3.5.7 Aviation Sector Institutional Framework

     371. In many CAREC countries, the civil aviation authorities are set up in a way that the roles
     of policy maker, the technical regulator, the accident investigator and the operator have been
     performed by one agency. The consequential conflicts of interests adversely affect the
     credibility of results generated by each of the functions. Further, some countries have a state
     monopoly that unites the airline, the ATC and the airport authority under one umbrella. It is
     impossible to expect a competitive, safe and reliable operation free of misuse, cover-ups and
     inappropriate practices that flourish otherwise.

     372. To attain compliance in an institutional sense, a restructuring of the aviation sector must
     be carried out. Countries should create an independent and competent CAA that will take care
     of policy-related matters, a licensing authority that will ensure all existing policies are adhered to
     by the operators, an accident investigation body that is independent from the CAA and the
     operators that operate on the basis of solid commercial practices and high regard of safety.

A.3.5.8 Supra-national Institutions

     373. The world’s most mature and successful regional groupings have established supra-
     national institutions to manage their trade and transport systems. They try to assure a “level
     playing field” or fair competition. Their markets then become competitive and attract global
     capital, rather than trying to corner it.

     374. In developing and implementing a regional trade and transport multi-country grouping, it
     would be over-optimistic to expect that differences between regional partners, public or private,

82
   SMGS on OSZhD and CIM elsewhere, though Iran now accepts SMGS and Eastern Europe has long experience of
   both systems for transit.
83
   http://www.railcan.ca/documents/publications/2002_11_01_Three_Rs_en.pdf.
84
   One of several professional and industrial NGOs pursuing best standard practice in railway engineering.
                                                                                                            131 Appendix 3


     will not arise and that such a group can make progress if its decisions and agreements are later
     repudiated. The World’s successful regional groupings include mechanisms to resolve problems
     between members, or to rule on whether or not an issue falls within its remit.

     375. The CAREC countries lack supra-national organizations with sufficient influence on
     transportation issues, comparable to say that of the EC, the EMCT, or UNECE in Europe. The
     only exception to this would be the CSZhD railway organization, which provides technical
     harmonization and some commercial coordination to the FSU rail system. There are no regional
     aviation bodies or associations that provide a forum for cooperation, exchange of opinions, and
     definition of common regional strategies to improve the quality of services and flight safety.

     376. UNECE, which is also the repository of the inland transport international conventions,
     has delegated administration of the TIR convention to the IRU, which is an NGO.

     377. The equivalent of the UNECE organization covering the CAREC countries is UN
     ESCAP.85 It actively promotes regional integration of transport among its member countries.
     There is no equivalent in Asia to the ECMT. An ESCAP conference in Busan, Korea in 2006
     resolved to create an Asian Conference of Ministers of Transport (ACMT).

     378. Only Kyrgyz Republic, Mongolia and the PRC are members of the WTO. Other CAREC
     countries have applied for membership, and are progressing at different paces towards
     achieving it. Compliance with membership conditions of the WTO, would do much to unfetter
     the trading patterns of the region.

     379. Integration with WCO programs and procedures would also do much to improve the
     freedom of cross-border traffic conditions without lengthy negotiations of bilateral or multilateral
     regional agreements.

     380. CAREC transport forums may be active, but so far they do remain just forums. Policy
     and specific issues can be discussed, declarations made, and agreements eventually signed
     and ratified. That is too often the ultimate result. As noted previously, there is little compulsion to
     implement regional transport agreements, and in fact many never are.

A.3.5.9 Stakeholder Identification and Commitment

     381. It can be difficult to fully identify, reach, and survey all of the stakeholder groups most
     affected by a regional transport development initiative. They are far more widely dispersed and
     represent a more diverse spectrum of interests than would be the case for a national project.

     382. The corollary to this difficulty is that while the benefits of a regional intervention may be
     broader, the risk of mis-targeting it is higher. If the stakeholders are not identified, then
     problems to be solved can remain unrecognized, opportunities conjectural, the design
     inappropriate, and the results disappointing.

     383. Any initiative obviously requires interested participants and users to be worthwhile. In
     the case of an infrastructure development project, ongoing maintenance is a prerequisite to
     achieve longevity of the benefits associated with the project. This, in turn, requires regular long
     term financing. Thus there should not just be interest in the project by stakeholders, but a long
     term commitment to maintain it. Loan covenants are rather remote from such a commitment for
     most national projects. For regional projects the linkage is even more tenuous.




85
     http://www.unescap.org/, the regional arm of the United Nations Secretariat for the Asian and Pacific region is the
     United Nations Economic and Social Commission for Asia and the Pacific. It was established in Shanghai, China in
     1947 and has 62 members.
 132 Appendix 3


A.3.5.10 Transport Associations and Joint Ventures

     384. Internationally, an abundance of professional and trade associations represent the
     interests of the participants in the transport industry. They range from trade unions, with a fairly
     narrow objective to defend the interests of the workers in a particular sub-sector, to broadly
     based organizations (for example the Freight Transport Association of FTA of the UK)
     representing at the same time carriers, their major clients, and the brokers who find a role to
     play between them. Some umbrella organizations represent national groupings at the
     international level (for example the International Road Transport Union or IRU, and the
     Federation Internationale des Auxiliares de Transport or FIATA).

     385. These groupings exist and thrive on the basis of the utility or respect that they provide to
     their members. Some, such as FIATA play a very useful and even unique role in facilitating
     contacts between transport professionals with international ambitions. Such contacts may
     commence with fairly modest business arrangements, but can and do initiate development of
     logistic chains.

     386. The CAREC countries are only slowly developing regional and international private
     sector links. Meanwhile, opportunities to trade and establishment of regional transport alliances
     are being missed or delayed.

A.3.6 BORDER CROSSING POINT FACILITIES, ARRANGEMENTS AND LOGISTICS

A.3.6.1 Introduction

     387. It is well recognized that cargo clearance delays are a major impediment to trade in the
     CAREC region. No infrastructure improvement or technology application can cure existing
     problems until there are drastic changes in the management and culture of central customs.

     388. CAREC countries have a general consensus on the causes of border-crossing delays.
     They listed the following impediments to regional trade:86

           (i)      poor transparency,
           (ii)     lack of harmonization in customs procedures and entry requirements,
           (iii)    insufficient trust and jealousy,
           (iv)     protection of national interest over regional interest,
           (v)      absence of regional transit agreements,
           (vi)     difference in standards between countries,
           (vii)    deficient infrastructure,
           (viii)   language problems,
           (ix)     legal barriers,
           (x)      underdeveloped logistics and support services, and
           (xi)     deeply entrenched requirement for unofficial payments.
     389. Despite the accession to a variety of international conventions to facilitate trade and
     transport, there is little evidence of actual implementation. For example, surveys confirm that
     Tajikistan Customs Administration87 still carries out 100% physical inspection of all imports. The



86
     ADB 2003, Protocol, Ministerial Conference on Transport and Trade in Central and South Asia, 31 July – 1 August
     2003, Manila.
87
     Survey of three Tajikistan border crossing points, May 2007.
                                                                                                      133 Appendix 3


     Turkish Road Transport Association reports that some CAREC members still seize TIR Carnets
     with no explanation.88

A.3.6.2 Border Crossing-Point Challenges

     390. The main trade flows through the CAREC region are from PRC, Iran, Russian
     Federation, and Turkey. Some CAREC countries limit the number of border crossing points that
     accept international road transport. TRACECA data on the nationality of road transporters
     shows the dominance of Turkish and Iranian carriers in transporting cargo between Europe,
     Middle East and Central Asia. Central Asian road carriers generally concentrate on transport
     serving intra-regional or Russian trade. Iranian trucks use the CMR note as a transit document.

A.3.6.3 Current Infrastructure Conditions

     391. There are 28 border crossings in the CAREC region by corridor and transport mode.
     TRACECA found a wide difference in the size, standard, and management performance of
     border crossing points. While some countries have invested in major89 border crossing points,
     the infrastructure of minor border crossing points remains poor.

     392. A number of countries have constructed new buildings, traffic lanes, overhead canopies,
     elevated walkways, inspection pits and lighting in major border crossings. Some countries have
     also invested in building new facilities at their medium border crossings, placing all government
     agencies under one roof to facilitate dealing with trade. However, minor border crossing points
     frequently consist of one or two timber huts or a mobile office unit. Unfortunately, until inefficient
     clearing methods are replaced, the new structures offer very little in removing border delays for
     truck drivers and customs brokers.

A.3.6.3.1 Islamic Republic of Afghanistan

     393. During many years of conflict, border crossing points in Afghanistan were neglected and
     some fell into ruin. The border crossing point survey90 shows a lack of scales, cranes, cargo
     inspection sheds, and X-Ray or other inspection equipment. Depending on the crossing,
     physical inspection times vary from 20% to 100%.

     394. Afghanistan has sixteen bilateral and multilateral agreements. The challenge is
     enforcing the provisions of the agreements, especially the Afghan Trade and Transit Agreement
     (ATTA) with Pakistan.

     395. With help from several international donor agencies,91 some border crossing points were
     rebuilt. For example, Torkham at the Afghanistan and Pakistan border was rebuilt with help from
     the UN Office for Project Services (UNOPS).

     396. Afghan Customs Department is currently working under the 2007 – 2012 Five Year
     Strategic Plan. The plan, building on previous accomplishments, aims to create customs
     assessments and procedures on par with international standards through reviews of present
     laws and procedures. Automated System for Customs Data (ASYCUDA) software has been
     installed at major customs posts and will be gradually introduced to all customs posts. Further
     data collection and processing is being carried out by Eurotrace and this will be modified once
     ASYCUDA is fully implemented.
88
   Discussion with RODER officials in Istanbul, Republic of Turkey, 14 May 2007.
89
   TRACECA border crossing point classification method includes:
     •   Major road border crossing point: over 150 trucks each day,
     •   Medium road border crossing point: between 50 and 150 trucks each day, and
     •   Minor road border crossing point: under 50 trucks each day.
90
   ADB, Islamic Republic of Afghanistan, Ministry of Public Works, Cross Border Trade and Transport Facilitation, ADB
   TA4536 – AFG, Executive Summary, June 2006.
91
   European Union, Deutsche Gesellschaft fur Technische Zusammenarbeit Gmbh. (GTZ), and USAID.
134 Appendix 3


 397. There are plans to introduce risk management, primarily with regards to business
 process changes, into customs procedures. Automation of customs services will greatly assist
 in risk management strategies. Recruitment and training policies will be established with full
 time trainers and the development of a national level training academy. Some further issues
 that the Five Year Strategic Plan is addressing are

      (i)        shortage of office buildings, working space and equipment;
      (ii)       creation of physical infrastructure (terminal buildings and cargo handling
                 equipment is necessary);
      (iii)      lack of capability for inspection and auditing;
      (iv)       needs to create the capability to generate automated analysis reports on
                 the basis of data available in customs offices; and
      (v)        key performance indicators and milestones to be established to ensure that
                 the Strategic Plan is implemented effectively.
 398. However, it should be emphasized that the Afghan Customs Department with the
 support of its development partners is making major strides to upgrade its operations and utilize
 international best practices. The commitment to facilitating trade through the faster clearance of
 goods and by providing high quality warehousing and terminal operations is being demonstrated
 as it implements the 5-year Strategic Plan.

A.3.6.3.2 Azerbaijan

 399. The Customs service of Azerbaijan is committed to intensive development and
 modernization. They have a fully automated system of cargo delivery, and have introduced an
 automated system of customs clearance and centralized cargo management. Technical control
 stock is constantly expanding to equip customs clearance points. For transit, the operating
 system is transparent, with processing requiring only several minutes and there are no financial
 guarantees required for transit through the Republic. There are also four mobile x-ray non-
 intrusive inspection devices now in operation, to speed up processing.

 400. In accordance with the advanced world practice that is based on utilizing EDI and
 automated customs registration and clearance, all reforms are being implemented. There was
 also a project set up in 2006 under the National Committee to facilitate the movement of goods
 and control potential threats.

 401. Azerbaijan customs has good relations with stakeholders. To combat changes in work
 environment the increased use of technology and the need for analysis and audit functions a
 regional training centre assisted by the WCO is providing capacity development based on
 international best practices.

 402. Large scale planned reconstruction is underway as well as rebuilding of border crossing
 points located along CAREC routes and other transport corridors. Customs’ plans for
 redevelopment in the field of IT appear comprehensive and in line with international best
 practice and future plans include applying single window services. Customs agencies continue
 working to improve the system, including development of infrastructure and control methods.
 The following measures are being taken to achieve this objective:

      (i)        procurement and installation of modern and sophisticated technologies,
                 including X-ray devices that are widely used on a daily basis;
      (ii)       reconstruction of customs check-points, including Astara, Samur, Synyg
                 Kerpu, Biliasuvar, Mazym Chai. Design for construction of the above points
                 has been conducted in accordance with the best international practices,
                 including the “single-window” concept. New projects for reconstruction of
                                                                                         135 Appendix 3


                remaining check-points and internal        terminals   are   envisaged    for
                implementation in the near future;
        (iii)   implementing the recommendations of the WCO’s diagnostic mission in
                terms of monitoring processes;
        (iv)    coordination of working hours with border services and other relevant
                agencies in neighboring countries;
        (v)     modernization and development of custom agencies in accordance with the
                “National Program for Custom System Development for 2007-2011”; and
        (vi)    implementation of the “Cargo Delivery Program” for control of cargo
                transportation routes. Automation and computerization of Customs services
                and introduction of Risk Management in order to speed up Customs
                clearance are considered as a high-priority task. Development of legislation
                and standards, formulation of risk indicators, and preparation to introduce a
                risk management system into practice are underway.
A.3.6.3.3 People’s Republic of China

 403. China Customs is the most advanced in the CAREC region not just in terms of
 automation, which is up to international standards, but also in many aspects of customs
 modernization. PRC Customs officers have much higher professional standards and are better
 trained.

 404. China Customs has created an ePort as the electronic gateway for processing entries
 and the interface for trade. The ePort is user friendly and free of user fees. The ePort design
 and management, including multiple firewalls between the ePort and the China Customs
 internal IT system, mirror servers, central security monitoring system, etc. are among the best of
 the world.

 405. China Customs adopts risk management techniques. Shippers are classified by grades,
 with the better the grade, the lesser the chance for Customs inspection. Shipments of
 blacklisted companies and forwarders are always selected for careful inspection. China
 Customs relies on a mathematical model to score declarations based on over 100 parameters.
 Depending on the score, the entry will be flagged for further checking (by different experts, at
 different agencies, depending on the specific parameter) or the shipment selected for physical
 inspection at either the border or the trade’s facility.

A. Ala Shankou

 406. Ala Shankou is a small town with only a few thousand permanent residents. At present,
 it is the only rail BCP between the PRC and Central Asia, where China Railways connects with
 Kazakhstan Temir Zholy (KTZ). The PRC and Kazakhstan have agreements that permit rail
 and freight forwarder staff on both sides of the border to travel freely within the CR/KTZ rail yard
 boundary. The stationmasters of both railroads also lunch weekly (alternating between the PRC
 and Kazakhstan) to resolve operational and service issues. China Customs and all 16 customs
 brokers and forwarders work in a four-storey building owned by CR’s Urumqi Railways
 Administration.

 407. On average, China Customs inspects 3% of containers traveling on express container
 trains, and 10% of containers traveling in regular trains. For shipments moving in wagons, the
 percentage is usually higher, with inspection done when the load is transferred from one wagon
 to another.

 408.     The amount of time for China Customs to inspect a trainload of cargo is as follows:

        (i)     Express Container Train: 4 to 6 hours
136 Appendix 3


      (ii)       Regular Container Train: 8 to 10 hours
      (iii)      All Wagon Train: 20 hours
409. The amount of time for Kazakh Customs to inspect a trainload of cargo is 5 hours,
mainly due to limited yard capacity (only 12 tracks).

B. Khorgas

410. To promote trade between the PRC and Central Asia, the PRC and Kazakhstan have
created the 177.33 sq km “China-Kazakhstan border free trade zone”. During the first phase of
the development:

      (i)        Chinese private investors will construct 3.43 sq km of trading, exhibition,
                 wholesale and retail sales facilities, as well as 9.73 sq km of logistics, value
                 added processing, and support facilities on the Chinese side; and
      (ii)       Kazakh private investors will build logistics facilities on the 1.2 sq km of
                 free trade zone space on their side.
411. CR is building a new rail line connecting Khorgas to Urumqi and KTZ is constructing a
new rail link from Almaty to Khorgas. Also, the Khorgas-Lianyungang Expressway will be
completed in 2008. This spirit of co-operation makes it easier to move cargo between the PRC
and Kazakhstan. However, there are still major obstacles that must be overcome:

      (i)        Chinese drivers have tremendous difficulty in obtaining visas to Central
                 Asian countries. For example, it takes 2 to 4 months to get a visa from the
                 Kyrgyz Republic Consulate in Urumqi. The process of getting an
                 Uzbekistan visa is even longer and more difficult, as they are only issued
                 from Uzbekistan’s Embassy in Beijing. This means an Urumqi based driver
                 must apply for his Uzbekistan visa in a city 4,000 km away.
      (ii)       Even though Chinese truck standards are similar to Central Asian
                 standards, they are not widely recognized in Central Asia. Police in Central
                 Asia are particularly tough on fining Chinese trucks, even though they are
                 actually better constructed and carry the cargo in sealed containers (e.g.,
                 China Standard: weight 49 tons, length 18 m, height 4 m, width 2.5 m:
                 Kyrgyz Standard: weight 40 tons, length 20 m, height 4 m, width 2.55 m).
                 Chinese road carriers feel that it is unfair to limit their trucks to 40 tons.
                 There is a general disharmony and lack of transparency with respect to
                 rules and regulations. To operate in Central Asia, trucking companies must
                 make unofficial payments.
      (iii)      It was reported by shippers and freight forwarders that traders must pay
                 considerable amounts for a truck to pass through Customs and the
                 amounts are rising every year. In the past, accompanied baggage of
                 travelers could be brought into Kyrgyz Republic duty-free, whereas today
                 this might require a payment.
      (iv)       Other obstacles include language, poor road and bridge conditions,
                 frequent police road blocks and overpriced insurance requirements.
412. The PRC claims to be more open towards Central Asian trucks and that its laws and
regulations are more transparent. However, except for a very limited number of trucks (typically
three or four) accompanying scheduled bus services, there is only limited cross border freight
traffic. The vast majority of goods are transshipped at or near the border.
                                                                                             137 Appendix 3


A.3.6.3.4 Kazakhstan

     413. Despite a Customs Union with Russia, full document checks are still made at the
     Russian border. Aktau Sea Port on the Caspian Sea handles dry cargo including grain,92 rolled
     steel and scrap metals. Oil is loaded onto tankers using KazTransOil owned jetties. The
     planned Free Trade Zone is attracting private logistics companies to build warehouses and
     multimodal facilities.

     414. Khorgas at the Kazakhstan/PRC border is the largest crossing point in the CAREC
     region. With the creation of a large Free Trade Zone, Kazakhstan logistics companies plan to
     build new warehousing and install modern handling equipment. A new railway line will be built
     from Taldy Korgan, near Almaty to connect with the Jinghe-Yining-Khorgas rail extension from
     Urumqi, at Khorgas.

     415. Cross border traffic at Dostyk is divided into inbound during mornings and outbound
     during afternoons. Despite the bilateral agreement between Kazakhstan and the PRC, access
     within 90 km of the BCP is restricted. Documents are checked twice, in Dostyk and again at the
     BCP.

     416. Fetislovo is a medium road border crossing point between Kazakhstan and
     Turkmenistan located 90 km north of the demarcation line near the remote desert town of Novy
     Uzen. Access roads are in poor condition.

     417. Korday is a major Kazakhstan and Kyrgyz Republic road border crossing point handling
     passenger and commercial traffic. Traffic from the Kyrgyz Republic needs to cross into
     Kazakhstan to get to Russian markets. The BCP is congested because each side of the BCP
     uses linear traffic flow lanes. There is no TIR or CIS transit fast track lane.

     418. Merke is a medium Kazakhstan and Kyrgyz Republic rail and road border crossing west
     of Bishkek processing traffic from Turkey, Iran, Uzbekistan, Kazakhstan and the Kyrgyz
     Republic. Investment is needed to build a new Customs Administration building, and procure
     modern communication and IT equipment.

     419. The Customs service in Kazakhstan is currently under the customs reform program for
     2007-2010, which is intended to introduce modern international standards and is supported by
     the Government of Kazakhstan. Over recent years the Customs Control Committee (CCC-KAZ)
     has ensured that significant improvements are made to customs functions. The legislative basis
     was strengthened by the new Customs Code in 2003, and as a result productivity has increased
     and there have been significant investments in technology and infrastructure. An Internal
     Security Department has been established to improve integrity and good governance.

     420. In 2006, the CCC-KAZ signed an inter-governmental agreement for single window
     processing. Also in 2006, Kazakhstan was one of the Commonwealth of Independent States
     (CIS) countries that adopted a resolution to design a special government level program to
     deliver technical assistance and support thorough the WCO Columbus Capacity Building
     program. In 2007, the government of Kazakhstan was involved in a World Bank funded
     Customs Development Project.

     421. Customs activities need to be further developed, building on the solid base that already
     exists. According to WCO some areas that can be improved upon are

           (i)      Areas of risk management and integrated border management should be
                    tied closely together and more consistently applied. These should be added
                    into planned IT and procedural changes;

92
     Egypt is a major client for Kazakh wheat. Kazakhstan also sends wheat to Afghanistan.
 138 Appendix 3


           (ii)     Knowledge and material should be disseminated through training events.
                    Effort should be put into priority areas of training, especially in IT skills, risk
                    assessment, intelligence and enforcement;
           (iii)    Post clearance audit and other customs procedures should be introduced
                    into the Customs Code;
           (iv)     Efforts should be made to facilitate the step-by-step progress from a paper
                    environment towards the implementation of electronic declarations and E-
                    digital signatures. Also, further methods need to be taken to guarantee
                    uniform implementation of current Customs clearance procedures in all
                    customs points;
           (v)      There should be a move away from 100% inspections.               Physical
                    inspections should be targeted to high-risk consignments and goods. There
                    is the possibility of training drug detector dogs to search passengers at
                    gates and terminal areas;
           (vi)     Strict surveillance is needed for Customs warehouses such as video
                    surveillance and security cameras;
           (vii)    Customs Control Committee should have the power to seize and
                    investigate IPR and money-laundering infringements and offences; and
           (viii)   Strategic operational planning between customs and enforcement
                    managers should take place to enhance the effectiveness of mobile forces.
A.3.6.3.5 Kyrgyz Republic

     422. Ak Jol is a major Kyrgyz Republic and Kazakhstan road border crossing point handling
     passenger and commercial traffic. Kyrgyz trucking companies use this route to get to Russian
     markets. Kyrgyz transport companies and perishable product growers complain of Customs
     procedural delays on the Russian side of the Kazakhstan-Russian Federation BCP.93 The BCP
     uses linear traffic lanes that cause delays with no TIR and CIS transit fast track lanes.

     423. Bishkek has the largest rail control point where all rail imports and exports are managed
     instead of at twelve railway stations in the Republic or at the border. The Railway Customs is a
     separate part of the Customs Administration located close to the marshalling yard. Investment is
     needed for modern communications and IT equipment.

     424. Chaldovar is a medium size Kyrgyz and Kazakhstan road border crossing point in the
     north that handles traffic to and from Iran, Turkey, Uzbekistan, and Kazakhstan. In 1999, the
     Customs Administration building was built with French assistance, but was not occupied
     because of lack of funding to finish the interior and equip the building.

     425. Kara Suu is a major Kyrgyz and Uzbekistan (Savay) road border crossing point handling
     Iran, Turkey, Uzbekistan, PRC, and Tajikistan traffic. This BCP needs a new physical facility,
     communications and IT equipment and reliable electricity supply.

     426. The WCO have found the Kyrgyz Republic to be fully committed to customs reform at
     the highest level and there are ambitious and challenging programs of reform already underway.

     427. In 2006, there was a regional ADB project carried out within the Kyrgyz Republic and
     Tajikistan on Trade Facilitation and Customs Cooperation.          This project assisted in
     strengthening governance, transparency and institutional capacity, made sure the legal and
     regulatory framework were in line with international standards, and helped improve trade
     facilitation and regional cooperation.

93
      USAID Trade Facilitation and Investment Project, TIR Report by Jan Tomczyk, PRAGMA and Booz Allen Hamilton,
      2003.
                                                                                               139 Appendix 3


     428. The Kyrgyz Republic was also one of the first countries to sign the WCO SAFE
     Framework of Standards.        Legal infrastructure has been created which meets FOS
     implementation; legislation has been prepared to support the introduction of risk management
     and for the exchange of electronic information; and organizational structure changes are being
     made for the implementation of risk management. Some WCO suggestions for improvements
     are listed below:

           (i)     Coordination needs to be improved between donor programs to optimize
                   the use of resources and avoid duplication of work;
           (ii)    Audits of human resource requirements should be carried out regularly and
                   clear job descriptions, competencies and selection criteria established for
                   all positions;
           (iii)   Comprehensive customs-specific training programs should be established
                   including incentives for Customs officers to learn foreign languages;
           (iv)    There is a need to create a common enforcement electronic database to
                   provide for the integration, collection and evaluation of all enforcement
                   information;
           (v)     There should be a review of the structure of the Law Enforcement Division
                   to incorporate search, technical operations and drug detector dog support
                   units; and
           (vi)    The use of the Customs website as a communication tool needs to be
                   increased.
A.3.6.3.6 Mongolia

     429. Since the beginning of the 1990s, Mongolia has made major progress in trade
     liberalization. In a relatively short period, it has transitioned to a relatively open trade regime. On
     29 January 1997, Mongolia joined the WTO. At present, Mongolia is developing bilateral trade
     cooperation with many countries. An important step in supporting Mongolia’s exports was the
     removal by the European Union of the quota restrictions on Mongolia’s textile exports to its
     member states. In 1998, the US granted the most-favored nation status to Mongolia on a
     permanent basis.

     430. At present only a small portion of Mongolian transit traffic is carried by road, largely
     because of the long distances involved and the lack of paved roads built and properly
     maintained according to international standards. Mongolian trade with PRC principally moves by
     rail to/from Zamyn Uud, a border town established at the completion of the Mongolian railway in
     1956.

     431. Zamyn Uud is the largest border post in Mongolia. The border crossing is open for 8
     hours per day, 6 days per week. During the first half of 2005, some 145,000 people arrived in
     and 138,000 people departed from Mongolia through Zamyn Uud. This volume translates to
     47,000 people per month or 2,080 people for each day the border is open. In comparison,
     Altanbulag and Sukhbaatar in the north bordering the Russian Federation had 70,000 and
     38,700 people passing through, respectively, during the 6-month period. During busy periods,
     the Zamyn Uud border daily traffic volume reaches as high as 4,500 people, which strains the
     capability of the 4-lane immigration and emigration processing facility at the border.94

     432. Yarant, on the western border of Mongolia with XUAR is a small BCP. Due to its
     remoteness, customs data are first entered into tape, and then transmitted in batches to the
     Customs central computer. The Chinese side of the border is only open during the second half
94
     Assuming an average processing time of one minute/person, the 4 immigration officers can handle a
     maximum of 1,920 persons per 8-hour day. Another 1,920 persons can be handled by 4 emigration
     officers, resulting in a total daily processing capacity of 3,840 persons.
140 Appendix 3


 of each month, creating a monthly rush through the border at the end of every month. However,
 it should be noted that Chinese Customs opened a new large facility in 2007, and Mongolia
 plans on upgrading its post to accommodate traffic increases forecast as a result of Corridor
 4a’s paving and reconstruction.

 433. Mongolia’s customs are considered by the WCO to be equipped with the appropriate
 systems and procedures. There is a lively training program and Customs have pilot tested risk
 management procedures, which will need to be implemented in all locations. Mongolia has the
 capacity for electronic information submissions, but they are currently only used on a limited
 basis. Mongolia is currently following the revised Integrated Action Plan of the Mongolian
 Customs for the period 2007–2010. Some objectives for customs as found in the Action Plan
 and recommended by WCO are as follows:

       (i)       Draft and implement new regulations in accordance with the customs and
                 tariff laws and the revised Kyoto Convention;
       (ii)      Standardize trade documents required for customs and expand the use of
                 electronic submission of cargo and goods declarations in advance of the
                 arrival of the goods, including acceptance of foreign trade documents;
       (iii)     Capital investment must be made in acquiring technical equipment, such as
                 x-ray scanners and other examination tools, including non-intrusive
                 inspection technology;
       (iv)      Scanning equipment for examining trains and detecting radiation should be
                 installed on the border points (note: gamma detection devices have been
                 installed at some locations). Examination facilities for containers must be
                 established;
       (v)       The rate of physical examinations must be reduced by improving risk
                 management techniques. Simplified procedures for import should be
                 developed and the use of e-clearance should be offered to more clients;
       (vi)      Finalize preparatory works for the foreign trade single electronic window
                 service;
       (vii)     Ensure that customs IT software meets the internal and external business
                 requirements that result from new initiatives and upgrade the statistical
                 data compilation;
       (viii)    Introduce a system of online management and communications including a
                 website, that can be used by the public and used to receive comments and
                 requests from clients;
       (ix)      Recommended that customs be given the right to investigate customs
                 offences and develop guidelines and methodologies for immediate
                 preliminary investigation of criminal cases; and
       (x)       Establish branch laboratories at major border posts and moveable mini-
                 laboratories for use at other customs offices.
A.3.6.3.7 Tajikistan

 434. Simplifying customs procedures is a priority for facilitating trade. In this regard, the ADB-
 funded project, Kyrgyz Republic and Tajikistan: Regional Trade Facilitation and Customs
 Cooperation Project, was completed in 2006. The project aimed to strengthen governance,
 strengthen legal and regulatory framework for customs, improve operational efficiency and
 develop effective mechanisms for regional cooperation. Some of the many benefits Tajikistan
 received from this project were revising the Customs Code to provide legal regulatory
 framework for customs administration; improving human resource policies and establishing
                                                                                          141 Appendix 3


     training programs; and developing an ICT strategy and investment plan for modernizing
     customs operations and infrastructure.

     435. ICT strategies will also aim to automate Customs services allowing an increase in
     transparency and enabling efficient risk management. Intelligence gathering, setting up a risk
     profile database and strengthening the capacity of the anti-smuggling division were measures
     set up to prevent illegal transactions.

     436. Agreements were established in 2004 between Tajikistan and the Kyrgyz Republic to set
     up procedures to simplify transit shipment, recognising transit documents and establishing a
     financial guarantee system.

     437. Tajikistan is investing in new BCPs and expensive detection equipment is justified.
     UNDP administered Border Management Central Asia (BOMCA) program built a new minor
     BCP with Afghanistan. Tajikistan needs a minor BCP investment program that benchmarks the
     benefits from funding BCP performance management, detection and communications
     equipment and IT technology enabling Customs to use risk assessment, post audit inspections
     and other skills. The EU plans to fund a new Customs reform and management project in
     Tajikistan. Customs modernization is needed to eliminate the practice of 100% physical
     inspection.

A.3.6.3.8 Uzbekistan

     438. Alat is a major Uzbekistan and Turkmenistan road border crossing point located 100 km
     from Bukhara. Access road conditions are reported as adequate but not sufficiently wide
     enough due to the large number of trucks parked along the road. Traffic lanes are not
     segregated and each border crossing point agency has its own office.

     439. Gisht Kuprik (Corridors 3-a, 6-b, c) is one of the Uzbekistan and Kazakhstan road border
     crossing points handling traffic from Europe and the Russian Federation. TRACECA reports95
     the BCP buildings and office booths are modern but that traffic moves slowly through the BCP
     due to linear traffic lanes. The BCP is also congested because it is in an urban area where local
     traffic is mixed with BCP traffic. Yallama Customs Post (in the Tashkent area) handles the
     majority of freight cargoes between Uzbekistan and Kazakhstan.

     440. Kaggan is the Foreign Economic Activity Customs Post and Khodjadavlet is the Border
     Customs Post for Uzbekistan and Turkmenistan rail border crossing point handling rail wagons.
     Opening a railway link with Iran is expected to increase traffic. One office carries out a
     documentation check while another office in the railway station in Bukhara carries out physical
     inspections.

     441. Shumilovo is a major Uzbekistan and Kazakhstan rail control point in Tashkent with a
     multimodal rail container terminal. Traffic is divided between two other stations, Chukursay and
     Uzbekistan, in order to organize accelerated processing of cargoes by Customs Posts at these
     stations. Table A.3.29 shows recent traffic at selected BCPs in Uzbekistan.

     442. The Uzbekistan State Customs Committee (SCC) has invested considerable effort into
     improving its customs services and introducing modern international standards. There are
     around 30 Customs Posts now fitted with radiation detection equipment and the SCC is
     considering plans to purchase non-intrusive equipment at some checkpoints for checking
     containers. According to the WCO, Customs control in Uzbekistan is well aware of the
     challenges and is devoted and motivated towards addressing border control issues.




95
     TNREG 9308, p.55.
142 Appendix 3




               Table A.3.29: Uzbekistan Border Control Data at Selected Crossings
                                               Passengers                             Vehicles
    Border Crossing Point
                                           2005          2006                  2005              2006
    Karasu                                 2,088,165    3,853,602                     NA               NA
    Oybek                                    178,822      175,523                 19,250           20,820
    Karakalpakya                             117,116      154,406                 11,464           12,903
    Kunya Urgench                             48,667       57,199                    216              438
    Andarhan                                 186,473      203,685                  8,736            6,360
   Source: Evaluation of the Trade Facilitation Impact of the BOMCA Programme, Richard Pomfret, March 2007,

 443. In 2005 the SCC conducted a study of risk management and set up databases needed
 to analyze and evaluate information using risk indicators. In 2006 with the help of UNDP, a
 draft Customs Code incorporating provisions of the Kyoto Convention and Eurocustoms
 recommendations was prepared. There have been WCO recommendations on how Uzbekistan
 can move forwards and improve customs services:

       (i)       The formation of a high-level working group could be developed in order to
                 move forward key policies and strategies for reforming the Customs service;
       (ii)      Running a training service in cooperation with the WCO and Regional
                 Training Centre in Moscow on security issues and international supply
                 chains. Training programs for continuing development for Customs staff
                 should include incentives for learning foreign languages;
       (iii)     There is a need to identify and remove superfluous procedures and
                 documents used in Customs formalities;
       (iv)      Customs Service should work together with business circles to develop
                 streamlined Customs procedures for law-abiding foreign trade participants
                 including favorable conditions for movement of their goods;
       (v)       Risk management to be used as key part of the decision making process
                 and a universal tool for increasing security and facilitating trade;
       (vi)      Cooperation with neighboring countries to use the principles of integrated
                 management of borders (‘one stop’ process). Also joint planning and
                 running of special operations with neighboring countries could be used in
                 combating different types of Customs violations; and
       (vii)     Electronic exchange with other Customs services (a unified database for
                 joint use with other regulating agencies), running as a ‘single window’
                 system is needed to speed up the movement of goods.

A.3.6.4 Customs Staffing and Management in Central Asian Countries

 444. Since gaining independence, CAREC Customs administrations have grown in size and
 increased their professional capability. However, in a globally competitive world Central Asian
 Customs Administrations must keep a balance between revenue collection and trade facilitation
 functions.

 445. Current Customs staffing levels are high, due to high numbers of physical inspections,
 and manually checking paper declarations. Border crossing point managers do not delegate
 management responsibilities, choosing to centralize control instead of using team work and
 performance measurement techniques.

 446. Recruiting suitable Customs officers would be a seeming challenge because the majority
 of border crossing points are in isolated locations. However, a number of countries have
 indicated that they have been able to attract qualified candidates that are interested in the
 additional training provided such as by Uzbekistan’s Higher Military Customs Institute (HMCI).
                                                                                                   143 Appendix 3


     447. Customs Training Centers need trainers that know international conventions and with
     experience in developing and enforcing national and international standards and in using
     computer technology, such as those provided at HMCI. Ideally, all Customs officers in Central
     Asia should get exposure to Customs services in other countries. For example, the Turkish
     Customs Administration has a Twinning Agreement with the German Customs Administration.
     EU Customs Administrations can provide exposure to Central Asian Customs staff by
     accommodating reciprocal visits and loaning Customs officers as the Pakistan Customs
     Administration has done with the Afghanistan Customs Administration.

     448. Central Asian Customs officers need computer training, language skill training, risk
     assessment, applying Customs laws and rules and training, providing officer skills in transit and
     trade facilitation to traders and brokers. Giving Customs officers control skills is not enough.
     HMCI and other training centers are now providing the additional training.

A.3.6.5 Border-Crossing Point Equipment

     449. TRACECA reports some BCP Customs offices have a lack of office furniture and what
     they do have is in poor condition. Lack of reliable electricity at many minor border crossing
     points and lack of back-up generators makes using computers for declaration and Customs
     management difficult. On the other hand, other posts meet all the requirements for Customs
     infrastructure.

     450. Customs automation can benefit CAREC countries. The World Bank is helping
     Kazakhstan Customs Control Committee install and manage a new system. Other Customs
     Administrations like Afghanistan have installed ASYCUDA. Uzbekistan has an operational
     Unified Automated Information System (UAIS-Auto, UAIS-Railways) to control delivery and
     processing of cargoes, and a similar system for air cargo is being introduced.

A.3.6.6 Border Crossing Point Customs Procedures
     451. A major complaint of traders is the extensive amount of physical inspection at Central
     Asia BCPs. A survey of border crossing points at four Tajikistan border crossing points shows
     100% customs physical inspection. Turkish Customs Administration proved that reducing
     physical inspections from 100% to 20% did not result in revenue loss. Morocco Customs
     reduced the physical inspection rate from 100% in 1996 to 10% in 2003 and the target is to
     reduce it to 5%. 96 However, to do this, risk management methodologies and advanced
     technologies need to be implemented.

     452. Transit travel and cost surveys completed by several studies show a control mentality by
     most border crossing point agencies resulting in long delays and with no understanding of the
     need for trade facilitation and no knowledge of the country’s obligations under international
     conventions.

     453. The ESCAP time and cost survey using a non-TIR truck journey from Bishkek to
     Novosibirsk in the Russian Federation shows the extent of the challenge (Table A.3.30).97

     454. A recent US Chamber of Commerce study98 followed a truck’s journey from Shanghai to
     Germany via Kazakhstan. The survey revealed two days delay at the PRC/Kazakhstan BCP
     and one-day delay at the Kazakhstan/Russia BCP. A different survey99 recorded the average
     border crossing waiting time at Ak Jol and Korday BCPs of over 11 hours. This is far longer than
     the travel time of 4 hours from Bishkek to Almaty –a distance of 190 km. Another border
     crossing point survey at Dostyk and the Doslik Kyrgyz and Uzbekistan border near Osh

96
   World Bank, Customs Modernization Handbook, Editors Luc De Wulf and Jose B. Sokol, 2005, p.15.
97
   Evaluation of the Trade Facilitation Impact of the BOMCA Programme, Richard Pomfret, March 2007, p.37.
98
   Land Transport Options between Europe and Asia, Ramboll, US Chamber of Commerce, July 2006.
99
   Trade and Transport Facilitation in Central Asia (TTFCA), Pilot Performance Measurement, Lyubka Mihailova with
   the Forum of Kazakhstan Entrepreneurs and the Kyrgyz Transporters Association, March 2006.
 144 Appendix 3


  recorded TIR truck drivers paying officials between US$125 and US$170 to speed up the
  standard 6 to 8 hours crossing time.100


                            Table A.3.30: Charges and Delays at Selected BCPs
              BCP and check
       No                                     Procedure             Charges ($)                Delay in hours
                    point
                                 1. Passport control;
       1     Ak Jol BCP                                                         0                               4
                                 2. Customs checked documents
                                 1. Passport control, get
                                     immigration card and visa
                                     check;
                                 2. Customs document check,
                                     placed truck in terminal and
                                     charged Customs duties and
       2     Korday BCP                                                    1,029                           61.5
                                     fees;
                                 3. Truck technical inspection,
                                     check driving licence and
                                     charged for transport of
                                     perishable products;
                                 4. Vehicle insurance.
                                 1. Passport control, immigration
                                     card and visa;
                                 2. Transport inspected driving
                                     licence and truck documents;
       3     Sharbakhty BCP                                                  250                               30
                                 3. Phyto-sanitary inspection;
                                 4. Customs document check
                                     and charged customs
                                     charges and fees.
                                 1. Nine Traffic Police;
             Twelve Kazakhstan 2. One Migration Office;
       4                                                                     294                                5
             checkpoints         3. One Drugs Control Agency;
                                 4. Four Ministry of Transport.
                                 1. Passport control;
                                 2. Driving licence and truck
                                     insurance check;
                                 3. Customs check documents
                                     and cargo charging fees.
                                     Truck sent to bonded
       5     Kulunda BCP                                                     149                           27.5
                                     warehouse and again
                                     Customs document and
                                     driver document check;
                                 4. Check for narcotics;
                                 5. Truck weighed and axle
                                     check.
             Four Russian
       6                         Traffic Police                                 0                   45 minutes
             check points
                                                                                                124 hours and
                                    TOTAL                                             1,722       45 minutes:
                                                                                                  over 5 days
      Source: “Evaluation of the Trade Facilitation Impact of the BOMCA Programme,” Richard Pomfret, UNESCAP,
      Bangkok, March 2007.

  455. Interviews with freight forwarders revealed that they prefer sending goods by rail to
  avoid delays at road BCPs. Freight forwarders prefer rail transport because it is more consist
  than road transport. Central Asian border crossing point procedure challenges101, 102 were listed
  by donor agency projects as

100
      Evaluation of the Trade Facilitation Impact of the BOMCA Programme, Richard Pomfret, March 2007, p.39.
101
      EU TRACECA Central Asia: Reassessment of the Regional Transport Sector Strategy, 2003, p.62.
                                                                                                         145 Appendix 3


           (i)     inspection of all documents and vehicles using TIR Carnets;
           (ii)    transit trucks must pay customs convoy escort charges;
           (iii)   local authority border checks duplicating BCP checks;
           (iv)    time consuming procedures in issuing driver visas and carrying out security
                   checks;
           (v)     incomplete implementation of customs codes, rules and instructions;
           (vi)    excessive and unclear documentation needs; and
           (vii)   corruption.
      456. Customs procedures in the region tend to be non-transparent, complex and bureaucratic,
      giving Customs officials too many discretionary powers.103

      457. The World Bank’s Doing Business report for 2007 ranks Tajikistan at 163, Uzbekistan at
      169, Kazakhstan at 172, and Kyrgyz Republic at 173 out of a total of 175 countries. Table 2.33
      shows the results (long hours or days, and high costs) because of the large number of
      documents and approvals needed to satisfy export and import procedures.

      458. The biggest obstacle to trade facilitation in Central Asia continues to be the control
      mentality of the authorities. 104 Change is needed in the corporate culture of Customs
      Administrations from a control mindset to compliance facilitation. An ADB report 105 defines
      compliance facilitation as encouraging informed compliance by traders crossing borders and
      using risk management techniques and random audits to reinforce compliance.

      459. The high transport costs and long and unpredictable transport times for international
      shipments identified as a problem in Table A.3.31 arise not only because of the landlocked,
      remote location of the region and its often difficult topography, but also owing to excessive
      certification needs and weak institutions responsible with regulating standards.106

      460. Transport issues such as poorly developed routes, quotas limiting the number of
      vehicles each year that can enter or exit a territory107 and excessive and arbitrary fees also
      discourage cross-border trade and sometimes make costs prohibitive for both domestic and
      international businesses. The combination of these barriers with non-transparent, complex and
      bureaucratic border procedures and arbitrary standards on weight, height and width,108 not just
      inflate costs but are used to discriminate against foreign vehicles.




102
    USAID RTLC Project document EG115-06-007 Section C – Description / Specifications / Statement of Work, Section
    c.3 Background, A. General, p15.
103
    USAID RTLC Project document EG115-06-007 Section C – Description / Specifications / Statement of Work, Section
    c.3 Background, A. General, p10.
 104
     Evaluation of the Trade Facilitation Impact of the BOMCA Programme, Richard Pomfret, March 2007, p.31.
105
     ADB CAREC Risk Management: Catalyst of Customs Reforms and Modernization, Jeffrey Liang and Dorothea
    Lazaro, April 2006.
106
    USAID RTLC Project document EG115-06-007 Section C – Description / Specifications / Statement of Work, Section
    c.3 Background, A. General, p11.
107
    The futility of truck quotas was shown during April 2007 when the annual quota for Turkish trucks entering Russia
    was exceeded in April 2007: Turkish Daily News, April 2007. Truck quotas damage economic development.
108
    Kazakhstan has a 38-ton weight restriction while other countries have 40 tons. Instead of trying to control a 38 ton
    weight Kazakhstan would save money and time by changing its transport law to a 40-ton weight limit.
 146 Appendix 3


                                   Table A.3.31: Trading Across Borders
                      Documents       Time for      Cost to     Documents       Time for      Cost to
                      for Export       Export      Export ($/   for Import       Import      Import ($/
                       (number)        (days)      container)    (number)        (days)      container)
       Region
       East Asia and
                              6.9         23.9        884.8            9.3           25.9         1,037
       Pacific
       Europe and
                              7.4         29.2     1,450.20             10           37.1         1,589
       Central Asia
       Central Asia Region
       Kazakhstan              14           93        2,789             18             87         2,880
       Kyrgyz
                                 -           -            -             18            127         3,032
       Republic
       Tajikistan              14           72        4,300             10             44         3,550
       Uzbekistan              10           44        2,550             18            139         3,970
                   109
       Afghanistan               -           -            -             10             97              -
       South East Europe and NIS
       Bulgaria                 7           26        1,233             10             25         1,201
       Romania                  4           14        1,300              4             14         1,200
       Russia                   8           38        2,237              8             38         2,237
      Source: USAID RTLC Project Document EG115-06-007, US Agency for International Development, Washington,
       D.C., 2007.

  461. Kazakhstan, Tajikistan, and Uzbekistan have applied for WTO accession. Their
  respective customs administrations must change their customs laws and rules to include WTO
  provisions including procedures to expedite customs clearance. The WTO customs clearance
  expediting provisions relate to the General Agreement on Trade and Transport (GATT) 1994,
  Article VIII (Fees and Formalities Connected with Importation and Exportation) and, in particular
  1(c):

             “The contracting parties also recognize the need for minimizing the incidence
             and complexity of import and export formalities and for decreasing and
             simplifying import and export documentation requirements.”

  462. WTO proposals separating the release of goods from clearance procedures are
  pending.110 This issue is linked to Customs modernization and automation.




109
      Trading Across Borders, 2005.
110
      See UNCTAD Technical Note TN/TF/W/19, 21 and 30.
                                                                                              147 Appendix 3


             Annex A.3-A: United Nations Multilateral Treaties (as of 1 March 2006)

CHAPTER X. INTERNATIONAL TRADE AND DEVELOPMENT
1. a) General Agreement on Tariffs and Trade. Geneva, 30 October 1947.
1. b). Havana Charter for an International Trade Organization. Havana, 24 March 1948.
1. c). Agreement on most-favored-nation treatment for areas of Western Germany under military
       occupation. Geneva, 14 September 1948.
1. d). Memorandum of understanding relative to application to the Western Sectors of Berlin of the
       Agreement on most-favored-nation treatment for areas of Western Germany under military
       occupation. Annex, 13 August 1949.
2. Agreement establishing the African Development Bank. Khartoum, 4 August 1963.
2. a). Amendments to the Agreement establishing the African Development Bank. Abidjan, 17 May 1979.
2. b). Agreement establishing the African Development Bank done at Khartoum on 4 August 1963, as
       amended by resolution 05-79 adopted by the Board of Governors on 17 May 1979. Lusaka, 7 May
       1982.
3. Convention on Transit Trade of Land-locked States. New York, 8 July 1965.
4. Agreement establishing the Asian Development Bank. Manila, 4 December 1965.
5. Articles of Association for the establishment of an Economic Community of West Africa. Accra, 4 May
   1967.
6. Agreement establishing the Caribbean Development Bank. Kingston, 18 October 1969.
7. Convention on the Limitation Period in the International Sale of Goods. New York, 14 June 1974.
7. a). Protocol amending the Convention on the Limitation Period in the International Sale of Goods. Vienna,
       11 April 1980.
7. b).Convention on the Limitation Period in the International Sale of Goods, as amended by the
      Protocol of 11 April 1980. New York, 14 June 1974.
8. Agreement establishing the International Fund for Agricultural Development. Rome, 13 June 1976.
9. Constitution of the United Nations Industrial Development Organization. Vienna, 8 April 1979.
10. United Nations Convention on Contracts for the International Sale of Goods. Vienna, 11 April 1980.
11. Charter of the Asian and Pacific Development Centre ...Bangkok, 1 April 1982.
11. a). Amendments to the Charter of the Asian and Pacific Development Centre, Kuala Lumpur, 16
    July 1998.
12. United Nations Convention on International Bills of Exchange and International Promissory Notes.
    New York, 9 December 1988.
13. United Nations Convention on the Liability of Operators of Transport Terminals in International
    Trade. Vienna, 17 April 1991.
14. Agreement to establish the South Centre. Geneva, 1 September 1994.
15. United Nations Convention on Independent Guarantees and Stand-by Letters of Credit. New York,
    11 December 1995.
16. Agreement Establishing the Bank for Economic Cooperation and Development in the Middle
    East and North Africa. Cairo, 28 August 1996.
17. United Nations Convention on the. Assignment of Receivables in International Trade. New York 12
    December 2001.
18. United Nations Convention on the Use of Electronic Communications in International Contracts.
    New York, 23 November 2005.
148 Appendix 3


CHAPTER XI. TRANSPORT AND COMMUNICATIONS
A. Customs Matters
1. Agreement providing for the provisional application of the Draft International Customs
    Conventions on Touring. on Commercial Road Vehicles and on the International Transport
    of Goods by Road. Geneva, 16 June 1949.
2. Additional Protocol to the Agreement providing for the provisional application of the Draft
    International Customs Conventions on Touring, on Commercial Road Vehicles and on the
    International Transport of Goods by Road. Geneva, 16 June 1949.
3. Additional Protocol to the Agreement providing for the provisional application of the Draft
    International Customs Conventions on Touring, on Commercial Road Vehicles and on the
    International Transport of Goods by Road, relating to the International Transport of goods
    by container under the TJ.R. Carnet Regime. Geneva, 11 March 1950.
4. Additional Protocol amending certain provisions of the Agreement providing for the provisional
    application of the Draft International Customs Conventions on Touring, on Commercial Road
    Vehicles and on the International Transport of Goods by Road. Geneva, 28 November 1952.
5. International Convention to Facilitate the Importation of Commercial Samples and
    Advertising Material. Geneva, 7 November 1952.
6. Convention concerning Customs Facilities for Touring. New York, 4 June 1954.
7. Additional Protocol to the Convention concerning Customs Facilities for Touring, relating to
    the Importation of Tourist Publicity Documents and Material. New York, 4 June 1954.
8. Customs Convention on the Temporary Importation of Private Road Vehicles. New York, 4
    June 1954.
9. Customs Convention on Containers. Geneva, 18 May 1956.
10. Customs Convention on the Temporary Importation of Commercial Road Vehicles. Geneva,
    18 May 1956.
11. Customs Convention on the Temporary Importation for Private Use of Aircraft and Pleasure
    Boats. Geneva, 18 May 1956.
12. Customs Convention concerning spare parts used for repairing EUROP wagons. Geneva, 15
    January 1958.
13. Customs Convention on the International Transport of Goods under Cover of TIR Carnets
    (TIR Convention). Geneva, 15 January 1959.
14. European Convention on Customs Treatment of Pallets used in International Transport.
    Geneva, 9 December 1960.
15. Customs Convention on Containers, 1972. Geneva, 2 December 1972.
16. Customs Convention on the International Transport of Goods under Cover of TIR Carnets
    (TIR Convention). Geneva, 14 November 1975.
17. International Convention on the Harmonization of Frontier Controls of Goods. Geneva, 21
    October 1982.
18. Convention on Customs Treatment of Pool Containers used in International Transport.
    Geneva, 21 January 1994.

B. Road Traffic
1. Convention on Road Traffic. Geneva, 19 September 1949.
2. Protocol concerning countries or territories at present occupied. Geneva, 19 September 1949.
3. Protocol on Road Signs and Signals. Geneva, 19 September 1949.
4. European Agreement supplementing the 1949 Convention on road traffic and the 1949
   Protocol on road signs and signals. Geneva, 16 September 1950.
5. European Agreement on the application of article 3 of Annex 7 of the 1949 Convention on
   Road Traffic Concerning the Dimensions and Weights of Vehicles Permitted to Travel on
   Certain Roads of the Contracting Parties. Geneva, 16 September 1950.
6. European Agreement on the application of article 23 of the 1949 Convention on road
   traffic, concerning the dimensions and weights of vehicles permitted to travel on certain
   roads of the Contracting Parties. Geneva, 16 September 1950.
7. Declaration on the construction of main international traffic arteries. Geneva, 16 September
   1950.
8. General Agreement on Economic Regulations for International Road transport (a)
                                                                                          149 Appendix 3


     Additional Protocol; (b) Protocol of Signature. Geneva, 17 March 1954; (c). Protocol
     relating to the adoption of Annex C. 1 to the Set of Rules annexed to the General
     Agreement on Economic Regulations for International Road transport. Geneva, 1 July
     1954.
9. Agreement on Signs for Road Works, amending the European Agreement of 16
     September 1950 supplementing the 1949 Convention on Road Traffic and the 1949
     Protocol on Road Signs and Signals 1. Geneva, 16 December 1955.
10. Convention on the Taxation of Road Vehicles for Private Use in International Traffic. Geneva, 18
     May 1956.
11. Convention on the Contract for the International Carriage of Goods by Road (CMR). Geneva, 19
     May 1956.
11. a). Protocol to the Convention on the Contract for the International Carriage of Goods by Road
     (CMR). Geneva, 5 My 1978.
12. Convention on the Taxation of Road Vehicles engaged in International Goods Transport. Geneva,
     14 December 1956.
13. Convention on the Taxation of Road Vehicles Engaged in International Passenger Transport.
     Geneva, 14 December 1956.
14. European Agreement concerning the International Carriage of Dangerous Goods by Road (ADR).
     Geneva, 30 September 1957.
14. a).Protocol amending article 14 (3) of the European Agreement of 30 September 1957
        concerning the international Carriage of Dangerous Goods by Road (ADR). New York, 21
        August 1975.
14. b). Protocol amending article 1 (a), article 14 (1) and article 14 (3) (b) of the European
        Agreement of 30 September 1957 concerning the International Carriage of Dangerous Goods by
        Road (ADR). Geneva, 28 October 1993.
15. European Agreement on Road Markings. Geneva, 13 December 1957.
16. Agreement concerning the Adoption of Uniform Technical Prescriptions for Wheeled Vehicles,
    Equipment and Parts which can be fitted and/or be used on Wheeled Vehicles and the Conditions for
    Reciprocal Recognition of Approvals Granted on the Basis of These Prescriptions. Geneva, 20
    March 1958.
17. Agreement on Special Equipment for the Transport of Perishable Foodstuffs and on the Use of such
    Equipment for the International Transport of some of those Foodstuffs .Geneva, 15 January 1962.
18. European Agreement concerning the Work of Crews of Vehicles Engaged in International Road
    Transport (AETR). Geneva, 19 January 1962.
19. Convention on Road Traffic. Vienna, 8 November 1968.
20. Convention on road signs and signals. Vienna, 8 November 1968.
21. European Agreement concerning the Work of Crews of Vehicles Engaged in International Road
    Transport (AETR). Geneva, 1 July 1970.
22. Agreement on the International Carriage of Perishable Foodstuffs and on the Special Equipment to be
    used for such Carriage (ATP). Geneva, 1 September 1970.
23. European Agreement supplementing the Convention on road traffic opened for signature at
    Vienna on 8 November 1968. Geneva, 1 May 1971.
24. European Agreement supplementing the Convention on road signs and signals opened for signature
    at Vienna on 8 November 1968. Geneva, 1 May 1971.
25. Protocol on Road Markings, additional to the European Agreement supplementing the Convention on
    Road Signs and Signals opened for signature at Vienna on 8 November 1968. Geneva, 1 March
    1973.
26. Convention on the contract for the international carriage of passengers and luggage by road (CVR).
    Geneva, 1 March 1973.
     A). Protocol to the Convention on the contract for the international carriage of passengers and
    luggage by road (CVR). Geneva, 5 July 1978.
27. Agreement on minimum requirements for the issue and validity of driving permits (APC). Geneva, 1
    April 1975.
28. European Agreement on main international traffic arteries (AGR). Geneva, 15 November 1975.
29. Intergovernmental Agreement on the Establishment of an Inter-African Motor Vehicle Third Party.
    Liability Insurance Card. New York, 1 October 1978.
30. Convention on Civil Liability for Damage caused during Carriage of Dangerous Goods by Road, Rail
    and Inland Navigation Vessels (CRTD). Geneva, 10 October 1989.
31. Agreement concerning the Adoption of Uniform Conditions for Periodical Technical Inspections of
 150 Appendix 3


    Wheeled Vehicles and the Reciprocal Recognition of such Inspections. Vienna, 13 November 1997.
31. Rule No. 1. "Uniform provisions for periodical technical inspections of wheeled vehicles with regard to
    the protection of the environment". Geneva, 14 December 2001.
32. Agreement concerning the Establishing of Global Technical Regulations for Wheeled Vehicles,
    Equipment and Parts which can be fitted and/or be used on Wheeled Vehicles. Geneva, 25 June
    1998.
33. Agreement on International Roads in the Arab Mashreq. Beirut, 10 May 2001.
34. Intergovernmental Agreement on the Asian Highway Network. Bangkok, 18 November 2003.

C. Transport by Rail
1. International Convention to facilitate the crossing of frontiers for passengers and baggage
   carried by rail. Geneva, 10 January 1952.
2. International Convention to facilitate the crossing of frontiers for goods carried by rail. Geneva, 10
   January 1952.
3. European Agreement on Main International Railway Lines (AGC). Geneva, 31 May 1985.
4. Agreement on International Railways in the Arab Mashreq. Beirut, 14 April 2003.

D. Water Transport
1. Convention relating to the limitation of the liability of owners of inland navigation vessels (CLN).
    Geneva, 1 March 1973.
1. a). Protocol to the Convention relating to the Limitation of the Liability of Owners of Inland Navigation
      Vessels (CLN). Geneva, 5 July 1978.
2. Convention on the contract for the international carriage of passengers and luggage by inland
     waterway (CVN).Geneva, 6 February 1976.
2. a). Protocol to the Convention on the Contract for the International Carriage of Passengers and
       Luggage by Inland Waterway (CVN). Geneva, 5 July 1978.
3. United Nations Convention on the Carriage of Goods by Sea, 1978. Hamburg, 31 March 1978.
4. International Convention on Maritime Liens and Mortgages, 1993. Geneva, 6 May 1993.
5. European Agreement on Main Inland Waterways of International Importance (AGN). Geneva, 19
     January 1996.
6. European Agreement concerning the International Carriage of Dangerous Goods by Inland
     Waterways (ADN). Geneva, 26 May 2000.
7. Memorandum of Understanding on Maritime Transport Cooperation in the Arab Mashreq.
     Damascus, 9 May 2005.

E. Multimodal Transport
1. United Nations Convention on International Multimodal Transport of Goods. Geneva, 24 May 1980.
2. European Agreement on Important International Combined Transport Lines and Related
    Installations (AGTC). Geneva, 1 February 1991.
2. a). Protocol on Combined Transport on Inland Waterways to the European Agreement on
       Important international Combined Transport Lines and Related Installations (AGTC) of 1991.
       Geneva, 17 January 1997.

CHAPTER XII. NAVIGATION
1. Convention on the International Maritime Organization. Geneva, 6 March 1948.
1. a). Amendments to articles 17 and 18 of the Convention on the International Maritime Organization.
       London, 15 September 1964.
1. b). Amendment to article 28 of the Convention on the International Maritime Organization. London, 28
       September 1965.
1. c). Amendments to articles 10, 16, 17, 18, 20. 28, 31 and 32 of the Convention on the International
       Maritime Organization. London, 17 October 1974.
1. d). Amendments to the title and substantive provisions of the Convention on the International
        Maritime Organization. London, 14 November 1975 and 9 November 1977.
1. e). Amendments to the Convention on the International Maritime Organization relating to the
        Institutionalization of the Committee on Technical Co-operation in the Convention. London, 17
        November 1977.
1. f). Amendments to articles 17, 18, 20 and 51 of the Convention on the International Maritime
                                                                                             151 Appendix 3


      Organization. London, 15 November 1979.
1. g). Amendments to the Convention on the International Maritime Organization, (institutionalization
        of the Facilitation Committee). London, 7 November 1991.
1. h). Amendments to the Convention on the International Maritime Organization. London, 4
        November 1993.
2. Convention regarding the Measurement and Registration of Vessels Employed in Inland Navigation.
    Bangkok, 22 June 1956.
3. Convention relating to the unification of certain rules concerning collisions in inland navigation.
    Geneva, 15 March 1960.
4. Convention on the registration of inland navigation vessels. Geneva, 25 January 1965.
5. Convention on the measurement of inland navigation vessels. Geneva, 15 February 1966.
6. Convention on a Code of Conduct for Liner Conferences. Geneva, 6 April 1974.
7. United Nations Convention on Conditions for Registration of Ships. Geneva, 7 February 1986.
8. International Convention on Arrest of Ships, 1999. Geneva, 12 March 1999.

CHAPTER XXVII. ENVIRONMENT
1. Convention on Long-range Transboundary Air Pollution. Geneva, 13 November 1979.
1. a). Protocol to the 1979 Convention on Long-range Transboundary Air Pollution on Long-term Financing
       of the Co-operative Programme for Monitoring and Evaluation of the Long-range Transmission of Air
       Pollutants in Europe EMEP). Geneva, 28 September 1984.
1. b). Protocol to the 1979 Convention on Long-Range Transboundary Air pollution on the Reduction of
       Sulphur Emissions or their Transboundary Fluxes by at least 30 per cent. Helsinki, 8 July 1985.
1. c). Protocol to the 1979 Convention on long-range transboundary air pollution concerning the
        control of emissions of nitrogen oxides or their transboundary fluxes. Sofia, 31 October 1988.
1. d). Protocol to the 1979 Convention on Long-Range Transboundary Air Pollution concerning the
        Control of Emissions of Volatile Organic Compounds or their Transboundary Fluxes. Geneva, 18
        November 1991.
1. e). Protocol to the 1979 Convention on Long-Range Transboundary Air Pollution on Further
        Reduction of Sulphur Emissions. Oslo, 14 June 1994.
1. f). Protocol to the 1979 Convention on Long-Range Transboundary Air Pollution on Heavy Metals.
       Aarhus, 24 June 1998.
1. g). Protocol to the 1979 Convention on Long-Range Transboundary Air Pollution on Persistent
        Organic Pollutants. Aarhus, 24 June 1998.
1. h). Protocol to the 1979 Convention on Long-range Transboundary Air Pollution to Abate
        Acidification, Atrophication and Ground-level Ozone. Gothenburg (Sweden), 30 November 1999.
2. Vienna Convention for the Protection of the Ozone Layer. Vienna, 22 March 1985.
2. a). Montreal Protocol on Substances that Deplete the Ozone Layer. Montreal, 16 September 1987.
2. b). Amendment to the Montreal Protocol on Substances that Deplete the Ozone Layer. London, 29
       June 1990.
2. c). Amendment to the Montreal Protocol on Substances that. Deplete the Ozone Layer.
        Copenhagen, 25 November 1992.
2. d). Amendment to the Montreal Protocol on Substances that Deplete the Ozone Layer adopted by
        the Ninth Meeting of the Parties. Montreal, 17 September 1997.
2. e). Amendment to the Montreal Protocol on Substances that Deplete the Ozone Layer. Beijing, 3
        December 1999.
3. Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their
    Disposal. Basel, 22 March 1989.
3. a). Amendment to the Basel Convention on the Control of Transboundary Movements of Hazardous
        Wastes and their Disposal. Geneva, 22 September 1995.
3. b).Basel Protocol on Liability and Compensation for Damage Resulting from Transboundary
        Movements of Hazardous Wastes and their Disposal. Basel, 10 December 1999.
4. Convention on Environmental Impact Assessment in a Transboundary Context. Espoo, Finland, 25
    February 1991.
4. a). Amendment to the Convention on Environmental Impact Assessment in a Transboundary Context.
        Sofia. 27 February 2001.
4. b). Protocol on Strategic Environmental Assessment to the Convention on Environmental Impact
        Assessment in a Transboundary Context. Kiev, 21 May 2003.
 152 Appendix 3


4. c). Amendment to the Convention on Environmental Impact Assessment in a Transboundary Context.
       Cavtat 4 June 2004.
5. Convention on the Protection and Use of Transboundary Watercourses and International Lakes.
    Helsinki, 17 March 1992.
5. a). Protocol on Water and Health to the 1992 Convention on the Protection and Use of
        Transboundary Watercourses and International Lakes. London, 17 June 1999.
5. b). Amendments to Articles 25 and 26 of the Convention on the Protection and Use of
        Transboundary Watercourses and International Lakes. Geneva, 17 February 2004.
6. Convention on the Transboundary Effects of Industrial Accidents. Helsinki, 17 March 1992.
7. United Nations Framework Convention on Climate Change. New York, 9 May 1992.
7. a). Kyoto Protocol to the United Nations Framework Convention on Climate Change. Kyoto, 11
        December 1997.
8. Convention on biological diversity. Rio de Janeiro, 5 June 1992.
8. a). Cartagena Protocol on Biosafety to the Convention on Biological Diversity. Montreal, 29
        January 2000.
9. Agreement on the conservation of small cetaceans of the Baltic and North Seas. New York, 17 March
    1992.
10. United Nations Convention to Combat Desertification in those Countries Experiencing Serious Drought
    and/or Desertification, Particularly in Africa. Paris, 14 October 1994.
11. Lusaka Agreement on Co-operative Enforcement Operations Directed at Illegal Trade in Wild Fauna
    and Flora. Lusaka, 8 September 1994.
12. Convention on the Law of the Non-Navigational Uses of International Watercourses. New York, 21
    May 1997.
13. Convention on Access to Information, Public Participation in Decision-Making and Access to
    Justice in Environmental Matters. Aarhus, Denmark, 25 June 1998.
13. a). Protocol on Pollutant Release and Transfer Registers. Kiev, 21 May 2003.
13. b). Amendment to the Convention on Access to Information, Public Participation in Decision-Making
         and Access to Justice in Environmental Matters. Almaty, 27 May 2005.
14. Rotterdam Convention on the Prior Informed Consent Procedure for Certain Hazardous Chemicals and
    Pesticides in International Trade. Rotterdam, 10 September 1998.
15. Stockholm Convention on Persistent Organic Pollutants. Stockholm, 22 May 2001.
16. Protocol on Civil Liability and Compensation for Damage Caused by the Transboundary Effects of
    Industrial Accidents on Transboundary Waters to the 1992 Convention on the Protection and Use
    of Transboundary Watercourses and International Lakes and to the 1992 Convention on the
    Transboundary Effects of Industrial Accidents. Kiev, 21 May 2003.
                                                                                      153 Appendix 4



                                    STRATEGIC FOCUS AREAS

A.4.1 INTRODUCTION

1.      To respond to the transport and trade challenges and maximize the arising opportunities,
a series of projects are foreseen. These, along with a results framework and an implementation
plan form part of the Implementation Action Plan for the Transport and Trade Facilitation Strategy
(the Action Plan), which is provided in a separate document.

2.     The purpose of this Appendix is to present the rationale of the projects described in detail
in the Action Plan. It is the bridge between identified challenges on which the Transport and
Trade Facilitation Strategy (the Strategy) focuses and specific projects to capture opportunities.

3.        The Strategy has three overarching goals:

       (i)        to establish competitive transport corridors across the Central Asia
                  Regional Economic Cooperation (CAREC) region;
       (ii)       to facilitate efficient movement of people and goods across borders; and
       (iii)      to develop sustainable, safe, and user-friendly transport and trade
                  networks.
4.     The attainment of these goals requires not only concentrated focus on physical corridors
but also on the key management clusters and stakeholders. These focus areas are described
below.

A.4.2 ESTABLISHING COMPETITIVE TRADE AND TRANSPORT CORRIDORS

A.4.2.1        Seamless Cross-Border Trade and Transport

5.      Trade facilitation is conceptually distinct from transport improvements. However, there are
synergies to be gained through focusing the efforts of the trade facilitation strategy on the
corridors identified in the transport component of the Strategy. The CAREC region is well-suited
to a corridors approach to trade facilitation because most intra- and inter-regional trade flows use
a limited number of east-west and north-south routes.

6.      As described in Appendix 3, an international trade and transport operator must navigate a
mosaic of rules and regulations to traverse CAREC borders and to proceed through each country
along its corridors. Controls are applied by what appears to be a diverse series of authorities,
using rather basic methods. The rules originate from and are enforced by different branches of
government each with its own agenda. The result is slow, irregular, and unpredictable logistics
services across the region, costing more and being used less than otherwise would be the case.

7.      Borders and their crossing points are a sensitive domain of government. High level policy
finds manifestation there because of sovereignty and security considerations. Rapid changes to
benefit the trader and transport operator can only be brought about if a higher level of governance
is engendered at the same time as physical controls become less intrusive. Fortunately, this is
possible using modern management methods and technology. These, in turn, must be housed in
modern infrastructure, and rely on modern information and communications technology (ICT)
equipment. Hence, within CAREC, actions must be taken that encompass all three pillars of this
strategy’s approach: infrastructure, management, and technology.

8.      Tackling these problems requires a concerted and broad suite of actions that reconcile the
interests and responsibilities of the different stakeholders and authorities involved at the national
level. A streamlined approach is proposed that compartmentalizes actions into discrete fields
matching the specialist interests of the stakeholders. Some overlap of these fields is inevitable so
parallel coordination actions are foreseen at the national and regional levels.
154 Appendix 4



A.4.2.2 Customs Reform and Modernization

9.     Customs cooperation will remain the core of the trade facilitation strategy. The medium-
term objective will be to promote concerted customs reforms and modernization, with the
Customs Cooperation Committee (CCC) serving as a regional forum to address issues of
common interest. Simplification and harmonization of customs procedures are being achieved in
the CAREC region through revision of customs codes in line with the Revised Kyoto Convention,
introduction of risk management practices, joint customs control, and customs automation. The
process of changing the culture of customs administrations from control-orientation to
compliance-facilitation is crucial and has begun. The strategy will continue to focus on this
process.

10.      The customs-related work program in the short to medium term will focus on (i)
harmonization of custom procedures and documentation; (ii) customs automation; (iii) data
exchange; (iv) joint customs control; (v) risk management, post-entry audit, and customs
intelligence; (vi) regional transit development; (vii) frameworks for customs cooperation; and (viii)
training.

11.    CAREC has begun to work in close collaboration with the WCO Columbus program.131
The program includes

           (i)     strategic management,
           (ii)    materials and human resources management,
           (iii)   legislation,
           (iv)    procedures,
           (v)     enforcement,
           (vi)    ICT,
           (vii)   external bommunications, and
           (viii) governance.
12.    The Strategy has incorporated the WCO program and the Action Plan encourages
operational partnership with the WCO in the implementation of its program.

A.4.2.3 Regional Logistics Development

13.    The trade logistics component of the Strategy will facilitate the development of an efficient
regional logistics industry. The work program will be closely coordinated between the CCC and
the Transport Sector Coordinating Committee (TSCC) and include efforts to

           (i)     assess and plan the development of logistics centers, and rail intermodal
                   hubs, with a regional and local focus where particular projects are already
                   underway;
           (ii)    focus on logistics centers for agricultural produce;
           (iii)   train logistics service providers and promotion of a regional logistics forum
                   or professional association;
           (iv)    strengthen the capacity of local authorized offices (and testing centers) for
                   goods certification; and


131                                    th
      Presentations by the WCO at the 6 CAREC Ministerial Conference in Dushanbe, November 2007, the first joint
      meeting of the Trade and Transport Sectors’ Coordinating Committees in Tashkent, January 2008, and working
      group sessions with ADB CAREC management and their consultants in Beijing, April 2008.
                                                                                                       155 Appendix 4

         (v)     facilitate and financing of key investments including public-private
                 partnerships.

A.4.2.4 Institutional Interfaces

14.     The reinforcement of institutional interfaces is the most important action for overall long-
term results as well as for sustainability of the benefits of arising from technology and investment
in this focus area. However, rapid institutional changes are rare. Vested interests in the status
quo can be strong and resist change. The different parties involved must be given time and be
assisted to discover that a win-win prospect is unfolding.

15.     The CCC and TSCC could not separately bring to bear all of the institutional interface and
expertise necessary to achieve results in all Action Plan components. The Strategy will foster the
creation in each CAREC country of National Joint Trade and Transport Facilitation Committee
(NJC), or equivalent entity, under a mandate from the government that incorporates all relevant
private and public sector representatives.132 Each government should choose its own structure for
this, and some already have such structures in place. Coordinated functionality rather than form
is the key issue. Ministry of Transport and Communications and Customs authorities are both
expected to play prominent roles in these bodies, but other interests should also be represented
including most certainly private sector trade representatives, transport corridor users and
transport service providers.

16.     Ideally, these bodies should be established and working, and then become the interfaces
within an integrated CAREC trade facilitation and transport corridor management program.

17.     In reality, the national and the regional extension phases will have to overlap or progress
will be too slow. Bilateral, trilateral and multilateral entities may best fit the complexity of the
corridors. Ultimately transport development and activities along the CAREC corridors should be
managed by entities that can ensure seamless operations across borders and through CAREC
countries.

18.      It is proposed that for those countries that have not yet established a structure for
implementing coordinated transport and trade policies that consideration be given to forming the
NJCs. The role of the committees will be broad. They will coordinate a review of policy and
legislation to identify and correct gaps and anomalies relative to international best practice.
CAREC countries are at different stages of adherence to international conventions concerning
trade and transport. As of 2007, only one CAREC countries has ratified the Revised Kyoto
Convention,133 while four have acceded to the Convention on Harmonization of Frontier Control of
Goods (see Table A.3.28). Acceding to or at least harmonizing national procedures in accordance
with these and other international conventions will in itself develop a high degree of
standardization across the region as well as with global trading partners. To the same ends, the
CAREC project will promote close liaisons and active collaboration with bodies such as World
Customs Organizations (WCO), United Nations Economic and Social Commission for Asia and
the Pacific (UN ESCAP), the European Union (EU) (their Border Management Central Asia –
BOMCA program administered by United Nations Development Programme [UNDP], and
Transport Corridor Europe-Caucasus-Asia [TRACECA] programs in particular), multilateral
institutions, and bilateral assistance organizations.

19.    The International Monetary Fund (IMF) has recommended that those Central Asian
countries that are not yet members of the World Trade Organization (WTO) should give


132
    The need for closer coordination has also been noted within CAREC; for example, Trade Policy Coordinating
    Committee Status Report to the SOM Meeting, para.10.(ii), April 2006, Urumqi, and the presentation at the first joint
    meeting of the Trade and Transport Sectors’ Coordinating Committees in Tashkent, January 2008, by UNESCAP,
    see “Trade Facilitation Handbook for the Greater Mekong Sub-region UN ESCAP 2002” and “Study On National
    Coordination Mechanisms for Trade And Transport Facilitation in the UNESCAP Region”.
133
    unfccc.int/files/kyoto_protocol/background/status_of_ratification/application/pdf/kp_ratifcation.pdf.
156 Appendix 4



precedence to accession to this organization.134 The five CAREC countries that are not members
are in various stages of pre-accession. Again, project activities would help put in place trade
facilitation and transport engagements that align CAREC countries with the obligations of WTO
membership in these fields.

20.     Coordinating all of the preceding activities with actual implementation of the conventions,
and with the present and evolving regional agreements on transport will overlap with other
projects that will be providing more detailed assistance in particular fields of application.

21.     The meeting agendas of the CAREC CCC and TSCC will be set to ensure closer
integration between the fields of trade policy, trade facilitation, and transport.

A.4.2.5 International Conventions, Regional Agreements, and Regulations

22.     CAREC countries will need further general and specific assistance to adhere to
international conventions and implement them. The conventions cover a broad range of border
crossing as well as more technical harmonization issues so that this CAREC focus area is of
interest to both the CCC and TSCC.

23.   The conventions are crucial management pillar components of the Strategy. Important
conventions include

        (i)      border-crossing procedures complying with the new Annex 8 of the
                 Convention on the Harmonization of Frontier Controls of Goods, 135 and
                 engagements under the Revised Kyoto Convention;
        (ii)     UN ESCAP resolution 48/11 list of priority conventions; and
        (iii)    UN Convention against Corruption, December 2005.
24.      Although the conventions are broad, their implementation is sometimes difficult. They
address quite complex technical fields, requiring specialist knowledge. Also, modification of
existing legal frameworks, regulations and enforcement authorities’ working practices can
demand laborious effort and training. In the case of technical regulations enforcement is often by
traffic police rather than the Ministry of Transport and Communications (MOTC). The risk of
confusion over the current regulations to apply and how to do so is to be resolved by the
coordination of the NJC.

25.     Specific issues that need to be addressed include

        (i)      Equitable transit and cross-border entry charges. The goal would be to
                 establish regimes for charging foreign vehicles engaged in transport
                 operations across and between borders for road use. The principles of the
                 regime should be fully compatible with best international practice (e.g., the
                 European Union), including nondiscrimination and transparency, but at the
                 same time allowing the CAREC countries to recover the maintenance costs
                 occasioned by foreign as well as domestic traffic.
        (ii)     Vehicle insurance. The goal would be to explore the feasibility of alternative
                 approaches for establishing a third-party motor vehicle liability insurance
                 regime valid across CAREC. The aim of such a regime would be to assure
                 compensation for victims of road traffic accidents and simplify
                 administrative and judicial consequences for any foreign vehicle implicated
                 in an accident in a CAREC country.

134
    Presentation by Luc Moers IMF Representative in Dushanbe to CAREC TPCC organized jointly by ADB and IMF,
    September 2006.
135
    http://www.unece.org/trans/bcf/ac3/documents/2005-1e.pdf.
                                                                                      157 Appendix 4

       (iii)   Road safety. Improvement of road safety is a very urgent priority. A safety
               audit of CAREC corridors needs to be conducted in collaboration with local
               authorities and stakeholders, exchanging know-how at the same time as
               identifying the typical problems that can be addressed systematically. A
               range of safety improvement measures covering infrastructure,
               management, technology and public relations/media will be recommended.
       (iv)    Vehicle emissions. The reduction of vehicle emissions is a particularly
               complex problem to address, not least because a large population of
               poorer persons living in rural areas depend for their mobility on vehicles
               that are chronically over-polluting. A fuller understanding of the technical
               aspects of the problem and of the evolving standards applied in other parts
               of the world (particularly the European Union series) must be imparted to
               CAREC national specialists on the subject. A balanced plan for tightening
               standards must be formulated taking account of benefits relative to cost,
               and the interests of urban as against rural dwellers.
26.     Nearly all of the region’s cross-border and transit road transport is conducted under
bilateral agreements. Their implementation mechanisms are absent or weak, allowing unilateral
interpretation. The CAREC region’s multilateral agreements so far have been difficult to activate
in practice. Diverse technical standards are enforced. This opens ambiguity in regulatory
application, and creates a confusing mosaic of rules. Thus, there is a need to assist CAREC
countries in adopting international standards as the reference benchmarks to harmoniously
regulate their cross border transport relations. This will be of great value whichever agreements
prevail as the region’s favored working instruments.

A.4.2.6 Border-Crossing Point Improvements

27.     While certain CAREC border-crossing
points (BCPs) have been improved, many
have woefully inadequate infrastructure and
equipment. It would not be possible to
implement world best practice at border
crossings under the present conditions. All
border crossings along the six CAREC
corridors    must     be    assessed,      and
improvement measures designed. Information
for this assessment will be collected from
other CAREC activities, such as the corridor
monitoring and evaluation program, feasibility         Container Train on CAREC 1 in Kazakhstan
studies for road and rail infrastructure
improvements in the vicinity of borders, and the customs reform and modernization projects being
conducted with the WCO.

28.    The functionality sought will be sufficient to allow rapid controls and full compliance with
the Convention on the Harmonization of Frontier Controls of Goods, including the new Annex 8.
This prescribes, among other functions, efficient

       (i)     visa issue to drivers;
       (ii)    vehicle inspection and weight certification;
       (iii)   joint controls (one-stop technology), timely operations, separation of lanes (e.g.,
               Transport Interationaux Routiers [TIR], perishable freight, and other);

       (iv)    off-lane inspection areas, parking, and terminals;
       (v)     hygiene and telecommunication facilities; and
158 Appendix 4



        (vi)     facilities for auxiliary transport service providers (e.g., customs brokers,
                 forwarders and operator association representatives, etc).
29.    It is essential that ICT and control equipment at BCP be of a technical level necessary to
support rapid processing. Customs and other control officers will receive training in application of
the new procedures and utilization of new equipment.

30.     Processes and documentation should fully exploit the efficiency and effectiveness of new
infrastructure and equipment, with minimum one-window controls at the BCP itself, clearance at
destination, use of risk management techniques using software compatible with world standards,
common adoption of the single administrative document (SAD), advanced information transfer,
and processing.

31.   The surveys of BCPs will be complemented by cost estimates and cost-benefit
assessment. This will allow the formulation of investment plans to implement physical,
management and technology improvements, with a view to MI participation in the financing of
improvements.

A.4.3 DEVELOPING TRANSPORT CAPACITY

A.4.3.1 Improving Basic Land Links

32.    Analysis of corridor profiles, roads and railroads has revealed the need to rehabilitate
large sections of the road and rail network as well as to construct new roads and rail links.
Proposed projects are at different stages of implementation. Therefore, the Strategy includes both
investment projects and infrastructure development feasibility studies. These are numerous and
comprise the core investment planning for the Strategy. Details of individual components are to
be found in the Action Plan.

A.4.3.1.1      Road Infrastructure

33.     The need for road improvement can arise from different origins. First, lack of road
maintenance leads to pavement deterioration so severe that road rehabilitation is required.
Secondly, increased traffic may necessitate capacity expansion such as road widening, adding
additional lanes, and improving the road surface. The second case is, as yet, relatively rare since
road congestion is not prevalent in CAREC countries except in major urban areas. However,
much of CAREC road infrastructure was designed many years ago and practically any
improvement implies a total construction or reconstruction. Often, road standards now need to be
raised from Class IV gravel to Class II or III with asphalt concrete paving. The Action Plan will
address these outstanding issues.

A.4.3.1.2      Railways

34.     CAREC rail infrastructure was in general better developed than its roads and of much
higher capacity. It was however not well oriented nor technically equipped to satisfy CAREC’s
present trade demands. Moreover, heavy renewal and maintenance requirements are now
apparent, just as traffic is recovering from a long period of decline. In particular the overall system
is facing difficulty in satisfying trans-CAREC traffic demand and potential. Four types of rail
investment projects can be envisaged and have been included in the Strategy: railroad
rehabilitation of infrastructure, renewal of the rolling stock, electrification of railroads and
construction of new railroads.

35.     In certain cases governments are themselves funding rail projects, and taking active steps
to involve the private sector in what has traditionally been a preserve of the state. Rail projects
are invariably expensive and in the case of new rail links, enormously so. Many of the proposed
                                                                                         159 Appendix 4

rail projects will require close scrutiny and careful financial planning to reach fruition within the ten
year time horizon of the Strategy.

A.4.3.2          Airports and Related Infrastructure

36.     The aviation sector in CAREC countries is forecast to grow at 7% per annum over the
next decade. In order to respond to this increase, improvements have to be implemented for a
number of airport facilities. Runways have to be reinforced and expanded in several airports; in
others, terminals are congested and need expansion; and in countries like Afghanistan, a series
of regional airports need to be established.

37.    Also, as part of the aviation development program and for air safety reasons, air
navigation equipment need to be modernized in a few airports along with training programs.

A.4.3.3          Ports and Maritime Transport

38.    Traffic is growing on the Caspian Sea, led by the oil and gas industry and related activity.
Increased transport capacity is required. CAREC meetings and in-country discussions reveal
expansion plans including

           (i)      Aktau Port,
           (ii)     Baku Port,
           (iii)    Ro-Ro ferries,
           (iv)     a new canal link from the Caspian to the Black Sea (complementing the
                    Volga-Don canal),
           (v)      undersea pipeline(s), and
           (vi)     land links to the ports.
39.     These plans are developed to varying degrees of technical detail. The sector is potentially
very open to private sector participation (PSP). Serious interest has been displayed by private
investors in Aktau, Baku and elsewhere. Any such participation should be managed with all due
diligence to the protection of public interests, of competitive transport market access, of the
environment, as well as passenger and workplace safety.

A.4.3.4 Maintaining CAREC Corridor Infrastructure

40.     Lack of maintenance on road and rail                     Combined transport operations
infrastructure in CAREC countries is a serious
concern. Corridors will be functioning competitively
only if they are properly maintained. This implies
that CAREC countries need to urgently resolve
problems related to financing of maintenance.
Effective measures need to be adopted.

A.4.3.5          Rail Operations

41.     CAREC railways are predominantly state-owned and operated. All are at present
undergoing some degree of reform and restructuring. Much of the support from ADB and other
multilateral institutions has been provided to assist in this process. However, the regional facets
of this difficult process are relatively under-exposed. Assistance remains needed to discuss the
various options and implications with rail operators, and to develop models 136 based on
international practice that CAREC could build on. The essential framework for discussion will be
two-fold:

136
      The EU and North America are both rich sources.
160 Appendix 4



            (i)      The enablement and regulation of rail restructuring and operations on a
                     regional basis. This aspect would focus on the cross border operation of
                     block trains (intermodal, combined, 137 bulk, passenger), including
                     locomotives by entities which would be at least partly private. Private
                     investment138 could accelerate the introduction of new technology. Issues
                     would include techniques, as well as the marketing, regulation and
                     licensing (market access) of operations and operators. Institutional
                     structures would also require attention to clearly divide responsibility for
                     these functions. Ideally and subject to effective NJC actions, the trains
                     would not stop at borders, thus gaining valuable speed and predictability of
                     services and much enhancing the competitiveness of corridors.
            (ii)     Cost accounting and tariff models to support rail restructuring. This aspect
                     complements the preceding, with an emphasis on regional operations, but
                     the focus will be on financial management and cost accounting
                     methodologies that can calculate and equitably divide the cost of the
                     individual service components required to operate cross border block trains.
                     The costing should foresee sustainable performance of systems (track,
                     rolling stock, well qualified and highly motivated staff, etc.) while
                     conducting business to satisfy market needs and price competitiveness. It
                     will operate under the hypothesis that infrastructure owners, operators, and
                     regulators are separate entities, each requiring financing. There is
                     resistance to dividing these roles at present because, among other fears,
                     revenues from operations might not be distributed as needed to support all
                     three entities.
42.    Technical assistance could address both of these closely related topics. Furthermore,
operations extending beyond CAREC borders should be foreseen. These actions will assist
CAREC’s integration both internally and with global logistic chains.

A.4.3.6 Financing of Transport Equipment Renewal for Private Operators

43.      Large multilateral loans will assist CAREC countries to develop, for example,
infrastructure that is typically state-owned. These investments will provide many opportunities for
financing of small and medium sized business enterprises to grow and to expand across borders.
In fact, there are many of them already. Sustained success of the Strategy will depend much on
their economic and technical development. Present micro-credit loan facilities, welcome though
they are, are too expensive for CAREC operators in the transport sector.

44.     Better commercial vehicle exhaust emission standards and improved road safety can only
be achieved if operators are able to purchase more modern vehicles. CAREC actions under the
Strategy will explore the possibilities of easier access to credit, for example for trucking and
logistics service suppliers.

A.4.3.7           Air Transport

45.     The CAREC program is relatively new to the air transport sector. It is however clear that
demand is growing rapidly and that investment is urgently required in infrastructure, management
and technology. Interviews with CAREC countries’ civil aviation authorities indicate that regulatory
authorities are very concerned about the situation.

46.    The International Civil Aviation Organization (ICAO) has established the Universal Safety
Oversight Audit Program (USOAP) to sample the level of regulatory safety oversight compliance

137
      Combined in this context refers to road-rail-road.
138
      Since privatization of British rail systems US$3 billion have been invested by the private sector in rolling stock and
      fixed infrastructure (terminals etc). David Potter, Institute of Logistics and Transport, December 2006.
                                                                                            161 Appendix 4

among its membership. The program was made compulsory in 1998. The audits discovered that
numerous member states were not fully compliant with ICAO standards and that some had no
regulatory oversight of their industry at all.

47.     For CAREC countries which are members of the Commonwealth of Independent States
(CIS), the Interstate Aviation Committee (MAK) coordinates the activities related to the use of
airspace and air traffic control, certifies aircraft, aerodromes and equipment, investigates air
accidents, and provides for the unification of aviation rules, among other functions. Since its
inception MAK has organized seminars and projects to improve civil aviation safety in the CIS
States. However and despite these efforts, ICAO audits indicate that a number of countries have
not been able to implement an effective safety oversight system over their aviation activities. The
main reason identified for this situation is lack of adequate resources, specifically in terms of
qualified technical expertise.

48.     The ICAO COSCAP (Cooperative Development of Operational Safety & Continuing
Airworthiness Programme for CIS) initiative is sponsored by a number of aviation industry
stakeholders including civil aviation authorities, Eurocontrol, major aircraft manufacturers, and
others. It organizes projects with outputs such as:

          (i)      operations manuals for airlines (for the states of the region);
          (ii)     model laws and regulations;
          (iii)    safety seminars and training courses;
          (iv)     establishing regional civil aviation educational/ trainer centers; and
          (v)      English language proficiency training.
49.     Other actions in the aviation sector need to address emergency compliance with ICAO
requirements and carry out a general needs assessment of the Central Asia civil aviation sector.
These actions will facilitate economic development through the creation of a safe, reliable and
efficient air transport industry in CAREC countries. Subsidiary outcomes will include better access
to emergency services and humanitarian aid, as well as attracting more business travelers and
tourists.

A.4.3.8         Technology and Global Logistics Chains

50.    Global logistics chains depend on reliable transit times, which in turn require rapid
transmission of information. Excepting aviation control systems, the most glaring need to be
addressed by the Action Plan are those that will reduce border crossing delays. These include
tools to assist full implementation of Annex 8 of the International Convention on the
Harmonization of Frontier Controls of Goods such as:

          (i)      software for rapid border-crossing processing;
          (ii)     smart cards, smart seals, bar codes, and radio frequency identification
                   (RFID), global positioning systems (GPS) and other devices supporting
                   fast processing systems;
          (iii)    communications and data transmission hardware; and
          (iv)     inspection instruments such as scanners, probes and detectors of
                   radioactive materials and contraband.
51.     Other equipment such as digital devices for recording and controlling commercial vehicle
driver’s working hours, speed, and idling times will also need to be introduced.
162 Appendix 4



A.4.4 DEVELOPING USER FRIENDLY TRANSPORT AND TRADE

A.4.4.1 Introduction

52.     The third goal of the Strategy is to develop safe and user-friendly transport systems that
are affordable and environmentally sustainable. Under this goal are three objectives:

           (i)      to develop (healthy and environmentally) sustainable transport systems,
           (ii)     to reduce the number of road accidents, and
           (iii)    to develop user-friendly transport systems.
53.      The Strategy will focus on the challenges and opportunities present in the CAREC region.
It will reflect world experience and best practice to enable capture of the opportunities and
mitigation of the challenges.

A.4.4.2          Developing and Maintaining a Safe Transport System

54.      Road safety is an important issue throughout the CAREC region. The incidence of road
accidents and road fatalities is high relative to countries that have made road safety a very high
national priority.139 A high incidence of road accidents can cost a country between 1 to 3% of its
gross domestic product (GDP) because resources that could otherwise be applied to economic
development are diverted to compensate the effects of road accidents. With an increasing
number of road vehicles, traffic volumes and speeds, decreasing the incidence of road accidents
and road fatalities presents a major challenge for CAREC. In the aviation sector, as noted
previously, ICAO audits have discovered that member states (not only in CAREC) were not fully
compliant with ICAO standards. CAREC will work closely with ICAO, including its COSCAP
(Cooperative Development of Operational Safety & Continuing Airworthiness Programme for CIS)
initiative.

55.   Rail and maritime safety have not been so prominently raised as issues in CAREC
workshops and reports, but are of concern. CAREC investment projects in these sub-sectors will
address safety issues when appropriate.

56.    Adopting a regional perspective to address safety issues will provide economies of scale,
enable standardization, and help ensure that travelers are aware of safety rules and practices in
other CAREC countries.

A.4.4.3 Developing User Friendly Transport and Trade Networks

57.      A challenge facing a number of CAREC countries is that border-crossing facilities and
aviation, sea, and rail terminals are often out-dated and/or designed to stop traffic rather than
facilitate ease of movement. The state of these facilities combined with the lack of harmonized
border-crossing procedures results in delays that can discourage rather than welcome travelers.
Welcoming travelers and trade is inherent to the concept of a people friendly transport network.
Having mentioned the challenges, there are also opportunities including those that will enable
increased participation by the private sector so that market demands can be responded to more
quickly.

58.     A people friendly system anticipates "stress points" and bottlenecks that impinge on the
flow of goods and people, and implements mitigating measures. The upgrade of facilities
including terminals is ongoing in many CAREC countries. These upgrades should include
signage and other information that provide useful and welcoming data (e.g., travel and safety
warnings, information on lodging and other points of interest) to the traveler. The upgrades and

139
      Such as the Scandinavian counties.
                                                                                        163 Appendix 4

especially the border crossings and other points of entry (customs and immigration), should also
include measures to reduce the quantity of “paper” and increase the quality of information storage
and exchange, e.g., electronic data interchange (EDI). Collectively, these measures will facilitate
traffic flows and provide the traveler with the sense that they are welcomed visitors. Visiting
industry professionals always stress that the first impression is key. If a traveler, whether a transit
truck driver or a tourist, has the sense that he is going to be mired in a laborious bureaucratic
process, he is not going to be happy.

59.     A people friendly transport network has other economic benefits. With transit times
reduced, transport tariffs should decrease for both passenger and freight. Reduced transport
rates encourage more traffic, which in turn provides more goods at generally more competitive
prices. For passengers, lower transportation cost, ease of entry and welcoming information are
clear signals that this is a good place to spend money, which leads to local job creation.

60.     In general, operating under competitive pressure in many (though not all) situations, the
private sector will provide a more people friendly service than will a monopoly (whether state or
private). It will respond more quickly to changing market demands. Restructuring of transport
infrastructure and operations, including PSP in financing is dealt with more fully in section A.0
Private Sector Participation.

61.      At the level of user friendly service provision the Strategy will encourage PSP to develop
roadside services including rest stops and as participants in all terminal upgrades. The promotion
of inter-country bus services will be another opportunity for PSP. Rail operations, maritime
services and the aviation sector reforms will need to facilitate private sector provision of user
friendly services.

62.     What has to be emphasized is that the concept of people friendly is based not on
investment projects or policies but on the attitudes and practices of people. Transport system
users have to be viewed as customers in a competitive market for sellers. If the customer is not
satisfied, the customer will go elsewhere and use another transport mode or corridor, or visit
another destination. The world today is a buyer’s market, and the customers demand satisfaction.

A.4.4.4   Mitigating Potential Negative Health Impacts of Increased Trade, Traffic, and
          Mobility

63.     Improved corridors will result in increased mobility, which presents both challenges and
opportunities. One of the primary challenges is providing a more mobile population with up-to-
date information and safeguard measures that can facilitate their travel and avoid practices that
could harm them. This challenge has to be understood within the context that there are issues
that pose threats to travelers as well as residents in the region that can be mitigated through time-
sensitive practices, interventions and other measures.

64.    Generally, the potential threats are well known and include: HIV/AIDS/STI, communicable
diseases such as avian influenza (“bird flu”), tuberculosis, and SARS (Severe Acute Respiratory
Syndrome), human trafficking, contraband trafficking such the illegal movement of weapons,
endangered species, illegally logged timber, radioactive materials, and drugs. Another important
potential threat that is more common is linked to road safety.

65.       All CAREC countries recognize that these threats exist and are implementing programs
and projects to mitigate and monitor them. However, most of these efforts are being
implemented on a national basis even though there is increasing regional coordination on a
number of these issues. Addressing these issues on a regional basis for transport and trade
facilitation provides economies of scale, and also enables more focused effort such as building
safeguards into all infrastructure investment projects and ensuring that border crossing facilities
and other entry/exit points are staffed by professionals with adequate knowledge and tools. The
preceding points suggest that standardizing materials and training so that they can be utilized for
all transport projects in a country and in all corridors is a logical course to pursue. The focus
164 Appendix 4



areas and actions defined in Section A.4.2 (a.4.2 Establishing Competitive TRADE AND
Transport Corridors) will enable increased trade, traffic and mobility while strengthening
safeguards against potentially negative impacts.

A.4.4.5 Developing and Maintaining an Environmentally Sustainable Transport System

66.     There is general agreement that environmental sustainability should be incorporated in all
projects. However, there are challenges to successfully implementing measures to attain this
objective. These include foremost that there are only limited resources available to educate,
implement, and enforce measures that promote environmental sustainability.                This is
compounded by the fact that there is an aging transport fleet in the region that includes vehicles
and craft that are not fuel efficient, and emit higher levels of pollutants than more recently
manufactured equipment.

67.    Another challenge is that infrastructure development projects have typically been targeted
for example, to provide increased capacity without full consideration of impacts on land use and
land degradation. This is fortunately changing with capacity enhancements in the transportation
agencies throughout the region. In addition, there are examples of countries successfully
designing and implementing programs that mitigate environmental impacts. These include the
PRC’s sand dune/migrating sands projects at Shapotu and the Baijintan Nature Protection Area
in Ningxia, and the PRC’s “Green Corridor” concept. These projects can serve as models to be
applied elsewhere in the CAREC region and can be implemented without additional technical
assistance at this time.

68.    The Strategy recommends planning development of the corridors with appropriate land
use regulations, and to reduce the environmental impacts of vehicles through recycling waste
products such as used tires, waste oil, and used glass.

69.     CAREC countries all impose or state their intention to impose EU standards of vehicle
emission controls, but all are at different stages of doing so. Geographically the CAREC regional
corridors are widely dispersed, pass through widely varied socio-economic zones, and only
occasionally cross large urban agglomerations. Urban vehicle emissions are, rightly, the focus of
most attention. The impacts on rural poor of any rapid changes to regulations either regionally or
nationally require particular attention. These problems have been recognized within the CAREC
Program140 for some time. The Strategy recommends to reduce the negative impacts of road
vehicle emissions while harmonizing CAREC standards, and thus avoid divergences between
countries becoming a further hindrance to cross border transport.

70.     The actions taken by the countries on an individual and regional should lead to reduced
pollution (emissions and waste) by the sector as well as improved land use and reduced land
degradation.

A.4.4.6        Utilizing Transport Sector Investments as Engines of Economic Growth

71.      As will be discussed in the section on affordability and poverty under sustainability below,
infrastructure investment projects have tremendous potential to increase incomes and reduce
poverty through job creation. However, evidence has shown that building a road or railroad is
insufficient in itself to serve as an economic engine of growth. Thus, there is a need for
complementary resources, policies, and commitment to realize the potential economic benefits of
infrastructure development.

72.     The primary challenge facing the region with respect to utilizing infrastructure investments
as engines of growth is to transition from being landlocked to land-linked countries. Inherent to
land-locked is that the region largely consists of small segmented markets that are at a
140
      Urumqi 2006 Transport Sector Coordinating Committee priority actions
                                                                                          165 Appendix 4

considerable distance from major markets. These factors result in higher prices for goods and
services. Limited transit traffic also results in higher per unit transport costs. The corridor
concept promotes connectivity, and connectivity should lead to reduced per unit rates for
transport, and ultimately reduced costs for goods and services.

73.      Increasing participation by the private sector will also enable more responsiveness to
market demands and more satisfied travelers or customers of the transport network. However,
beyond policies investment projects and as discussed with respect to the people friendly transport
system, emphasis has to be given to recognizing that there are consumers of the transport
network that demand a level of service and that meeting this demand is more than just building a
new railway or rehabilitating a road. It requires changing attitudes and practices, and most
importantly, operationalizing “good neighbors, good partners” so that “good prospects” become a
reality. Simply, travelers and transiting freight will shift to other corridors if they are not satisfied.

74.    By recognizing that the fruits of development can be more widely distributed through
increased integration and connectivity, more jobs can be created, incomes can rise, and poverty
can be reduced.

A.4.5 SUSTAINABILITY

A.4.5.1   Financial Sustainability

75.      As already shown in Appendix 3, the economic growth prospects of the CAREC region
are positive given the assumption of continued progress on economic policy reform and political
stability in the region. The GDP growth of Central Asia has been well above the global average
since 2002, and the case can be made that this performance can be maintained until 2017. To be
sure, increasing oil prices since the mid-1990s and increasing prices for other commodities since
2002 have contributed significantly to higher real growth, but the region is surrounded by three of
the world’s most dynamic economies, namely, the PRC, India and the Russian Federation which
provide growing markets for CAREC exports.

76.     However, the Central Asia region requires investments in infrastructure and logistics as
well as in technology in order to capture the available trade related opportunities. This fact has
led ADB alone to invest around US$ 1.5 billion in the CAREC region for infrastructure purposes in
the last ten years. In this context, the obvious concern involves the capacity of these countries to
service the existing debt and to take on new debt for the expansion and modernization of the
transport sector.

77.     For the region as a whole, the financial position has been improving significantly since
2002 with the current account of the balance of payments in surplus, a positive budgetary
balance and a declining debt to GDP ratio. However, there are significant differences among the
CAREC countries as Table A.4.1 shows. In fact, the countries of the region fall into three
categories from an economic and financial perspective. There are the oil exporters: Azerbaijan
and Kazakhstan; then there are the countries with a variety of resources and/or economic
diversification such as Uzbekistan, Mongolia, and the PRC; and finally, there are the countries
with a very limited economic base at present, namely, Afghanistan, Kyrgyz Republic, and
Tajikistan.

78.     Not surprisingly, the oil exporters have a positive budgetary balance and a very low public
sector debt to GDP ratio. Even though the debt is denominated in foreign currencies, the buoyant
export growth and the increasing revenues of the central government make it unlikely that debt
sustainability will become a major issue in the near or medium term. To be sure a collapse of oil
prices combined with an ambitious infrastructure investment program could bring with it Saudi
Arabia’s problem of the 1980s which would require severe cutbacks on the expenditure side as a
corrective measure. However, one should note that the available projections with lower oil prices
in the US$40 per barrel range do not raise many red flags for Azerbaijan or Kazakhstan. The
collapse would have to be very major, especially since Kazakhstan is building up its rainy day
166 Appendix 4



fund (National Fund for Kazakhstan Republic – NFKR). Any financial problems in Kazakhstan will
be related to the rapidly growing private sector debt.

                       Table A.4.1: Selected Debt Indicators (ratios in %), 2006
                                       Budget
                      PS Debt /                         PS Debt /         PS Debt /     Debt Service
        Country                       Balance/
                        GDP                              Exports          Revenue        / Revenue
                                         GDP
                                                  a
          AFG             184.2                1.6
          AZE               10.0                0.1              39.0           36.6              0.1
          KAZ                2.8                7.5               5.2           10.0
          KGZ               69.0               -1.4             160.5          259.4              3.5
          MON               51.0                3.3              88.6          111.5              1.5
          TAJ               30.6                0.5             245.4          163.3              2.7
          UZB               22.9                0.4              59.6           70.1              1.5
          PRC               12.2               -1.5              30.4           66.5              2.5
    GDP = gross domestic product, PS = public sector, Revenue = central government revenue
    AFG=Afghanistan; AZE=Azerbaijan; PRC=People’s Republic of China; KAZ=Kazakhstan;
    KGZ=Kyrgyz Republic; MON=Mongolia; TAJ=Tajikistan; UZB=Uzbekistan; XUAR=Xinjiang
    Uygur Autonomous Region.
    Sources: IMF, "Article IV Consultations" Reports, latest year available, Washington D.C.
    a
      includes donor budgetary grants, ( -3.6 budget deficit as a % of GDP without. )

79.    Although the total foreign currency debt of Azerbaijan and Kazakhstan (public plus private
sector debt) are considerably larger than those of other countries in absolute ($) terms, 34.7% of
GDP for Azerbaijan and 74.0% for Kazakhstan, it should be manageable given solid export
earnings in convertible currency. In this regard, both countries have also been able to attract
foreign direct investment or equity investment where the issue of servicing the foreign
indebtedness is considerably less serious than in the case of portfolio (debt) investment.

80.     PRC, Mongolia, and Uzbekistan have public sector debt levels that fall into the moderate
range, and the budgets are more or less in balance. In 2006, Mongolia and Uzbekistan had a
positive budgetary balance largely because of favorable copper and gold prices for the former
and a strong agricultural sector in the case of the latter. Uzbekistan also has some petroleum
resources, mostly for local use, and considerable mineral potential. The PRC did have a modest
budget deficit in 2006, but this fact raises no major financial sustainability issues since the public
sector debt is at present so small in relation to GDP and it is almost entirely local currency debt.
Moreover, the country has substantial foreign currency reserves, and in fact these have been
growing in all CAREC countries.

81.     Are there any financial sustainability risks in this generally positive structure? In the case
of Mongolia and Uzbekistan, analysts have pointed to the risks of lower growth, lower commodity
prices, and higher interest rates affecting the ability to service loans. Currently public sector loans
are at concessional rates, which mean that a low debt service to central government revenue
ratio is somewhat misleading. On the one hand, the implication is that the government should
continue to rely on concessional loans to avoid any interest rate shocks, but on the other hand
this policy inhibits the growth of wide and deep capital markets. A specific concern in the case of
Mongolia is the recent tax reform which has lowered tax rates and widened the tax base which
are positive factors, but at the price of raising taxes on the mining sector. Potentially, the impact
of lower mineral and metal prices on central government revenues is thus considerably enhanced
with a negative result for debt sustainability. In the case of Uzbekistan, it is not clear how the
country will maintain a strong agricultural sector largely based on irrigation. Uzbekistan uses over
half the water which used to flow into the Aral Sea with Kyrgyz Republic and Tajikistan being net
contributors. Diversification of the economy and improved water management would appear
necessary to maintain economic growth and government revenues.
                                                                                                              167 Appendix 4

82.      The risks related to debt sustainability are quite different in the case of the PRC. From a
strictly economic and financial point of view one might well say – what risks? As already noted,
the public sector debt to GDP ratio is very low at 12.2% and all except 0.4% of this number is
denominated in domestic currency. The total foreign debt to export ratio is the lowest among
CAREC countries, partly because of the very high and growing level of exports. The possible
risks include the growing private sector debt or some dramatic fall in economic growth leading to
large budget deficits on an ongoing basis. Such budget deficits could also be caused by the need
to increase social spending on health, education and poverty reduction especially in rural areas.
Increased spending on social services may also lead to a lower savings rate, and less local
currency financing of debt, but this type of scenario is more likely in the longer term rather than
the short or medium term. The state owned enterprises and the banking system are other
sources of risk to financial sustainability if the Government should become involved in large
bailouts. It is difficult to measure such risks in a quantitative way, but they appear small in the
foreseeable future.

83.     The financial position of Afghanistan, Kyrgyz Republic, and Tajikistan is the weakest
among the CAREC countries. All three would be running budget deficits if the grants which
Afghanistan receives from donors were subtracted from the revenue side. The public sector debt
to GDP ratio may not appear to be very high for Tajikistan, but this number reflects debt relief and
debt restructuring. In the case of Afghanistan, the official public sector debt to GDP ratio was
indeed 184.2 for 2006 but this number reflected the Russian debt of $11.1 billion which was
reduced to $730 million through negotiations in 2007. Nevertheless, whether Afghanistan or
Kyrgyz Republic could take on any more debt even at concessional rates appears doubtful, and is
unlikely to happen except within limits. Tajikistan is in a somewhat better position but the debt to
exports ratio and the public sector debt to government revenues ratio are very high. The debt
service to revenue ratio appears to be quite low. Except for the PRC, this reflects the
concessional loans and grants received by the CAREC countries.

84.     The CAREC countries represent a mixed but improving picture in their finances. Therefore,
over time it should be possible for most of them to take on additional debt on concessional terms
for infrastructure investment purposes. Analyses of debt sustainability show that their financial
position is fairly robust to changes in economic assumptions (slower growth, higher interest rates).
As well, the CAREC countries have met their conditionality and performance criteria used by the
MIs. The imponderable risks that remain include severe global (or at least Asian) economic
slowdown, political instability, and deterioration in national or regional security.

A.4.5.2          Economic Sustainability

85.     As already indicated, the CAREC countries have significant resources as well as the
inheritance of a relatively well educated workforce from the period before the transition. In fact,
education remains an important priority among the general public. This suggests that the region
could take advantage of opportunities first in primary commodity production, and later in higher
value added products and services. While Azerbaijan and Kazakhstan have already captured
some of the opportunities deriving from petroleum resources, the XUAR has over time moved up
the value chain, and has become successful in manufactured products.

86.     Not surprisingly, these CAREC members and the PRC rank rather well in terms of the
Global Competitiveness Index (GCI) of the World Economic Forum (WEF) shown on Table A.4.2.
The other CAREC members fall into the bottom third of the ranked countries while two of them
(Afghanistan and Uzbekistan) are not ranked by WEF. Does this ranking mean anything in terms
of the future prospects along the transport corridors in the CAREC region? Probably it does if one
considers the comprehensiveness and scope of the data base.141

141
      The WEF uses a combination of objective data and more subjective information based on interviews of executives.
      All the information is recorded in terms of nine pillars including institutions, infrastructure, macro-economy, health and
      primary education, higher education and training, market efficiency, technological readiness, business sophistication,
      and innovation.
168 Appendix 4



                                  Table A.4.2: Competitiveness Indicators
                    Country /         WEF GCI        WEF BCI              WB EASE Rank
                    Indicator      Rank out of 125 Rank out of 121          out of 175
                       AFG                        -               -                162
                       AZE                      64              77                  99
                       KAZ                      56              70                  63
                       KGZ                     107             112                  90
                       MON                      92              99                  45
                       TAJ                      96              98                 133
                       UZB                        -               -                147
                       PRC                      54              64                  93
                 AFG=Afghanistan; AZE=Azerbaijan; PRC=People’s Republic of China;
                 KAZ=Kazakhstan; KGZ=Kyrgyz Republic; MON=Mongolia; TAJ=Tajikistan;
                 UZB=Uzbekistan.
                 WEF = World Economic Forum; GCI = Global Competitiveness Index; BCI
                 = Business Competitiveness Index; WB = World Bank; EASE = Ease of
                 Doing Business Ranking.
                 Source: World Economic Forum, "Global Competitiveness Report, 2006-2007,"
                 Geneva, Switzerland, 2006; World Bank Group, The World Bank's Business
                 Center, "Doing Business 2007 Report," Washington, D.C., 2007.

87.     After looking at the economies of Central Asia in terms of broad or macro level factors, it
is time to examine those factors which determine business operations at the micro level. Such an
examination should shed light on the capacity of businesses to capture opportunities which arise
from improvements such as a reliable and cost effective transport corridor, and it should also give
some guidance on whether the current growth rates of the CAREC region are sustainable from a
business perspective. WEF’s business competitiveness index (BCI) takes into account many
factors ranging from the degree of competition to the efficiency of financial markets, to research
and development spending, to the quality and cost of labor. As Table A.4.2 above shows, the
ranking on business competitiveness for the CAREC countries is about the same as for global
competitiveness. Mongolia and Tajikistan exchange places, but there are no dramatic shifts in the
ranking. On the Travel and Tourism Competitiveness Index (TTCI), Kazakhstan and Tajikistan do
worse than on the other measures of competitiveness, but again there are no large changes with
the PRC doing better than the other CAREC countries, and Azerbaijan and Kazakhstan following
at some distance.

88.    This is not the case with the World Bank’s “Ease of Doing Business” ranking. This ranking
covers factors such as starting a business, dealing with licenses, employing workers, registering
property, getting credit (financing), protecting investors, paying taxes, trading across borders,
enforcing contracts, and closing a business. On these matters, on average, Mongolia comes out
best with a rank of 45 among 175 countries. Mongolia does exceptionally well on registering
property and protecting investors and since all the factors are weighted equally, very good
performance on a few factors counts for a lot. Uzbekistan and Afghanistan are at the other end of
the spectrum, but even they have one or two factors where they show good performance. The
“Ease of Doing Business” ranking shows the most volatility of any of the indicators which
suggests that caution should be exercised in interpreting the results.

89.     Notwithstanding technical and other problems of the indicators, CAREC countries clearly
have a number of areas where improvement is desirable if the recent, buoyant growth experience
is to be maintained. This conclusion is especially true at the micro level where business meets up
with government in its many roles, but also with other institutions such as those in education and
training and with those operating or regulating infrastructure.

90.    Having looked at indicators that attempt to measure present and future economic and
business performance it is time to turn to measures of governance since these are also related to
                                                                                                                   169 Appendix 4

the sustainability of economic growth. The first indicator on Table A.4.3 is the Corruption
Perceptions Index (CPI) of Transparency International which ranks 163 countries on the basis of
surveys that have been undertaken by other organizations. In other words, it is a poll of polls that
does not claim to measure corruption, but rather the perception of corruption. Nevertheless,
perceptions can be important in determining whether a business will decide to invest in a
particular country or region. There is no doubt that apart from the PRC, CAREC countries rank
quite low on this indicator. Mongolia and Kazakhstan do somewhat better than the other countries,
but the fact that, on a global basis, CAREC countries are perceived as corrupt poses a challenge
to either show that the impression is mistaken or to reduce the corruption that exists.

                                            Table A.4.3: Governance Indicators, 2006
                                                          World Bank Governance Indicators
                     TI - CPI
      Country /                     Voice and           Political    Government Regulatory             Control of
                    Rank out                                                               Rule of Law
      Indicator                   Accountability        Stability    Effectiveness Quality             Corruption
                     of 163
                                                                   Percentile Rank (0 - 100)
         AFG                  -                 10.6            1.4            5.7           3.4                0.5             1.9
         AZE                130                 14.9           15.9           27.5         34.1                22.4            15.0
         KAZ                113                 19.7           46.2           33.6         36.1                23.8            18.4
         KGZ                145                 27.9           13.0           21.3         28.3                10.5            10.2
         MON                102                 53.4           71.6           36.5         42.0                46.7            37.4
         TAJ                149                 11.1           10.6           14.2         17.6                12.9            18.9
         UZB                155                  2.4            4.3           10.0           3.9                4.8            14.1
         PRC                 71                  4.8           33.2           55.5         46.3                45.2            37.9
      AFG=Afghanistan; AZE=Azerbaijan; PRC=People’s Republic of China; KAZ=Kazakhstan; KGZ=Kyrgyz Republic;
      MON=Mongolia; TAJ=Tajikistan; UZB=Uzbekistan; TI-CPI=Transparency International Corruption Perceptions Index.
      Source: TI - CPI, "Transparency International Corruption Perceptions Index, 2006," International Secretariat, Berlin, 2007;
      "Worldwide Governance Indicators," World Bank, Washington. D.C. 2007.


91.     The most extensive set of governance indicators are those published by the World
Bank.142 Sometimes these are called the KK indicators, and they are not without controversy.
Some have argued that in publishing indicators which are based on factors that are political in
nature, the World Bank is exceeding its mandate. Others have questioned the technical validity
and robustness of the Worldwide Governance Indicators (WGI). 143 In any case, the WGI are
based on a comprehensive set of sources that focus on voice and accountability, political stability
and absence of violence, government effectiveness, regulatory quality, rule of law, and control of
corruption. In the CAREC region, the only country which ranks in the top half of the 213 countries
ranked on two of the indicators (voice and accountability and political stability) is Mongolia. The
PRC ranks relatively high on government effectiveness and relatively well on several other
indicators but very low on voice and accountability. However, all countries in the region face
challenges on most of the indicators with those of Afghanistan and Uzbekistan being especially
noteworthy.

92.     By way of summary, one should note that countries of the Central Asia region have
performed well on the financial and economic front in recent years despite what are perceived as
shortcomings on governance by MIs and others. However, the question of sustainability remains
a key consideration. Therefore, improvement in governance is one precondition for the projected
economic growth performance to continue supported by the projects included in the Strategy and
the Action Plan.




142
    Based on the work of Daniel Kaufmann, Aart Kray, and Massimo Mastruzzi, “A Decade of Measuring the Quality of
    Governance”, Governance Matters 2007, World Bank, Washington, D.C. 2007.
143
    See for example, M. A. Thomas, “What do the Worldwide Governance Indicators Measure?” School of Advanced
    International Studies, Johns Hopkins University, Baltimore, 2007.
170 Appendix 4



A.4.5.3        Private Sector Participation

A.4.5.3.1        Background

93.    CAREC countries face important structural challenges that must be addressed if they are
to maintain sustained economic growth, improve living standards, and continue their pursuit of a
greater role in the global economy. Two challenges broadly confronting CAREC countries in this
respect are meeting the demand for investments in transport infrastructure, management, and
technology improvements and adapting the role of the state to the changing economic
environment. Unless these challenges are met, economic growth cannot be sustained for long.

94.     Continued growth in demand for services, along with changing technology and regulatory
approaches, require a shift from the public to the private sector in infrastructure ownership and
service delivery. 144 This does not mean, however, eventual elimination of the public sector in
financing infrastructure or privatization of assets and operations. “The key issue is not whether
financing should be public or private, but how the public and private sector share the risks and
rewards in a way that works for both sides.”145

95.      Governments worldwide have increasingly turned to the private sector for additional
resources, increased efficiency, and sustainable development in many fields, including transport
infrastructure and services. Following trends in other fields (energy and telecommunications, to
name a few), private sector involvement in the transport sector has now become quite common in
many countries around the world. To facilitate private involvement, sector reforms have been
initiated, and many governments are also considering various other steps. PSP is being
increasingly sought in the investment and management of transport systems, including highways,
railways, seaports and airports.

A.4.5.3.2         Types of PSP146

96.     PSP is a developing subject and it is indeed difficult to outline the numerous possibilities
of PSP. There are many forms and degrees of PSP investment. These vary by structure and by
scope within each form. Further, these may depend on the country’s political situation, status of
economic development, socioeconomic conditions, competitive environment, legal and regulatory
environment, and other country and transport sector-specific factors. Figure A.4.1 depicts a
simplified range of PSP showing the main varieties and the extent of participation of the private
sector growing from low at left to high at right.

                                        Figure A.4.1: Extent of Participation of the Private Sector
                                                         Public Private Partnership




                                      Management &        Operation &          Build Operate
             Works & Services                                                                         Full
                                       Maintenance        Maintenance            Transfer
                Contracts                                                                         Privatization
                                        Contracts         Concessions          Concessions



           Low                                                                                                High

 Source: adapted by the Consultant.


144
    The World Bank, “Choices for Efficient Private Provision of Infrastructure in East Asia”, 1997, p. v.
145
    Asian Development Bank, Japan Bank for International Cooperation, and the World Bank; Connecting East Asia, A
    New Framework for Infrastructure, 2005, p. xxx.
146
    Adapted from Asian Development Bank, Best Practices for Private Sector Investment in Railways, a report by TERA
    International Group, Inc., 28 March 2006, under Contract No. 7133241 with The World Bank PPIAF and Regional
    Workshop on PSP in Asian Railways, ADB; Manila: 14-15 June 2006.
                                                                                                                                                             171 Appendix 4



97.      Despite the wide variety of PSP, however, similarities, particularly in form, exist. Figure
A.4.2 presents a more detailed description of the different degrees of PSP ranging from full public
sector ownership and operation to complete private sector investment and operation. Annex 4-A
at the end of this Appendix contains a detailed explanation of the concepts and definitions of PSP
depicted in Figure A.4.2. The Annex is written for PSP in railways, but the concepts and
definitions are equally applicable to other modes of transport.

98.     The figure distinguishes the public versus private ownership of assets at the top and
operations at the bottom as measures to depict the full spectrum of PSP. Obviously, PSP in
operations does not necessarily require ownership of assets. Also in many instances PSP can be
in partnership with the public sector.
                                                            Figure A.4.2: Private Sector Participation Continuum in Transport Sector


             Public Agency/SOE                                                                                                                       Private Sector Company
                                                                                           Sale of
                                                         Public                            Public                                     Private
                                                        Ownership                          Assets                                    Ownership




                        Government Performance Leasing Service and Concessioning   BTO                  Public-     BOT/     Public Sale of Non-    BOO    Divestiture
                        Department   Contract  Assets Management                                       Private JV   BOOT   Listing of core Assets
                                                        Contracts                                                           Shares



                                                                                          Private
                            Public Sector
                                                                                          Sector
                             Operations
                                                                                         Operations


                                                                                           Public-
                                                                                           Private
                                                                                         Partnership


                                                                                         Commercialization

Source: Consultant.



A.4.5.3.3 Potential Benefits of PSP

99.    The benefits of various PSP options are summarized in Table A.4.4. The list is not
exhaustive and the actual situation may depend on various factors, including the stage of
economic development; socioeconomic conditions, cultural and political situations; state of
development of alternative transport modes; competitive environment; and the regulatory
environment. These are but some of the factors, and there may be many more specific to the
transport system and the country, and the stage of development of the private sector.

A.4.5.3.4 PSP Opportunities in the CAREC Region

100. Driven by the need to develop new financing sources and the birth of large, global
infrastructure investors, the CAREC region offers a large variety of PSP projects, including

                  (i)          new seaport construction and existing seaport expansion                                                                           and
                               modernization projects in Alyat, Aktau, Atyrau, and other locations;
                  (ii)         inland dry ports and free trade zones including intermodal hubs and
                               logistics centers;
                  (iii)        new airport construction and existing airport expansion; and
                  (iv)         civil aviation pilot, traffic controller, and aircraft mechanic training centers.
101. The most promising ones are those that will produce an acceptable financial return
commensurate with risk. A Morgan Stanley analysis of financial performance in surface
172 Appendix 4



transportation in 2003 has shown that the average return on capital for 44 publicly-listed
companies in Europe, North America, and Asia was 9% and the average cost of capital for the
same companies was 6.5%, resulting in a spread of 2.5%.147 The highest return and spread was
observed in non-asset intensive companies such as freight forwarders and logistics management
firms (6.9% cost of capital and 14.1% return on employed capital, or a spread of 7.2%) and the
lowest in asset intensive railways (5.6% cost of capital and 6.1% return on employed capital, or a
spread of 0.5%).148

102. A strategic partner with a cost of capital and return of 5.6% and 6.1%, respectively would
be satisfied with a spread of 0.5% in a mature market environment such as North America or
Japan, which carries relatively lower risk. However, as risk increases such as in Central Asia
(mainly due to unclear separation of government and enterprise functions, continued government
control over price setting, and other uncertain conditions affecting operations and profitability) the
minimum spread required by the investor would also increase, which results in projects becoming
attractive with more than a 10% return on employed capital.

103. Unless investors see some specific advantages by way of higher rates of return on
investment compared with other sectors, they may not come to Central Asia to invest in transport
facilities. The investment packages need not necessarily rely on the rate of return based on the
project’s revenue stream. Incentives would need to be built into the investment package to make
the project attractive for the private sector. The incentives, inter alia, may include income tax
exemptions, provision of soft loans from government sources for supplementing investment from
private sources, and provision of preferential policies for the construction of projects.

A.4.5.3.5           PSP Success Factors

104. In a recent visit to a CAREC country, a senior transport ministry official indicated that
assistance is needed in contacting large global private sector investors for PSP projects in his
country. For CAREC PSP projects to be successful, an environment conducive to PSP must be
created, including:

            (i)     political will and commitment to PSP;
            (ii)    careful segregation of government’s role and investor’s role;
            (ii)    proper institutional framework offering the private sector a level playing
                    field vis-à-vis state owned enterprise(s) working in the same sector;
            (iv)    strong laws, judiciary, and government policy to protect property rights;
            (v)     unbundling of projects to segregate commercially suitable portions for PSP;
            (vi)    assigning risks and rewards to the party most capable of dealing with them;
            (vii)   project segments that enable investors to assume both attractive and less
                    attractive parts;
            (viii) social and environmental safeguards;
            (ix)    right regulatory and pricing policies to create competitive markets; and
            (x)     a transparent, fair tendering process for all private sector participants.
105. To put it simply, when private investors are assured that their capital and expertise will
earn them a fair return (commensurate with risk) over the life of the project, they will come.
However, for most of the CAREC countries, the environment essential to the success of PSP

147
      Morgan Stanley Equity Research, Surface Transport: Global Insights; September 8, 2003.
148
      The railways included in the Morgan Stanley analysis were Arriva and FirstGroup from U.K.; Central Japan Railway,
      East Japan Railway, and West Japan Railway from Japan; Burlington Northern, CSX, Norfolk Southern, Kansas City
      Southern, and Union Pacific from the US; and Canadian Pacific and Canadian National from Canada.
                                                                                                                        173 Appendix 4

remains to be developed. This is a big challenge for most of the CAREC countries and one which
ADB, as a trusted party and a leader in PSP,149 can add tremendous value.

                                Table A.4.4: Potential Benefits of Various PSP Options
          Service          Management
                                                       Lease            Concession          BOT/BOOT/BTO             Divestiture
         Contracts          Contracts
                                                                                                                    Full
        Promotes                                                                            Full responsibility
                                                                                                                    responsibility for
        competition                              Can increase                               for operations,
                                                                       Private sector                               operations,
        during           Can improve             efficiency of asset                        capital raising and
                                                                       management of                                capital raising
        bidding for      service quality         management and                             investment
                                                                       operations                                   and investment
        service                                  utilization                                assumed by
                                                                                                                    assumed by
        contracts                                                                           private sector
                                                                                                                    private sector
                                                 Reduced
                                                 government            Relieves             Potentially large       Full private
        Government’s
                         Reduced risk to         commercial risk.      government of        improvements in         sector
        risk is
                         government              Guaranteed            need to fund         operating efficiency    incentives in
        relatively low
                                                 collection of lease   investments          of bulk assets          bulk supply
                                                 revenue
        Contracts of                                                   Full
        short or long                            Management            responsibility for
                                                                                                                    Attractive to
        duration with    Potential first step    responsibility and    operations,          Full private sector
                                                                                                                    private financial
        easy             to concession           commercial risk       capital raising      incentives in bulk
                                                                                                                    institutions
        retendering if   contract                transferred to        and investment       supply
        contractor                               private sector        goes to private
        fails                                                          sector
                                                 Incentives for
        Well tested      Potential for setting   contractor to         Encourages
        easy-to-         performance             minimize costs,       potentially large    Attractive to private
                                                                                                                    Addresses any
        implement        standards with          provide reliable      improvements         financial
                                                                                                                    funding shortfall
        contractual      incentives and          services and          in operating         institutions
        terms            penalties               maximize revenue      efficiency
                                                 collection
                                                                                                                    Could be
                         Allows introduction                                                                        successful
        Potential        of private sector       Increased             Full private         Mobilizes private       where there is
        starting point   management skills.      government            sector               finance for new         good track
        for PSP          Limited                 revenue               incentives           investments             record of private
                         commercial risk                                                                            sector
                                                                                                                    ownership
                         Can revert to in-
                         house                                                                                      Mobilizes
        Can increase                                                   Attractive to
                         management or                                                      Addresses future        private finance
        focus on core                                                  private financial
                         contract may be                                                    funding shortfalls      for key
        business                                                       institutions
                         re-tendered if                                                                             investments
                         problems arise
                         Potential to
        Potential for
                         encourage
        efficiency
                         competition in
        gains
                         bidding
       BOT=Build Operate Transfer; BOOT=Build Own Operate Transfer; BTO=Build Transfer Operate;
       PSP=private sector participation.
       Source: Consultant.

106. Box 4 provides details on the Khorgos (also referred to as Korgas) border crossing
between Kazakhstan and XUAR. Responding to increasing traffic volume, new railway lines are
under construction on both sides of the border connecting Almaty and Urumqi. PSP in Khorgos
consists of construction of warehousing, wholesale, logistics, and distribution centers on both
sides of the border through private sector investment with the public sector providing the basic
transport infrastructure (roads and rail lines).




149
      “Best Practices for Promoting Private Sector Investment in Infrastructure” by Sean O’Sullivan, ADB.
 174 Appendix 4




                                              Box 4: Khorgos Free Trade Zone

          To promote trade between the PRC and Central Asia, the
          governments of the PRC and Kazakhstan established the 177.33
          sq km “China-Kazakhstan Border FTZ”.

          China Rail is building the new Jinghe-Yining-Khorgas rail line
          connecting Khorgos to Urumqi and KTZ plans to construct the
          new Zhetygen to Korgas rail link to shorten the distance from
          Almaty to Urumqi. Also, the Khorgos-Lianyungang Expressway
          will be completed in 2008. The two governments will also simplify                Customs building
          the visa requirements for entry to the international FTZ.

          During the first phase of the development, Chinese private investors will construct 3.43 sq km of trading,
          exhibition, wholesale and retail sales facilities, as well as 9.73 sq km of logistics, value added processing
          and support facilities on the Chinese side. Kazakh private investors will build logistics facilities on the 1.2 sq
          km of FTZ space on the Kazakhstan side.
                                                                                    Khorgos Shopping Center
          In April 2007, Ka Sun Real Estate Development Co. Ltd. from
          Zhejiang Province laid the foundation of a Global Logistics
          Center. The whole project is estimated to take 2 to 3 years to
          complete with total investment estimated at 300 million Yuan
          ($40 million). The center will be built on a 71 Mu (4.7 hectares)
          land area. It will be a Global Logistics Center integrating
          meeting and convention facilities, goods storage, exhibition
          hall, packing and various ancillary services.

          Khorgos FTZ is a good example of PPP in CAREC, creating the rail and highway links between Khorgos and
          the two major cities (Almaty and Urumqi) and easing Customs and visa procedures. It has attracted
          investment from real estate developers. Also, major KAZ and PRC logistics companies are planning to
          construct logistics centers in the FTZ.

A.4.6 SAFEGUARDS

107. This section summarizes socioeconomic issues that could be affected by corridor
development and increased trade traffic flows. These issues include affordability and poverty,
HIV/AIDS/STI, communicable diseases, human trafficking, movements of contraband, and the
environment.150 More detailed discussion of these issues is provided in Annex 4-B. Importantly,
all of these issues are being addressed by national programs that are impacting their incidence.
However, there is also the need to implement measures to mitigate the potential effects of
increased trade, traffic and economic integration through more cost-effective regional programs.
The section concludes with recommended regional initiatives that would complement the national
programs and would be specifically targeted for transport and trade facilitation.

108. The issues discussed below include those that are components of the CAREC
Comprehensive Action Plan such as movements of contraband under cross-border facilitation
projects. Some of the issues are included under CAREC’s Second Tier Activities such as
HIV/AIDS, Communicable Diseases/Avian Flu, and the Environment. In addition, issues such as
affordability and poverty and human trafficking are components of national development
programs, national Millennium Development Goals, and ADB’s country programs.

109. The proposed corridor development will provide a strategic basis to facilitate                                    transit,
international, and domestic trade and general economic growth in the region, and will                                 lead to
improved access to goods, services and markets. Experience from other road and                                        railway
projects indicates that there will be significant opportunities for local communities to                              directly

150
      STI: socially transmitted infections; communicable diseases: tuberculosis, avian flu, SARS (severe acute respiratory
      syndrome), and other human flu; contraband: drugs, weapons, rare and endangered species, radioactive materials,
      smuggled art and artifacts.
                                                                                                   175 Appendix 4

benefit from the upgrades through job creation, market access, poverty alleviation, and improved
access to social services. Experience from other road and railway projects also indicates that
these projects can serve as key catalysts for the induced benefits that are comparable in size to
the impacts of the direct benefits and often exceed them. However, for these benefits to be
realized, substantial effort will need to be given to targeting opportunities and matching local
human and physical resources with them.

110. As an example of positive effects, a World Bank report assessed the impact of the PRC’s
Road Improvement for Poverty Alleviation III (RIP A III) on poverty reduction, income generation
and economic diversification.151 The authors compared two poor prefectures in Henan Province
with similar socio-economic conditions prior to the implementation of the RIP A III program in one
of the prefectures. They found that GDP per capita increased faster in the prefecture
participating in the road improvement program (which they term “impact zone” or IZ) than in the
non-participating prefecture (termed “control zone,” or CZ) by the rate of 13.66% to 10.98% (ibid.,
pp. 15) respectively. The IZ also had its overall poverty rates decline faster (16.8% versus
14.0%), as well as the rural poverty rates (17.7% versus 15%) (ibid., pp. 17). Importantly,
farmers in the IZ switched from their traditional farming practices for rice and wheat to more
intensified agriculture producing market vegetables and fruits, with the result that “1 mu (1/15 of a
hectare) of vegetable income produces the same income as 10 mu of grain” (ibid., pp. 18-19).

111. In addition, the value of rural industrial production increased at a rate of 22% in the IZ
compared to 15% in the CZ (ibid., pp. 20). Developing non-agricultural sources of income is
generally accepted as an important factor in reducing vulnerability to natural disasters and other
factors such as market price fluctuations that affect poor farming areas.

112. With respect to transportation, the assessment determined that in the IZ, passenger km
and ton km increased at the rate of 26.4% and 31.6% respectively, compared to 17.1% and
16.9% respectively in the CZ (ibid., pp. 20).

113. The report states “Conclusions from the above analysis can be summarized as follows:
After the implementation of RIP A III, the general economy, the farmers’ incomes, small town
construction, rural industrialization, and the transportation industry in the Impact Zone develops or
increased faster than in the Control Zone. The implementation of RIP A also boosted the
development of tourism and agriculture, raised accessibility of health care services and brought
changes in the farmers’ ideology in the IZ. The implementation of RIP A has created positive
impacts both on economic growth and social progress, benefited directly to the poor population
and accelerated the pace of poverty reduction in the IZ” (Ibid., pp 20-21).

114. The report also states that “The positive impacts of transportation infrastructure
improvements on economic growth, social progress, and poverty reduction arise from several
factors, including: the PRC was strongly committed to development-oriented poverty reduction,
and it established policy priorities accordingly. Those policies, backed by effective institutional
mechanisms for program management and funding, involved all levels of government, as well as
users. The active participation of rural residents was instrumental in filling financing gaps (e.g.,
through voluntary labor for road upgrading). Lessons were learned from initial experiences.
Management adhered strictly to Chinese regulations and international principles, magnifying the
impact of poverty-alleviation funds and ensuring the sustainability of poverty-reduction programs.
Finally, international organizations have played an important role in providing funding and advice
on improving rural transportation management and construction” (ibid., pp. 3-4).

115. In another concluding point, the report indicates that, “it has been fully proven that
transportation infrastructure, especially highway infrastructure, is a fundamental factor affecting
the socio-economic development of poor areas. Creating transportation infrastructure is not just a

151
      Dong Yan and Fan Hua, Infrastructure, Growth and Poverty Reduction in China, the World Bank, Washington, D.C.,
      2004. A total of 3,724 households in the Impact Zone and 540 households in the Control Zone were surveyed, and
      the data corroborated through the use of township statistical data.
176 Appendix 4



matter of providing roads. It also actively affects economic development, income and living styles
of the farmers, access to health care and social stability. Therefore, the full effects of
transportation infrastructure on poor areas are hard to describe in concrete numbers” (ibid., pp.
25).

116. For a new railway project also in the PRC, it was estimated that 1 direct job employed by
the railway generated 35.7 additional jobs in the greater Chinese economy (based on the then
most recent national input-output model for 2000) because the area served by the railway could
now have its resources, especially for minerals and energy, as well associated industries such as
cement, building materials, and manufacturing, developed and transported economically. 152
These resources and industries were uneconomic based on truck transport. This railway project
is somewhat unique in that the area to be served has considerable resources that are in demand,
which is not the case for all railway projects. In a recently released ADB publication, the socio-
economic benefits of railway projects in the PRC are described comprehensively.153

117. What needs to be understood from the above examples is that developing a corridor
including the upgrading or building of a road or a railway will not be sufficient on its own to
promote economic growth and poverty reduction. Rather, there has to be commitment from all
levels of government, and a range of complementary policies that facilitate economic growth and
poverty reduction.154

118. The recent growth of the CAREC country economies as noted in the Introduction has
positively impacted poverty. However, the incidence of poverty remains an issue with a poverty
incidence of 44.7% in Azerbaijan (2003), 28% in Kazakhstan (2000), 41% in Kyrgyz Republic,
36% in Mongolia (2002, which has since fallen to about 32% in 2006), 27.5% in Uzbekistan
(2000), and 57% in Tajikistan (2000).

119. Table A.4.5 shows GDP per capita in constant (2000) US$ and GDP per capita based on
purchasing power parity (PPP) in constant international dollars, which reflects the cost of goods
and services relative to income in a specific country, for the period 1990-2005. As the table
indicates, GDP per capita generally declined during the first few years following the separation
from the former Soviet Union (FSU). From the mid to late 1990s, GDP per capita has been
increasing. While these recent gains have undoubtedly affected the incidence of poverty
throughout the region and given their exploitation of natural gas and oil, especially in Azerbaijan
and Kazakhstan, poverty is still an issue throughout the CAREC countries, with some countries
continuing to have large segments of population living in poverty.




152
     ADB PPTA 4577-PRC: Taiyuan-Zhongwei Railway Project, Supplementary Final Report, Volume 3, Manila,
    February 28, 2006, pp. 66.
153
     ADB, Building Railways in PRC: Changing Lives; by Manmohan Parkash; EARD Special Studies; Manila, 2008.
154
     In the case of the RIP A III example, China had also implemented a number of poverty alleviation, rural
    industrialization, and township development policies which collectively facilitated the results highlighted in the
    preceding discussion. These policies are continuing to evolve as evidenced by China’s recent (2006) dropping of
    income tax paid by farmers, and government’s increased contribution to education, health and pensions for rural
    residents. In addition, rural credit schemes are being expanded.
                                                                                                                                                                  177 Appendix 4

                                                                               Table A.4.5: GDP per capita, 1990-2005
                                                                                 GDP per capita (constant 2000 US$)
COUNTRY             1990        1991        1992          1993      1994      1995      1996       1997       1998    1999        2000      2001      2002      2003      2004      2005
Azerbaijan            1,251       1,223         932           706       559       488       489        513        558     594         655       714       784       866       945     1,182
Kazakhstan            1,612       1,425       1,351         1,235     1,095     1,023     1,044      1,078      1,076   1,116       1,229     1,397     1,534     1,671     1,819     1,978
Kyrgyz Republic         465         422         359           304       243       227       240        260        261     267         279       291       289       306       324       319
Mongolia                451         337         300           286       289       362       366        376        385     394         395       395       406       423       462       483
Tajikistan              485         441         308           253       196       170       139        140        145     149         159       173       187       204       223       237
Uzbekistan              685         667         579           553       514       500       499        515        528     543         558       574       590       608       647       684

                                                                         GDP per capita, PPP (constant 2000 international $)
Azerbaijan             4,724      4,619       3,521        2,667     2,113    1,842       1,847     1,936      2,109      2,245    2,474     2,698     2,962     3,269     3,571     4,463
Kazakhstan             5,696      5,038       4,774        4,364     3,870    3,615       3,689     3,811      3,804      3,944    4,343     4,938     5,422     5,906     6,428     6,990
Kyrgyz Republic        2,496      2,263       1,927        1,630     1,304    1,220       1,287     1,394      1,403      1,434    1,496     1,563     1,551     1,645     1,742     1,714
Mongolia               1,747      1,306       1,163        1,111     1,120    1,403       1,418     1,458      1,493      1,527    1,530     1,531     1,575     1,642     1,792     1,875
Tajikistan             2,467      2,243       1,564        1,287       998       862        708       710        738        756      809       882       952     1,038     1,136     1,206
Uzbekistan             1,836      1,789       1,552        1,482     1,378    1,341       1,338     1,381      1,417      1,457    1,497     1,540     1,583     1,630     1,735     1,835
Source: World Development Indicators, World Bank, 2007.


120. There is only limited data for Afghanistan and it is not comparable. However, it should be
noted that nearly 40% of the rural population are chronically or periodically short of food.
Furthermore, GDP per capita approximates about $200, indicating that poverty is widespread.

121. Xinjiang Uygur Autonomous Region (XUAR) has a far lower incidence of poverty (18% in
2005 compared to the national average of 10%) that is primarily concentrated in rural areas in the
far southern part of the province. GDP per capita in constant US$ was about $1,257 and GDP
per capita based on purchasing power parity (PPP) was $4,827 in 2005.

122. An important benefit of improved transport corridors will be the impact on the prices and
availability of goods. Mongolia is a case in point, where the increased imports of Chinese goods
including year-round fresh vegetables has resulted in a fall in prices for these items and helped to
reduce inflation in recent years. Inflation disproportionately affects the poor because their already
limited income becomes even smaller in terms of purchasing power.

123. Moreover, cheaper, safer, faster and reliable transport provides more opportunities for
people to travel, reduce the costs of utilizing health and social services, and that people are less
likely to have to bear the burden of the costs of accidents.

124. With respect to affordability, as shown in the above table, incomes are rising and indicate
that the general population will be able to benefit from improved transport. As the CAREC
economies continue to expand, there will be further opportunities to more widely distribute the
fruits of development as economic growth becomes more inclusive.

125. Trade and travel are already expanding and will continue to do so with the growing
CAREC economies. This also indicates that the population will be able to afford cheaper, safer,
faster and more reliable transport.

126. One recommended activity is a feasibility study (including assessing financing
mechanisms for private sector investments) to address the establishment of economic
development areas throughout the road transport corridor network. This concept has merit for
safety reasons alone (i.e., drivers need places to stop and rest, and transit truck drivers are
required to stop). However, where appropriately sited, rest stops and associated facilities such
as fueling stations, repair garages, restaurants, hotels, and shops provide employment and serve
as local growth centers. Given the long distances within the corridors, a systematic siting of rest
stops could generate a considerable number of jobs and income opportunities.
178 Appendix 4



                              Annex 4-A: Concepts and Definitions of PSP

1.     Starting from the left of Figure A.4.2 in Section A.4.5.3 of this Appendix, the following
progressively increasing levels of PSP are found in railways around the world. The same
concepts are equally applicable for other modes of the transport sector:

GOVERNMENT DEPARTMENT

2.     In this form of investment in and operation of railway facilities the private sector is
completely absent. The railway sector is entirely funded through annual appropriations from the
government’s budget and all freight and passenger transport services are performed by
government employees. The railway entity functions as a department of a government agency
such as the Ministry of Transport (MOT) or Ministry of Railway (MOR) or as a state-owned
enterprise reporting to a government agency.

3.       Railways operating as a department of a government agency were (and still are) common
in centrally controlled socialist countries such as the (FSU and the Democratic People’s Republic
of Korea where the absence of the private sector in the economy precludes any form of PSP. In
transition economies such as Central Asian republics and the PRC, as well as in many
developing member countries such as Pakistan, Philippines, and Sri Lanka with varying degrees
of private sector presence in economic activity, outsourcing for materials, parts, and supplies
needed by the railway is frequently stated as PSP. Procurement from the private sector, however,
does not typically include investment in and operation of productive railway facilities.

4.      The importance of outsourcing by a government-owned and operated railway to the
private sector cannot be overstated. It provides significant benefits to the economy in terms of
increased efficiency and cost reduction. Technology improvements introduced by the private
supplier positively contributes to improvements in railway service quality and cost, which
ultimately benefit the users of the service (passengers and freight shippers).

5.      An emerging practice gaining momentum among government-owned railways is
corporatization. Corporatization occurs when a government agency is transformed into a
company registered in the same manner as a private company, except all its shares are owned
by the Government. A board of directors manages the corporatized railway with executive powers
resting with the President generally appointed by the Board. The management is provided some
autonomy in its operations with “bottom-line” responsibility just as the management of a private
sector company. Corporatization is often the first step towards divestiture either by sale of shares
to the public or to strategic investors. Corporatization of railways has been implemented in
Kazakhstan, Malaysia, Russian Federation, and Romania to name a few examples. It is currently
being considered for implementation by Pakistan and others.

GOVERNMENT DEPARTMENT WITH PERFORMANCE CONTRACT

6.      Performance contracts with the management of the government’s railway department or
the state-owned railway are typically focused on output such as carrying a target quantity of
freight expressed in tons and/or ton-km (TKM). Usually without regard to economic efficiency,
performance contracts tend to perpetuate inefficiency and cost escalation without adding value to
the productive efficiency of operations or allocative efficiency of the economy. 155 Circuitous
routing, shipping the same commodity in both directions, and other types of transport service
duplication which were endemic in the FSU and other centrally controlled economies are typical
examples of inefficient operations in performance contracts.

155
       Productive efficiency refers to an input-output relationship between resources used (such as labor, tractive power,
      fuel, etc.) and output generated (such as passenger-km, tons, ton-km, etc.). Allocative efficiency refers to the
      relationship between resources allocated for production of an output and the net benefit attained by the society.
      Maximizing efficiency in both instances aims at producing the maximum result with minimum resource.
                                                                                                     179 Appendix 4

7.      Performance contracts without an obligation of the railway to achieve specific productive
efficiency targets are becoming rare. For example, the performance contract system, which was
established in early 1980s in China Railways soon showed its weaknesses. Subsequently, the
PRC MOR established a substantially improved variant of a performance contract known as the
Assets Operation Liability System (AOLS). Under the AOLS the management of China Railways
commits to performance targets, which focus on profitability, return on fixed asset investment,
and return on equity.

LEASING ASSETS

8.      A lease transfers the right to use a property for a defined period of time to the lessee, and
is combined with contractual rights. Leasing can be similar to contracting described below, but in
this case the lessee pays a fee for the use of the property. Leasing arrangements may be of two
types, leasing to the private sector or leasing from the private sector.

Leasing to the Private Sector

9.       Railways typically own vast real estate assets in addition to extensive fleets of rolling
stock, motive power, construction and repair equipment, above ground infrastructure such as
track, catenary, signaling and telecommunications facilities, workshops and depots, warehouses,
office buildings, stations, schools, hospitals, and other assets. The right-of-way can be leased for
installation and operation of utility services such as pipelines, electrical lines, and fiber optic
cables for telecommunications. Non-operating land assets (plots other than the right-of-way) are
typically leased for residential and commercial development. Space in stations and other
buildings are frequently rented to retailers as kiosks and shops. All these forms of asset utilization
are undertaken through asset leases where the lessee is responsible for investment in property
development and management. In areas at or close to track where safety of train operations is a
concern (such as underground utilities at the right-of-way) lessee’s access for repair and
maintenance is forbidden in most cases.

10.     An attractive asset base for many railways is real estate and other non-core assets, which
can be operated commercially. In a study for the Philippines National Railways (PNR), it was
estimated that if the approximately 50,000 pieces of PNR real estate assets were managed by
private sector property developers, the railway would generate an incremental annual net income
in excess of 550 million pesos, more than twice the amount the railway receives annually as
subsidy from the Government of the Philippines.156

11.     Railway land assets are particularly valuable for companies that need contiguous and long
tracts of land for installation of their utility network such as fiber optic cable (e.g., Bangladesh,
Romania, US, and many other railways). Negotiating with one landlord rather than numerous
small landholders provides the company an efficient alternative to accumulate land under one
contract.

Leasing from the Private Sector

12.      Major railway systems around the world are increasingly opting for leasing of rolling stock
and equipment in lieu of direct purchase. Leasing helps to obviate the need for investments on
assets; the investment saved can then be put to alternative productive use. Leasing also has the
advantage of improving the overall productivity and efficiency of assets. Leasing of rolling stock is
favored by major freight railroads in North America and is also being increasingly used by
Europe’s railways. In the United Kingdom, the train operating companies under passenger
franchises operates passenger train services. However, in many cases the trains and/or rolling
stock are owned by private sector rolling stock companies, which lease the trains or rolling stock
to the train operating companies.

156
      Transportation and Economic Research Associates, Inc. (TERA); Technical Assistance Report on Restructuring of
      Philippine National Railways; May 5, 1999, p.10.
180 Appendix 4



13.    In North America, the railroads lease intermodal flat cars and special purpose wagons for
timber and automotive transport from Trailer Train Inc. (TTX) of the US, a major player in the
leasing of freight wagons (Box A.1).

                                                Box A.1: Trailer Train, Inc.

  In the 1950s, two US Class I railroads and one intermodal trucking company formed an independent corporation
  designed to acquire and pool a fleet of intermodal flat cars that could be freely interchanged between the two
  railroads, thereby forming a seamless transportation network, which did not rely on interchange of equipment and
  the related record keeping, and costly reciprocal billing for usage of each others’ equipment. The membership of
  this venture grew rapidly until virtually all of the Class I railroads in the US became shareholders of TTX. At one
  time the participating railroads numbered 44 members, but have since dwindled to 9 as a result of mergers,
  consolidations and closings.

  Although the TTX is owned by 9 US and Canadian railroads, it is operated as a stand-alone corporation. The
  company consolidates the purchasing power of all of the individual owners into a single leverage position. The fleet
  is operated as a cooperative pool and each owner pays a leasing charge (comprising a per-day rate plus a per-mile
  rate) for each car it uses. Non-owner railroads are charged the same rate as owners. TTX is solely responsible for
  maintenance of the fleet with each railroad being compensated for any maintenance and repair it performs on a
  TTX car. The car maintenance department of TTX has facilities located at most major railway yards and intermodal
  ramps in the US and Canada as well as large contract repair, rebuild, and retrofit facilities throughout the US.
  Routine maintenance of intermodal cars and prescribed maintenance to specialized intermodal appliances is done
  right on the ramp tracks. Integrating the car maintenance into the intermodal ramp operation has resulted in an
  exceptional fleet mechanical condition (as prescribed by the Federal Railway Administration) that allows trains
  comprising intermodal equipment to operate at near passenger train speeds.

  TTX has a proven history of profitable operations. TTX has diversified, on a smaller scale, to provide similar assets
  and services to other railroad transportation industries such as automotive, forest product, and specialized
  transportation equipment. The TTX has been a successful model of a private sector entity leasing equipment to the
  railroads.


14.    For the Burlington Northern and Santa Fe Railroad (BNSF), the locomotive lessor also
provides maintenance, and the railway pays by usage (unit of tractive effort or distance). Such
opportunities are particularly favorable for specialized or limited use equipment.

15.      The Indian Railways has been leasing railway equipment from its subsidiary, the Indian
Railways Financial Corporation (IRFC), which was created for the purpose of raising financing
from market (largely private) sources by issuing bonds, buying operational equipment and leasing
it to the Indian Railways.

16.    In Europe and North America cross-border leasing of railway infrastructure and equipment
was introduced recently. In a cross-border leasing transaction, an investor -- in this case, a US
company -- leases an asset from a foreign entity, which owns the asset. The owners immediately
lease back their asset from the US company so that they still own and operate the asset. The US
company, on the other hand, gains a tax benefit for writing off the up-front lease payment as an
expense. About 150 municipalities in Europe, including those in the Austria, France, the
Netherlands, and Switzerland, have offered cross-border leasing deals.

17.     Cross border leases are particularly attractive to US investors because the tax
advantages of leasing a huge fixed asset, which depreciates each year, more than offsets the
upfront fee. Under current US tax law, 99-year leases are treated as sale which gives the lease
holder the benefits of depreciation, while the lessor gets cash benefit for enabling the lease
holder to gain a tax benefit. German cities and towns have profited for at least 10 years from
complicated financing transactions known as cross-border leasing deals involving the leasing of
German assets, such as streetcars, purification plants, sewage systems, town halls, and school
buildings. But since the spring of 2003, the complicated transactions have come under increasing
public scrutiny with legal and ethical implications.157

157
      The Frankfurt city government, for example, had intended to lease its subway to a US investor over 99 years for the
                                                                                                       181 Appendix 4

SERVICE AND MANAGEMENT CONTRACTS

18.      The first level of PSP in railway operations is in the form of contracting. There are two
forms of contracting: service and management. In these contracts there is an apportionment of
roles, i.e., those of a client and contractor. Both forms of contracting allow the government to
maintain ownership of public facilities and control over public services. The government benefits
from private sector management and operation. The private sector derives revenue from
management fees or fees for services. Even if still publicly owned, the railway can contract or
outsource to the private sector for almost any activity.

19.     Contracts are typically budgeted on an annual basis and their scope may extend up to 5
years. Based on past experience, contracting with the private sector: (i) increases efficiency; (ii)
decreases vulnerability to employee actions and contractor failures; (iii) provides protection
against monopolistic behavior of contractors or government agencies; (iv) provides dual
yardsticks for measuring and comparing performance; and (v) provides more substantive
knowledge and understanding of service delivery.

Service Contracts

20.     Service contracts are usually executed for a relatively short period of 1-2 years and for a
limited scope. Under service contracts a government agency contracts with a private firm to
provide a specific service for a specified period of time. In some service contracts the private
sector invests in and owns the assets. Contracts in many passenger railway operations for
provision of on-board services in trains are a good example of this type of PSP. Other examples
include freight handling at railway owned stations and warehouses, and local drayage for pick up
and delivery of freight from/to shipper facilities.

21.     Some contracted services cover a relatively small area or narrow scope, which do not
involve direct train operations. In some cases, however, core services are outsourced to the
private sector. One example of this practice is contracting out rolling stock maintenance to a
private contractor using the government’s workshop(s) and equipment.

Management Contracts

22.     Governments are also using management contracts to provide services more efficiently
while maintaining ownership control. A management contract is an arrangement by which a
private company is entrusted with various types of tasks usually performed by the public authority.
In this form of PSP, a contractor takes over responsibility for operation and maintenance of a
service facility for a specified period of time with the freedom to make routine management
decisions.

23.    The governments seek management contracts with the private sector in order to transfer
operational risk and improve the quality and efficiency of services. Management contracts may be
funded annually and may be extended for 5-year periods; the private contractor recruits staff,
manages facilities, and provides services. Management contracts can also (or only) focus on
operation management.158

24.     Management contracts range from what is essentially a form of technical assistance,
where the management contractor takes no financial risk, to more significant cases where
compensation is based, at least partly on results, including performance incentives. The
contractor assumes responsibility for operations and maintenance of a particular activity, or even
an entire railway. Competition arises from the possibility of several firms bidding for the contract.

    sum of US$2.7 billion. The US investor's insistence upon secrecy was one of the factors that contributed to the
    turning down of this deal. Opposition to the deal led to a public examination that ultimately led the city council to
    reject the deal in October 2003. Cross-border leasing deals also failed in Stuttgart and Dresden, because the
    citizens did not consent to lease the municipal facilities to a nameless investor.
158
    Nicola Tynan, Private Participation in the Rail Sector—Recent Trends, World Bank Note No. 186; June 1999.
182 Appendix 4



25.     Pakistan Railways contracts out ticket sales and inspection and on-board services for two
lines out of Lahore. The contractor pays a fixed rate to the railway and, therefore, has an
incentive to collect as much as possible. This arrangement has reduced the previously high level
of “ticketless” travel. Other contracted services in Pakistan include luggage handling and parcel
service.

26.     In Japan, the Shinkansen (bullet train) right-of-way is maintained under contract with the
private sector, and the maintenance is done more efficiently than on the conventional lines. In
several US railways, locomotives are maintained by private contractors at a lower cost than by
the railway itself. Also in the US some railways contract out the operation of intermodal terminals
under competitively bid management contracts.

27.    Management contracts can also be used for freight and passenger transport operations
under the following conditions:

       (i)       The government wants to obtain the benefits of private management or
                 technology but the private sector considers the political, financial, technical,
                 or economic risks too high to own or invest in the system.
       (ii)      The government is reluctant to relinquish ownership due to the desire to
                 maintain control or unwillingness to implement needed reforms.
       (iii)     Continued government ownership provides access to low-cost funds (such
                 as tax-exempt or donor funds) or grants that otherwise would not be
                 available to a private company.
       (iv)      The government has decided to privatize the railway, but due to the
                 condition of the state-owned railway a management contract is being used
                 in an attempt to improve its performance before privatization.
28.     In Poland, the government used management contracts to privatize state-owned
enterprises during the 1990s. Under the business contract arrangement, groups of Polish or
foreign managers could obtain the right to restructure and develop a state enterprise by
submitting a business reorganization plan and making a down payment (as collateral) equivalent
to about 5% of the value for which they estimate the enterprise can be sold after restructuring.
The managers receive shares in the state-owned enterprises and could realize capital gains after
the company is privatized. If the restructured state-owned enterprises could not be privatized, the
managers would lose all or part of their collateral. Management contracts have also been used to
restructure state-owned enterprises that could not be immediately privatized and for which there
was no prospect for capital gains.

29.      Despite their limited scope, Bangladesh Railway’s commercial passenger train contracts
are an example of contracted operations. These types of contracts can cover specific trains or the
entire operations of the railway. At the next level are leases (also known as affermage), where the
private contractor pays a guaranteed leasing fee and is responsible for providing the service at its
own risk. The short-lived 5-year performance-based management contract of railway operations
from Zambia north to the minerals belt of the Democratic Republic of Congo awarded to a
consortium of Transurb and Transnet, both from South Africa is a good example of contracted
operations with the private sector bearing commercial risk. Management contracts represent the
first level of risk assumption by the private company since the contractor generally assumes
marketing and sales functions and contracts with the railway to carry its business along a specific
route within a time slot.

30.     In 1985, the State Railways of Thailand contracted with private operators for provision of
long-distance express passenger services on three lines, which were previously unprofitable. By
emphasizing service quality and efficiency the new operators were able to attract long distance
passengers. After two years of operation, all three lines were able to cover operating costs and
                                                                                      183 Appendix 4

earn substantial profits. The contracts were canceled in 1991 and the operations taken over by
State Railways of Thailand, because it wanted to regain the profits for itself.

CONCESSIONING

31.    One of the most commonly used form of PSP by railways around the world, concessioning
involves a long-term contract (typically 20-30 years with options to extend) wherein the
government maintains ownership of track (and in some cases such as Brazil, the rolling stock)
and the private company has the right to operate trains and is responsible for maintaining track
and investing in other tangible assets. Concessions (also known as usufruct contracts) may cover
a part (as in Argentina and Brazil) or whole (as in Malawi) of the national railway network. A
concession implies a contractual right to operate a business. It does not transfer property rights to
the operator. Concessions have been used for PSP in the railway sector, particularly in Latin
America since early 1990s (Argentina, Brazil, Mexico, Bolivia, Chile, Peru, Colombia, and
Guatemala) and more recently Africa (Ivory Coast/Burkina Faso, Cameroon, Gabon, Malawi,
Democratic Republic of Congo, Togo, Senegal/Mali, Madagascar, Zambia, and Mozambique).

32.     Concessions are a mechanism through which a government, while retaining the
ownership of a railway, transfers to a private concessionaire the operation of the entire railway, a
portion of the railway system, or a function of the railway for an extended period. The
concessionaire carries both the investment cost and commercial risks and is responsible for
financing rehabilitation or upgrading of old fixed assets and the acquisition of new fixed assets.
Normally, these new assets revert to the government at the end of the concession period.

33.    The concessionaire pays a fee for the use of assets and makes a commitment to maintain
them. Normally the concessionaire has freedom to set tariffs and other commercial conditions.
The concessionaire often furnishes a performance bond to support a commitment for investment
and service as described in the concession contract.

34.    One of the features of concessions is that the initial capital cost for taking over the
operation of the railway is much less than an outright purchase. This broadens the market for
PSP and enhances competition. Furthermore, implementation of the concession option is simpler
and takes much less time than the outright sale of the railway.

35.    The conditions of the concession are described in a concession agreement or contract,
wherein the government’s or the landlord railway’s as well as the concessionaire’s specific rights
and responsibilities are defined, including the period of the concession, payment of concession
fee, and several other features, such as the objectives of the concession and the allocation of
risks.

36.     An example is Ferrocarriles Argentinos, which was broken up into six cargo lines, as well
as separate suburban and metro passenger lines. Concessions of 30 years have been granted to
the cargo line operators, who are responsible for all maintenance and investment. Concessions
for the Buenos Aires commuter system were offered for 10 years (20 years for the segment which
includes the underground system), with interested consortia bidding for the lowest subsidy on
operations and investment.

37.      Concessions may take various forms such as master concessions, wholesale
concessions, sub-concessions, and lines of business concessions. In the railway sector multiple
types of concessions could be used. A master concession would allow a private company to
operate the railway (including track, operation and maintenance, and freight and passenger
services). Sub-concessions could be for providing food and beverage services, workshops and
other support activities. A wholesale concession awards the right to operate all core and non-core
activities to one concessionaire who might in turn have the right to award sub-concessions. Lines
of business concessions are used when each individual activity operates under an individual
concession.
184 Appendix 4



38.    Considering the prevailing environment and the government’s objectives, a decision must
be made about the concessioning option considered most suitable. Some of the options that
could be considered include the following:

Vertically Integrated Concession

39.     In a vertically integrated concession, almost all the railway functions are the responsibility
of a single concessionaire (Guatemala, Malawi, and Estonia). This option is particularly
appropriate for railways with comparatively small networks, especially if they require some initial
investment. The concessionaire may prefer to carry out various railway functions using the
services of a contractor rather than its staff. For example, track or locomotive maintenance might
be contracted out. The concessionaire has the full responsibility for rail operations and rail asset
maintenance and renewal, including all railway functions. When a vertically integrated concession
applies to the entire system, it is generally the government that enters into a concession
arrangement with the concessionaire. When only a branch line is involved, the railway itself might
enter into the arrangement with the concessionaire.

Functionally Separated Concession

40.     The concession might be limited to one, two, or three of the four major railway functions
(train operations, track maintenance, equipment maintenance, and sales and marketing). A
possible choice is a concession covering functions other than infrastructure provision and
maintenance. The concessionaire maintains equipment, markets railway services, and operates
trains. The scope of a functionally separated concession ranges from assuming complete
responsibility for system infrastructure or complete responsibility for operations to assuming
responsibility for only a single service in a single area, such as passenger commuter services in a
particular city, or for a single rolling stock maintenance facility.

Concession for Specific Service

41.     This type of concession may cover only one service (e.g., freight trains or container trains
or passenger trains) on the whole railway, or on only a part of the system. This option is suitable
for a railway that wants to provide freight and passenger services through separate arrangements.
For example, passenger services suffering losses can be operated through a government entity
or through a negative concession (payment of a subsidy to the concessionaire), and freight and
multimodal services can be operated through a concession under competitive conditions.

Joint Venture Concession

42.     The joint venture concession is an option that pertains to the type of concessionaire. The
concessionaire could be a joint venture in which the private sector partner has at least a 51%
share, with a minority share being retained by the public entity that owned and managed the
railway before the concession. A joint venture arrangement could also involve other stakeholders,
such as major customers and forwarding agents, as minority shareholders. The senior private
sector partner assumes managerial control of the concession and brings in an agreed amount of
investment to improve assets and operations. The public entity may not bring any cash to the joint
venture but may transfer equipment instead. This concession option enables the public entity to
participate in the management of the railway through its members on the board of directors, and
in case the concession is unsuccessful, the public entity is in a position to quickly resume
management of the railway. The participation of other stakeholders in the joint venture
arrangement would help the venture by bringing in a steady business and placing greater
emphasis on customer service.
                                                                                     185 Appendix 4

Transborder Concession

43.     In cases in which the viability of a railway depends on the performance of the whole
corridor spanning across an international border, a single transborder concession may be most
appropriate. The railway concession for Burkina Faso and Côte d’Ivoire is an example of a
transborder concession serving two countries. This concession was awarded to Sitarail, a
consortium of the Bollore group companies (private sector shareholder) holding 67%, two
governments (15% each), and railway staff (3%).

44.     On a number of smaller railways there is insufficient volume to have an effective business
sector. For example Swiss Railway, a small railway in central Europe, has limited domestic
freight business but its future is in international business. Therefore, it has formed a partnership
(Cisalpino AG) with the neighboring Italian Railway in 1993. Another example is the CityNightLine
CNL AG which was originally established by Swiss, German, and Austrian national railways in
early 1990s, but is now wholly owned by the German Railway.

BUILD TRANSFER OPERATE (BTO)

45.     This type of contract is the last stage of public ownership in the spectrum of PSP and is
commonly considered as another part of concession. It is generally applicable to greenfield
projects where the private sector assumes the construction risk and finances the investment until
completion of the construction works. At the completion and acceptance of the project by the
government, the short-term construction financing is replaced by a long-term debt instrument
(bank loan or bond) typically encumbering the asset value or revenue stream as collateral. Upon
completion of the financial arrangements, the concessionaire commences operation of the railway
under terms included in the concession contract.

46.     BTO type agreements are useful in cases where permanent financing to replace the
construction loans is possible through a pledge of the asset (asset securitization) and the
government intends to own the asset at the completion of construction. Since ownership of the
asset will eventually be turned over to the government, the private sector cannot be viewed as the
owner and, therefore, is unable to pledge the asset as collateral. Under these circumstances, the
ownership is transferred to the government upon completion of construction so that it can be used
as collateral for the permanent loan.

PUBLIC-PRIVATE JOINT VENTURE

47.    This type of PSP is the first stage of ownership of assets by the private sector. Similar to
concessions described above, the public-private company is established through a pledge of
assets by both partners for operation of a specific service or all train services along a segment or
on the entire network. It is also used in non-traffic operations. An example of this is the joint
venture company which was established between the former Adtranz of Germany (now a
subsidiary of the Canadian Bombardier) and Uganda Railways to own and operate the locomotive
workshop in Kampala. The initial joint venture agreement provided for 60% ownership by Adtranz
and 40%t by the railway and stipulated that in case the neighboring Kenya Railway and Tanzania
Railway decide to join the venture each of the initial partners would relinquish 10% of their shares
to each new partner.

48.     There are also instances where a public railway forms a joint venture specifically for the
purpose of gaining access to technology for its manufacturing operations. One example of this
practice is the joint venture between China Railways and the Union Switch and Signal Company
of the US, which is now operating as Beijing CS Signal Controlling System Ltd., a subsidiary of
Ansaldo Signal of Italy.

49.     More recently public participation in railway projects became a necessity due to the weak
financial performance of some concessions. For example, recognizing that the concessionaires
were not in a position to invest in line expansions, in May 2003 the MOT of Brazil announced a
186 Appendix 4



rail revitalization plan intended to stimulate increased private investment by modifications to the
regulatory framework, and by restructuring concessions to permit government expenditure
alongside private investment in order to stimulate expansions. One such project was a rail cargo
bypass line (“rail beltway”) around the city of San Paulo with participation of the Federal
Government, State of San Paulo, and private sector concessionaires (MRS Logistica and
Ferroban). Similarly, the Nordeste concession is discussing a potential line extension
(“Transnordestina”) to involve governmental participation and concessionary funding from the
Brazilian Development Bank, BNDES.159

BUILD OWN OPERATE TRANSFER (BOOT) AND BUILD OPERATE TRANSFER (BOT)

50.     This type of agreement is applicable to new investments, where the private company
builds and retains ownership of the project throughout the concession period, which is generally
25 to 40 years with a renewal option. At the end of the concession period the ownership of the
infrastructure and all other improvements, as well as all rolling stock and other facilities revert to
the government. In this respect, the ownership of the assets by the private sector is not perpetual
but over a long period of time.

51.    Governments in developed and developing economies use BOOT/BOT agreements in
which the private investors build infrastructure, operate the facilities for an agreed-upon period of
time to enable the companies to recoup their investment and a reasonable profit before the
ownership and control of the facilities are transferred to the public entity.

52.     Under a BOOT/BOT, the responsibility of the investor is not limited to operation and
maintenance of the infrastructure but also comprises an initial construction, upgrading or major
railway rehabilitation component. Massive investment and consequent mobilization of private
funding sources is, therefore, required from the investor and is to be repaid from the revenue
collected from rail customers through tariffs. BOOT/BOT stresses the responsibility of the private
entity during construction and operation of the railroad and the handing over (transfer) of the
assets to the public entity at the end of the operation period. The high initial investment required
from the private sector and the consequent long concession period make the distribution of risk
between the parties a key element of success in such schemes. Many variations on this type of
contract have been implemented with a consequently growing number of acronyms used to label
them.

53.    In 2001, the Netherlands developed a BOT with a consortium led by Siemens Corporation
to design, build, finance and maintain the superstructure of a high-speed rail system that will run
from Amsterdam into Belgium. Financing for the project comes from the sponsors and from a 28-
year loan from the European Investment Bank.

54.    The Beitbridge Bulawayo Railway is another example of a BOT transaction from Africa.
The 345-km line is from Beitbridge, on the South African border on the Limpopo, to Henry
Junction, near Bulawayo, where it rejoins the main Zimbabwe railway system. BBR is a privately
owned Zimbabwe-registered railroad company with 85% of its shares owned by New Limpopo
Projects Investments (which also owns the Zambia concession) and 15% by the National Railway
of Zimbabwe. The line opened in July 1999 after a reported investment of US$85 million.160

PUBLIC LISTING OF SHARES

55.   This type of PSP allows the public sector railway to issue and trade its shares in the stock
exchange(s). The private sector investors are typically shareholders with no involvement in the

159
    Richard Sharp, Results of Railway Privatization in Latin America; Transport Papers TP-6, World Bank, September
    2005, p. 22.
160
    Richard Bullock, Results of Railway Privatization in Africa; Transport Papers TP-8, World Bank, September 2005, p.
    17.
                                                                                                     187 Appendix 4

day-to-day management of operations. In cases where the public sector entity holds a non-
controlling minority share, the private investors would be able to control the board’s composition
and management of the company.

56.    One example of the public listing of a railway’s shares is the Guangshen Railway of the
PRC (between Guangzhou and Shenzhen) which has ADR (American Depository Receipt)
shares listed in the New York Stock Exchange (NYSE) under the symbol GSH.

SALE OF NON-CORE ASSETS

57.     Railways frequently sell their non-core assets such as surplus land and buildings. These
types of asset sale, however, do not constitute a significant contribution to improving the
efficiency of the railway’s operations through private sector operations. It is however, an option for
the governments to reduce the financial burden of railway subsidies.

BUILD OWN OPERATE (BOO)

58.    As opposed to the BOOT and BOT, the build own operate contract provides for perpetual
ownership of the asset by the private company. Similar to BOT and BOOT it is used for
construction and operation of new infrastructure.

DIVESTITURE

59.     Divestiture is the ultimate stage in PSP. It involves transferring to the private sector,
through a trade sale to a strategic investor or a public offering of shares on the stock market, the
ownership of existing assets and responsibility for future expansion. New Zealand is the only
example, which represents complete divestiture of railway assets and operations. A partial
divestiture example is the United Kingdom where the track infrastructure was privatized
(Railtrack)161 and passenger and freight operations franchised.

60.     A number of factors should be weighed when deciding whether divestiture should occur
through the stock market or through sale to a strategic investor. Investors make decisions based
on their assessment of risk and return in their customary line of business. A Morgan Stanley
analysis of financial performance in surface transportation in 2003 has shown that the average
return on capital for 44 publicly listed transport sector companies in Europe, North America, and
Asia was 9%t and the average cost of capital employed for the same companies was 6.5%t,
resulting in a spread of 2.5%. 162 The highest return and spread was observed in non-asset
intensive companies such as freight forwarders and logistics management firms (6.9% cost of
capital and 14.1% return on employed capital, or a spread of 7.2%t) and the lowest was in asset
intensive railways (5.6% cost of capital and 6.1% return on employed capital, or a spread of
0.5%).163

61.     A strategic partner with a cost of capital and return of 5.6% and 6.1%, respectively, would
be satisfied with a spread of 0.5% in a mature market environment such as North America or
Japan, which carries relatively lower risk than CAREC countries. However, as risk increases in
CAREC countries the minimum spread required by the investor would also increase, which
results in projects becoming attractive with double-digit returns on owners’ equity.

62.   There are a few examples of private ownership in railways, mostly in developed
economies. The freight railroads in both Canada and the US are owned and operated by the

161
    The subsequent failure of Railtrack to provide needed track maintenance has led the U.K. government to take back
    the track from the private sector. The railway track in U.K. is currently under the control of Network Rail Ltd., a
    government company, which took over the track in October 2002 from Railtrack.
162
    Morgan Stanley Equity Research, Surface Transport: Global Insights; September 8, 2003.
163
    The railways included in the Morgan Stanley analysis were Arriva and FirstGroup from U.K.; Central Japan Railway,
    East Japan Railway, and West Japan Railway from Japan; Burlington Northern, CSX, Norfolk Southern, Kansas City
    Southern, and Union Pacific from the US; and Canadian Pacific and Canadian National from Canada.
188 Appendix 4



private sector. In the US, the more than 500 privately owned short-line railroads have
demonstrated that smaller entrepreneurs, unburdened by restrictive labor conditions, can
succeed by cutting costs and sustain their financial viability through aggressive marketing. In
Senegal, a private sector railway company, the Société d'Exploitation Ferroviaire des ICS
(SEFICS), was established to transport the raw materials and outputs of a fertilizer manufacturing
plant. In comparison to the state-owned railway, SEFICS has maintained higher technical and
financial standards of operation and maintenance, lower costs of transport, higher staff discipline
and accountability, and a better safety record.
                                                                                                    189 Appendix 4




                    ANNEX 4-B: HEALTH AND ENVIRONMENTAL SAFEGUARDS

HIV/AIDS/STI

1.      If the objectives of the Transport and Trade Corridors are achieved, it will lead to
increased traffic flowing more freely through all of the CAREC countries. Greater ease of
movement through borders means that there is a higher risk of the spread of communicable
diseases including tuberculosis (TB), SARS, STIs and HIV/AIDS. The main high risk groups of
people are those with mobile professions, including truck drivers, traders, and seasonal migrants
including poor rural men and women, all of whom risk passing on diseases to their spouses and
other household members. An increase in truck drivers and mobile traders will in turn lead to
increased hospitality establishments and rest stops, and where there are large groups of mobile
populations such as migrant workers there tend to be commercial sex workers).

2.      There are already high levels of migration in the region which includes ethnic migrants,
refugee flows, rural to urban migration, and external labor migration including shuttle migration.
For example 60% of the population in Tajikistan is reliant on remittances from relatives that have
migrated to other countries.164 Economic migrants frequently go to the Russian Federation for
work where there is a major HIV/AIDS epidemic that is transferred predominantly sexually or
through injecting drug users (IDUs), the females of which are commonly CSW. These migrants
could import the epidemic back to their own countries when they return home.

3.       The HIV incidence throughout the region is primarily driven by IDUs and is likely to
continue to spread because of the increase in injecting drug use and commercial sex services,
which when combined, will potentially transfer the epidemic from selected vulnerable groups into
the general population. The concurrent incidence of STIs, economic and political migration, the
limited capacity of governments to implement effective preventative responses, the low level of
awareness of HIV/AIDS/STIs, and knowledge of risk practices and protection are all factors that
contribute to the spread of HIV/AIDS in the region.

4.        STI incidence rates have stabilized in most countries.165 Persons with an STI are more
likely to transmit HIV sexually or more susceptible to acquire HIV. High STI is also a marker for
high incidence of unprotected sex and sex mixing patterns that are conducive to HIV transmission.

5.      Table A.4.B.1 shows data collected by UNAIDS on the prevalence of HIV/AIDS in CAREC
member countries. It shows that the data in some cases is limited and also reflects the
uncertainty of the actual number of HIV cases in each country. For example UNAIDS estimates a
range of 11,000–74,000 HIV cases in Kazakhstan.




164
    Erica Marat “The State-Crime Nexus in Central Asia: State Weakness, Organized Crime and Corruption in Kyrgyz
    Republicand Tajikistan,” Silk Road Paper, October, 2006.
165
    Reversing the Tide: Priorities for HIV/AIDS Prevention in Central Asia, World Bank, Washington DC, March 2005, pp.
    14.
 190 Appendix 4



                                                             Table A.4.B.1: Status of HIV/AIDS in CAREC Countries
                                      Popn
                                                Male Life     Female Life    Number of people        Adults 15-49 HIV      Adults aged 15+       Females aged 15+
                        Popn (000)   Growth                                                                                                                            Deaths due to AIDS
                                               Expectancy     Expectancy      living with HIV        prevalence rate        living with HIV       living with HIV
                                      Rate

 Afghanistan                29.863     4.60%            42              42                 <1000                 <0.1%                  <1000                  <100                   <100

 Azerbaijan                  4,411     0.60%            63              68    5,400 (2600-17,000)        0.1 (0.1-0.4)%    5,400 (2600-17,000)    <1000 (300-2,300)                   <100

 People's Republic of                                                           650,000 (390,000-                           650,000 (390,000-      180,000 (90,000 -       31,000 (18,000 -
                         1,323,345     0.60%            70              74                                 0.1 (<0.2)%
 China                                                                                 1,100,000)                                  1,100,000)              310,000)                 46,000)
                                                                                  12,000 (11,000 -                           12,000 (11,000 -         6,800 (5,600 -
 Kazakhstan                 14,825    -0.30%            56              67                             0.1 (0.1 - 3.2) %                                                            <1000
                                                                                          77,000)                                     76,000)                43,000)

 Kyrgyz Republic             5,264     1.30%            59              67 4,000 (1,900 - 13,000)        0.1 (0.1-1.7)% 4,000 (1,900 - 13,000)   <1000 (290 - 2,200)                  <100

 Mongolia                    2,646     1.20%            61              69                   <500                <0.1%                   <500                  <100                   <100

 Tajikistan                  6,507     1.10%            62              64 4,900 (2,400 - 16,000)      0.1 (0.1 - 1.7)% 4,900 (2,300 - 16,000)                 <500                   <100

                                                                                  31,000 (15,000 -                            31,000 (15,000 -        4,100 (1,700 -
 Uzbekistan                 26,593     1.50%            63              69                             0.2 (0.1 - 0.7)%                                                               <500
                                                                                          99,000)                                    100,000)               13,000)
 Source: UNAIDS website 2007




6.       Programs of active surveillance (sentinel surveillance and second generation surveillance)
are just beginning in most CAREC countries with assistance from United States Center for
Disease Control and Prevention (CDC). Variations in reporting procedures also misrepresent
figures of HIV prevalence; for example in Afghanistan, registrations are limited to blood donors.

7.       Afghanistan’s emerging epidemic likely hinges on a combination of injecting drug use and
unsafe commercial sex. According to a UNAIDS study in 2006, 4% of injecting drug users in Kabul
are HIV positive. 166 Almost one-third of the IDUs participating in the study said they used
contaminated injecting equipment. In addition, large proportions of these drug users also engaged
in other high-risk behavior.167 Large refugee populations and a lack of proper testing centers are
two major factors that contribute to the spread of HIV in Afghanistan. Migration leaves individuals
open to contracting HIV through unprotected sex, intravenous drug use, and the lack of access to
education and information. AIDS can easily cross borders, carried by migrants or refugees who
pick up drug habits or have sex with infected people in those countries and return home.

8.       In Azerbaijan, injecting drug use is the most dominant form of transmission with 63% of all
HIV cases caused by IDU in 2004. The number of drug users at the time was expected to be
around 300,000 to 400,000 and 50-60% of those were injecting drugs. 168 The considerable
increase in HIV infection is thought to be due to a sharp growth of drug use, prostitution, and also
an increase of population migration. Those most vulnerable to the disease are youth from low
income families, or the unemployed. Drug using, or sexually active youth are particularly
vulnerable as they generally have a low awareness of the disease and lack of knowledge of the
protective measures available.

9.       All oblasts (regions) in Kazakhstan now have confirmed HIV positive cases. The two
most affected oblasts are Karaganda and Pavlodar (situated close to the Russian border), which
account for about 70% of the reported cases.169 In addition, Almaty, and the trading city Shymkent
have relatively high rates of infection. Results of sentinel surveillance in selected populations
indicate that HIV prevalence in Karaganda is about 5%, 2% in Uralsk and 0.3% in Almaty.170 Data
from STI clinics show that 75% of female sex workers have at least one STI, while 5% of prisoners
in temporary detention have syphilis. Some available data suggest that HIV prevalence in sex
workers was 0.5% at the end of 2001, while National HIV/AIDS Centre data suggests that at least
1%t are HIV positive.171

166
    AIDS Epidemic Update Dec 2006, UNAIDS and World Health Organization, Switzerland, December 2006, pp. 34.
167
    Ibid.
168
    Country Gender Assessment Azerbaijan, Asian Development Bank, pp. 54.
169
     HIV/AIDS in Europe: Moving from Death Sentence to Chronic Disease Management. Matic S, Lazarus JV,
    Donoghoe MC (eds). Copenhagen, WHO Regional Office for Europe, December 2006.
170
    ‘Kazakhstan - HIV/AIDS country profile (WHO)’, WHO Regional Office for Europe, 1 December 2006.
 171
     HIV/AIDS in Europe: Moving from Death Sentence to Chronic Disease Management. Matic S, Lazarus JV,
                                                                                                 191 Appendix 4

10.       The HIV/AIDS incidence in the Kyrgyz Republic is being aggravated by the overlapping
issues of drugs and STIs. The Kyrgyz Republic lies on drug trafficking routes that extend from
Afghanistan to the Russian Federation and Western Europe. Easy access to drugs has enabled
the rise of large numbers of IDU’s who have in turn fueled an increase in HIV/AIDS. The Republic
has a high rate of internal and external migration, especially from rural villages to the cities of Osh
and Bishkek. More than one third of people who leave their village will ultimately return home. In
addition to internal migrations, approximately 50,000 people a year enter the country as external
migrants. These migrants mainly come from other Central Asian countries.172 In Bishkek, 49% of
all sex workers are village women and one-third of the clients of Bishkek street sex workers are
visitors to the capital.173

11.      Mongolia had only 28 reported cases of HIV infection in February 2007.174 This figure is
very low, but the number of infections appears to be increasing. The main source of
contamination is through sexual transmission and more than 70% of the officially reported HIV
cases are among men who have sex with men (MSM).175 Unlike other Central Asian countries,
injecting drug use is not a major cause of HIV/AIDS infection. There are a number of factors that
make Mongolia vulnerable to HIV. These include: a high incidence of STIs, the prevalence of high-
risk behaviors; increasing numbers of sex workers; low condom use; poor access to and variable
quality of essential services, particularly STI testing and treatment; alcohol abuse; and high levels
of poverty. Lastly, much of the population is mobile, traveling to Ulaanbaatar or other countries for
jobs or trade, going to mining sites for seasonal work or moving with their herds, and there is an
increasing incidence of HIV/AIDS in Mongolia's neighboring countries, Russian Federation, PRC,
and Kazakhstan.

12.      In Tajikistan, the total number of registered cases was 317 in 2004, but the most recent
UNAIDS estimate puts the number of infections at 4,900.176 Injecting drug usage is the main
mode of HIV transmission, accounting for about 70% of all cases.177 There is a high level of HIV
infection among drug users, sex workers, prisoners and migrant populations. HIV is also
spreading among the general population. In Tajikistan, the most vulnerable group is the mobile
population and particularly labor migrants, estimated by the International Organization for
Migration (IOM) in 2003 to total 620,000 people. 178 The majority of HIV-infected people are
between 24 and 39 years old.

13.      In 2005 in Uzbekistan, more than 5,600 people were officially registered as living with
HIV/AIDS, 56% of those were in the age group 15–30. The main cause of the spread of HIV is
injecting drugs use; however, sexual transmission is increasing.179 Prostitution has been on the
rise in Uzbekistan since the country obtained independence in 1991. Uzbekistan has more CSWs,
and more risk of an AIDS epidemic, than any of its neighbors because it is the most populous
country in Central Asia and acts as a transit point for truck drivers from throughout the region, as
well as Turkey and Iran.

14.      The first case of HIV infection in XUAR occurred in 1995, and since then infection has
grown with the increasing number of injecting drug users. As of June 2006, there were 16,000
registered HIV cases including 500 with full blown AIDS and 100 cases of AIDS related deaths.180
According to statistics for 2006, the incidence of HIV in XUAR is 0.53 per 100,000 people.181 The

    Donoghoe MC (eds). Copenhagen, WHO Regional Office for Europe, December 2006.
172
    Reversing the Tide: Priorities for HIV/AIDS Prevention in Central Asia, World Bank, Washington DC, March 2005,
    pp. 78.
173
    AIDS Five Years Resistance, pp. 169.
174
    Health Statistics, February 2007.
175
    Mongolia: Alliance linking organisation: National AIDS Foundation (NAF) website 2007.
176
    Tajikistan Country Situation Analysis, UNAIDS website 2007.
177
    UNAIDS in Action: Tajikistan: Joint UN HIV Advocacy Programme, UNAIDS, Tajikistan 2006.
178
    Ibid.
179
    UNICEF - Launch of HIV/AIDS awareness campaign in Tashkent, Press Release, Uzbekistan October 2005.
180
    TA 4773-PRC Xinjiang Regional Road Improvement Project, Final Report, SMEC ASIA Ltd, in association with
    Winlot Consulting Ltd, November 2006.
181
    China Statistical Year Book for 2006.
 192 Appendix 4



area of the population most vulnerable to HIV is among youth and the middle aged and
approximately 80% of infections were due to drugs.182 The cities in the region with the highest
incidence of drug use and therefore the most vulnerable to HIV/AIDS were the capital Urumqi, Yili
and Kashi. XUAR’s location in the northwest region of the PRC with borders to 8 different
countries makes it a prime location for drug trafficking.

15.       At present the needs of the migrating and mobile population are only partially addressed
throughout the region as they are not considered a key vulnerable group and sufficient funding is
not available. Even coverage of highly vulnerable groups (IDU, CSW, prisoners and youth at risk)
is still below desirable targets. Migrants and truck drivers need to be aware of risks and
preventative measures in order to limit the spread of the disease.

16.       Considering the issue of HIV/AIDS as a regional problem has several advantages, as
many of the characteristics of transmission, prevention and treatment are the same in each
country. In addition, many of the carriers of the virus cross borders, and major drivers of the
infection act regionally and can therefore be addressed best at a regional level. These include
trafficking of people and drugs, economic and political migration, and commercial sex work.

17.       Initiatives are already underway in the CAREC region to combat the spread of HIV/AIDS.
The countries are addressing the problem of HIV/AIDS individually and there is movement
towards regional initiatives. Although early action has been taken in the region, much remains to
be done to ensure proper coverage of highly vulnerable groups and address regional drivers of
the HIV epidemic, such as drug use and trafficking, human trafficking and migration. There are
institutional and organizational changes that need to be dealt with in order to reduce the threat of
HIV/AIDS.

18.     The Government of Afghanistan is planning to open testing facilities in border provinces to
prevent the spread of HIV from Tajikistan, Turkmenistan and Uzbekistan.183 These efforts could be
standardized and initiated in other countries. Similar programs are already in operation in
Mongolia where during the trading season a Global Fund grant being implemented by the National
AIDS Foundation and the government’s National Center for Communicable Diseases enables
educators to interact with mobile populations at the Mongolian-Russian border that connects to
the town of Irkutsk, which has one of the highest rates of HIV infection in the Russian Federation.
The educators advise the mobile traders on HIV transmission and distribute condoms. HIV
prevention education also takes place in the hotels near border crossings in order to catch as
many traders as possible before they cross the border.

19.      Another project that could be used as a regional guide is the 5 year project specifically
targeting the XUAR which started in March 2002. The $15 million project was a joint venture
between the Government of the PRC and the Government of Australia. Sponsored by AusAID,
the aim of the project was to increase the capacity of the XUAR to respond to HIV/AIDS through
effective multi-sectoral prevention and care programs that strengthen leadership and advocacy;
policy and planning; condom promotion, drug-related harm reduction; development of a
comprehensive care model, including antiretroviral drugs (ARVs); and addressing stigma and
discrimination. An important component of this program has been the establishment of Health
Posts in border towns that provide (i) information, education and communication materials about
communicable diseases, HIV/AIDS/STI, and drug use, (ii) health checks and testing services, (iii)
counseling services, and (iv) an inclusive mechanism to bring together government and
community resources to target these social problems.

20.    It is recommended that regional initiatives be implemented to combat the spread of
HIV/AIDS/STI, communicable diseases, drug use, and human trafficking based on the Xinjiang

182
    TA 4773-PRC Xinjiang Regional Road Improvement Project, Final Report, SMEC ASIA Ltd, in association with
    Winlot Consulting Ltd, November 2006.
183
    First HIV/AIDS Diagnostic Center Opens in Northern Afghanistan, www.medicalnewstoday.com, 14 May 2007.
                                                                                                     193 Appendix 4

Health Post concept and the Mongolian educators for border crossing points. A component of the
recommended initiative would be to develop information, education and communication materials
which could be utilized for any infrastructure project—whether Corridor or not.

21.       The recommended initiative would build on current efforts by governments and other
agencies in projects and programs in individual countries and throughout the region, such as the
Mongolia trainers and the Xinjiang health posts. Other important on-going projects include the
Kyrgyz Republic TA 4444 Southern Transport Corridor Road Rehabilitation Project, Tajikistan’s
‘Loan and Asian Development Fund Grant to the Republic of Tajikistan for the Dushanbe-Kyrgyz
Boarder Road Rehabilitation Project’ (TA 4382–TA J), Afghanistan’s ‘North-and South Corridor
Project’ (Loan 2257–AFG). Programs such as those under the Global Fund for the Fight against
HIV/AIDS, the United Nations Development Programme, the United States Agency for
International Development (e.g., Winrock International), and the World Bank, which are major
actors supporting the national HIV/AIDS control programs. Complementary activities are being
implemented with support from the International Organization for Migration and the Organization
for Security and Cooperation in Europe as key contributors to government programs for human
trafficking prevention.

COMMUNICABLE DISEASES

22.      Communicable diseases are regional issues because they do not stop at borders or
boundaries and diseases such as tuberculosis, hepatitis and HIV/AIDS are carried to different
countries by migrant workers, traders and travelers, or in the case of Avian Influenza can be
carried by birds and other animals.

23.      Avian influenza has been a much publicized communicable disease in recent years. The
disease has been found in animals in Afghanistan, Azerbaijan, PRC, Kazakhstan, and Mongolia
and carries the risk of spreading to other countries in the region through the migration of waterfowl
or cross border trade in poultry. This disease creates economic losses, but the major concern is
its potential to transfer to humans and cause a human epidemic. As of March 2007, there were
confirmed human cases in two CAREC countries. Azerbaijan reported 8 cases with 5 deaths and
the PRC has experienced 23 cases with 14 deaths.184 The ADB has been closely coordinating its
efforts against Avian Influenza with other agencies, in particular with the World Bank.

24.     There are current and ongoing projects in regards to AI in the CAREC region. In March
2006 the ADB approved a grant for Control and Prevention of Avian Influenza in Asia and the
Pacific Project (Grant 0041/RETA 6313) to support activities in the animal and human health
sectors. Central Asian countries have also received regional training on rapid response and
containment of an avian influenza outbreak organized by the World Health Organization (WHO).

25.      A regional conference was held in Almaty, Kazakhstan in June 2006 to create a
coordinated approach to the disease and increase collaboration between countries in the region.
This conference was organized by ADB, the CAREC Program, US Center for Disease Control and
Prevention, USAID, various UN agencies and the World Bank and attended by three
representatives per country in the Central Asian region. The countries have made a number of
declarations on ensuring commitment and priority at government level and finalization in each
country of a national preparedness response plan. The way governments have responded to the
threat of AI in Central Asia can be used as a model for future threats of communicable diseases.

26.     Another disease of concern is tuberculosis, which can be found across the CAREC region
and may be spread by the increase in mobility between countries due to the improvement of
border controls. The WHO has a set of standards for Directly Observed Treatment Short-Course
(DOTS), which were first implemented in the Kyrgyz Republic in the CAREC region. Tuberculosis
is the chief opportunistic infection causing death among HIV/AIDS sufferers, thus control of
tuberculosis should also be interrelated with HIV/AIDS prevention.

184
      http://www.who.int/csr/disease/avian_influenza/country/cases_table_2007_03_08/en/index.html.
 194 Appendix 4



MOBILE POPULATIONS AND HUMAN TRAFFICKING

27.      Immigration for the purpose of work is very common in CAREC countries. People travel
to participate in seasonal work or move permanently to neighboring countries, with Kazakhstan
and the Russian Federation popular destinations. As previously stated, in Tajikistan it has been
estimated that 60% of the population depend on emigrant remittances for their income,185 and in
Tajikistan and Kyrgyz Republic remittances provide around 20% and 15% of GDP, respectively.
Sometimes people take advantage of immigrants’ desperation for work and this can lead to an
important threat to migrant populations, human trafficking.

28.       Central Asia is a region of origin, transit and destination for human trafficking. Typically
trafficking victims are women and children that are coerced into leaving home, kidnapped or sold.
Those people most likely to be trafficked for sexual purposes are girls in their teens and 20s,
those from tribal groups and ethnic minorities, stateless persons and refugees, and those living in
poverty. Traffickers also target persons seeking employment opportunities in other countries, and
prey upon their desire for a better life through facilitated illegal migration, followed by exploitation.

29.      Traffickers approach victims directly and indirectly through friends and relatives, usually
offering to arrange employment abroad. They also use deceptive newspaper advertisements
offering false work abroad, fraudulent marriage proposals from men posing as wealthy
businessmen and even offers to participate in international beauty contests. Previously trafficked
women reportedly recruited new victims personally. Most trafficked persons traveled to their
destinations on forged passports obtained abroad. Employers and trafficking accomplices usually
held trafficked workers' passports during their stay in the country. Victims reported traffickers used
debt bondage, violence, or threats of violence to compel them to work.

30.       Poverty, a weak economy, lack of education and few job opportunities are all leading
factors in the increase of human trafficking. Approaches to combating trafficking generally focus
on raising the living standards of people through micro-credit programs in the sending countries,
public information campaigns; stronger anti-trafficking laws; and victim protection programs.
While these are all important forms of combating the trade the case of Kazakhstan, proves that
this is not enough to stop human trafficking. With an inflation rate of only 2.3% and a relatively
high per capita income, Kazakhstan is faring much better than other CAREC countries, but human
trafficking has not abated. 186 Therefore, regional interventions will need to focus on what is
happening at border points and make sure border guards are given sufficient training on victim
recognition and assistance.

31.     All countries in the CAREC region are carrying out public awareness campaigns warning
vulnerable people of the risks of human trafficking. These are generally carried out with the help
of non-government organizations (NGOs). Projects that should be considered when addressing
Human Trafficking in the CAREC region include:

        (i)       Afghanistan’s development of a pilot program to begin monitoring for evidence
                  of trafficking into or out of the country at two sites along the Afghan-Pakistan
                  and Afghan-Iran borders. Findings from these programs will be useful for
                  application in other parts of the region.
        (ii)      Azerbaijan has a State Border Service that was established by Presidential
                  Decree on August 31, 2002. Its activities are to safeguard the rights of
                  individuals entering and leaving the country and to suppress illegal migration.
        (iii)     In 2006, the Ministry of Interior in Azerbaijan conducted victim identification and
                  assistance training for NGOs, employees of the Police Academy, Ministry of

185
    Erica Marat “The State-Crime Nexus in Central Asia: State Weakness, Organized Crime and Corruption in Kyrgyz
    Republic and Tajikistan,” Silk Road Paper, October, 2006.
186
    ‘Kazakhstan Under Pressure for Human Trafficking,’ Analyst, Central Asia-Caucasus Institute, August 2003.
                                                                                                 195 Appendix 4

                 Justice's Legal Education Center, and the Education Center of the Prosecutor
                 General's Office.
        (iv)     The Kazakh Ministry of Internal Affairs conducted 80 training events for police
                 officers, primarily through the Anti-Trafficking Training Center, and for
                 prosecutors and judges on techniques for detecting, investigating, prosecuting,
                 and adjudicating trafficking cases. Kazakhstan conducted several joint
                 trafficking investigations with various governments. There was evidence of
                 complicity in trafficking by individual border guards, migration police,
                 prosecutors, and police.

32.       Human trafficking has been recognized as an issue that requires mitigation through
information, communication, monitoring and enforcement, and builds upon efforts being
implemented in the CAREC region. One related issue that remains somewhat undefined is
migrant workers. As noted above, migrant workers are important income generators in several of
the CAREC countries, and aside from basic numbers on remittances, the problems and potential
of migrant workers are not well defined or addressed. Numbering several million in the region,
migrant workers can be viewed as important facilitators of rising incomes and living standards, or
they can be viewed as cheap disposable transients. A regional initiative has been recommended
to address issues specifically related to migrant workers in order to mitigate potential negative
impacts such as those discussed with respect to HIV/AIDS/STI, communicable diseases, human
trafficking and drugs. The recommended initiative would initially focus on border crossing points
and other points of entry but could be expanded to other components of the transportation network
as warranted.

CONTRABAND

33.       Increased traffic flow through borders has the potential to encourage an increase in
trafficking of contraband. Contraband could be in the form of endangered species, illegally logged
timber, drugs, arms, human beings (covered above) or radioactive materials. The liberalizing of
borders will therefore necessitate mitigating measures to control the trafficking of contraband such
as training of customs officers and border guards, improved sharing and storage of information,
and better equipment.

34.      The major issue in the CAREC region is the trafficking of drugs, in particular opiates that
are grown in Afghanistan and trafficked throughout the region. In the 1990’s, at the same time the
countries in the former Soviet Union were suffering an economic downturn which resulted in loss
of jobs, public services and livelihoods, there was a rapid growth in opium production in
Afghanistan. This created a situation where drug trafficking could be established throughout the
region. By the year 2000, 75% of the world’s opium was from Afghanistan and half of that,
transported through Central Asia.187 This number has risen and according to the US Department
of State, in 2006, Afghanistan supplied 92% of the world’s raw opium.188

35.       The CAREC region lies along major drug routes from Afghanistan to the Russian
Federation and to Europe. In addition, it is estimated that there are half a million drug users in the
region, of which more than half inject drugs.189 The current situation in Afghanistan will take time
to rectify as opium currently generates as much as one-third of the country’s total GDP in 2004.190
Despite somewhat successful efforts to reduce opium poppy cultivation in 2005, favorable growing
conditions resulted in only a minimal decrease in total production of raw opium. In 2006, there




187
    Reversing the Tide: Priorities for HIV/AIDS Prevention in Central Asia, World Bank, Washington DC, March 2005.
188
    Interagency Assessment of the Counternarcotics Program in Afghanistan, US Department of State and US
    Department of Defense, July 2007.
189
    Reversing the Tide: Priorities for HIV/AIDS Prevention in Central Asia, World Bank, Washington DC, March 2005.
190
    Afghanistan’s Opium Economy, Curtis, G, ADB Review, December 2005.
 196 Appendix 4



was a further 59% rise in opium cultivation, largely due to a dramatic production increase in the
southern provinces.191

36.      A significant share of opiates gets trafficked through Tajikistan. In Tajikistan, as in most of
the other countries in the region, poverty is a problem with many poor looking to the drug trade as
a source of income. The World Bank estimates that 30–50% of economic activity in the country is
linked to drug trafficking and that 30% of the population depends on the drug business for their
livelihood. 192 Tajikistan's share of heroin seizures constitutes approximately 60% of total drug
seizures in Central Asia. The law enforcement agencies of Tajikistan seized 1,216 kg heroin in
2006, a 45% increase from 2005. Seizures in Kyrgyz Republic and Uzbekistan increased by 104%
and 173%, respectively. Unfortunately an increase in drug seizures is likely to be corresponding
to an increase in drug volume trafficked from Afghanistan.193

37.      Afghanistan is involved in a number of drug related aid projects including alternative
livelihood projects and measures to reduce drug dependency in the country. United Nations
Office on Drugs and Crime (UNODC) has two Afghan specific projects ‘in the pipeline’ that when
completed will relate to this project, they are ‘Strengthening the operational capacity of the
Counter Narcotics Police of Afghanistan’ and ‘Establishment of regional centers for the Afghan
boarder police in Nimroz Province.’

38.      UNODC has been participating in a project to improve the border controls in Hairatan, one
of the main border crossing points between Uzbekistan and Afghanistan (Project UZB/G28). In
order to mitigate any increased drug trafficking due to the upgrade at the border post known as
the “Friendship Bridge,” the Uzbek border staff have received increased training, and new
specialized equipment has been provided including mobile radar for controlling border areas, a
weighbridge, and a truck crane for loading and unloading cargo.

39.      At the same time that border police should be concerned with heroin and other opiates
being trafficked out of Afghanistan, they also need to be aware of chemicals being brought into the
country to convert opium into the more expensive heroin. "Operation Transshipment" a joint
project between UNODC and the International Narcotics Control Board (INCB) implemented in
2006, was set up to train staff at twenty strategic border checkpoints in five Central Asian
countries (Kazakhstan, Kyrgyz Republic, Tajikistan, Uzbekistan and Turkmenistan) how to
intercept the trafficking of smuggled consignments of precursor chemicals transiting through the
Central Asian states to Afghanistan. It has resulted in the confiscation of both chemicals and
drugs, and an extension of the operation into Iran, Pakistan, Afghanistan and the PRC is planned
for 2007.194

40.     On 30th May 2006, the UNODC project ‘Establishment of Regional Logistics and
Maintenance’ provided radio communication training for the 6th Brigade of the Afghan Border
Police. These officers were also given narcotic identification training and taught the necessity to
prevent the importation of precursor chemicals into Afghanistan.

41.     UNODC has set up computer based training centers in Kyrgyz Republic, Tajikistan, and
Uzbekistan with the objective to train law enforcement personnel, to secure the gradual adoption
of modern border management methods and to facilitate the licit flow of persons and goods in
Central Asia. During 2007, UNODC is planning to establish more than 20 additional sites in
Central Asian countries and Azerbaijan. The activities in Kyrgyz Republic and Tajikistan will be
funded by the European Union Border Management in Central Asia (EU BOMCA) program.



191
    Milestones Newsletter, United Nations Office on Drugs and Crime, February 2007.pg. 1.
192
    Reversing the Tide: Priorities for HIV/AIDS Prevention in Central Asia, World Bank, Washington DC, March 2005.
193
    Milestones Newsletter, United Nations Office on Drugs and Crime, February 2007Pg 10.
194
    Newsletter, United Nations Office on Drugs and Crime, February 2007.
                                                                                       197 Appendix 4

42.      There is a considerable amount of information already available from current projects in
the region on mitigating border issues and training staff and recognition of contraband. These
resources and lessons learned should be utilized as a basis to standardized training materials and
the training of trainers so that best practices can be applied throughout the region.

ENVIRONMENT

43.      The governments of the CAREC countries (i) recognize their unique natural assets, (ii)
realize that these assets and especially land, have been degraded through mismanagement over
the past decades, and (iii) are all committed to environmentally sustainable development.
Environmentally sustainable development requires the optimization of resources including land
and water in transport infrastructure development, improvements in the efficiency of passenger
and freight services, increasing energy efficiency, and the promotion of environmental protection.

44.      The upgrading of CAREC corridors is for the most part based on the improvement of
existing roads and railways and, as such, will generally not impact environmentally sensitive areas
including protected zones. In addition, it should be noted that internationally financed projects will
adhere to international best practices for environmental assessment and mitigation in project
design and construction. The environmental guidelines and requirements are well-known
throughout the CAREC region. Moreover, the CAREC governments are upgrading the capacity of
their environmental planning and management both in terms of their environmental agencies as
well as in incorporating international best practices including for design and construction into
nationally executed projects.

45.      Given the generally arid nature of the CAREC region, one issue that will need to be
carefully addressed during corridor improvements is soil erosion. Table A.4.B.2 presents a
framework for soil conservation management that needs to be utilized during construction
(upgrading or new) of road and railway projects.

46.      There is a potential that sand dune migration may impact some corridors as has occurred
in the desert areas in the past. Corridor management authorities may consider utilizing some of
the methods that have been developed elsewhere to protect the alignment from migrating sands.
There has been a number of successful dune stabilization techniques developed and tested,
including at Shapotu in the PRC’s Ningxia Province. Railroad engineers initiated a sand
stabilization project which has received a number of UN environmental awards. The method used
in this 55 km by 80 km experimental area, begins with covering the ground with small pebbles,
and then selected shrubs are planted in square meter plots, and irrigated with water from the
adjacent Yellow River to anchor the sand. Further north in Ningxia is the Baijintan Nature
Protection Area, a 75,000 hectare area established to address desertification. The method used
here is aerial seeding of several specific shrubs during the rainy season (June-July) each year.
The shrubs are protected by low wire fence barriers. A technique that is now being implemented in
the PRC’s desert areas is that a 20-meter zone on each side of the railway roadbed is leveled and
covered with impervious clay before planting. On the outlying sides of these areas, a windbreak
of trees is planted. The width of this line of trees ranges, depending on the seriousness of the
sand problem, from 55 to 200 meters on the windward side, and 25 to 125 meters on the leeward
side. These measures are supplemented by 1-meter high fences.
 198 Appendix 4




                        Table A.4.B.2: Soil Conservation Management Framework
 Potential Erosion Problem                                    Mitigation Measure
                                 All available spoil will be used for structural fill for access roads,
 Use of spoil/borrow pits
                                 stations, and embankments before borrow pits are excavated.
 Locating borrow pits            Borrow pits will be centrally located to serve more than one site.
                                 Sites for spoil and borrow pits will be a long way from industrial,
 Location of spoil/borrow pits   agricultural, residential, historic, and ecological sites. Soil and borrow pit
                                 sites will be at least 1 km from historic, cultural and ecological sites.
                                 Topsoil from the borrow pits will be removed and set aside. When the
                                 project is completed, the areas will be re-graded, the topsoil replaced,
 Topsoil from borrow pits
                                 and the area reseeded. Intercepting ditches will be constructed on the
                                 high side of the restored pit to prohibit surface scouring by storm runoff.
 Spoil disposal                  Spoil will be spread on the lowest yield/least productive land available.
                                 When soil is spread on slopes for permanent disposal, it will be
                                 buttressed at the toe by a retaining wall. The surface of the slopes, if
 Soil disposal
                                 necessary, will be stabilized by shotcreting, riprapping, or laid rubble
                                 prior to seeding.
 Steep cuts                      All steep cuts will be flattened and benched.
                                 Watercourses will not be blocked and temporary soil and rock stockpiles
 Natural watercourses
                                 will be designed so runoff will not induce sedimentation of waterways.
Source: Consultant.

47.     Another concept that is being utilized in the PRC and should be promoted throughout the
region is the development of a “Green Corridor.”           The “Green Corridor” is based on
environmentally sustainable actions and technologies including energy efficiency, renewable
energy where appropriate, re-vegetating construction areas with indigenous plants and trees or in
arid areas with species that require less water, providing signage that indicates sensitive zones,
and anti-littering information and waste collection sites.

48.       While these are all encouraging signs for environmentally sustainable development,
considerable work remains. There is a need to implement a regional initiative to establish and
enforce vehicle emissions standards. Air quality is an important issue in nearly all of the region’s
major urban areas, and vehicular emissions (from diesel and gasoline), poorly maintained engines,
adulterated fuels and burning of used oil and scrap tires are contributors. The recommended
initiative would provide an important basis to reduce vehicle emissions both in the immediate and
long-term future. For example, Japan experienced a 7% increase in road vehicle kms between
1997 and 2003 but CO2 emissions fell by 3.3%, with about one-half of this decline resulting from
improved vehicle quality and the other half resulting from improved traffic management and road
infrastructure. Another recommended initiative is to provide financing to replace the aging truck
fleets in selected CAREC countries, with the replacement vehicles more efficient in terms of
energy consumption and thus producing fewer emissions.

49.      The improved corridors will also enable more efficient transport services, which will also
lead to reduced emissions. Another recommended regional initiative is the establishment of inter-
city bus services between CAREC countries, which currently do not exist and thus require the use
of individual vehicles. Use of buses in preference to individual vehicles will also lead to reduced
emissions.

50.     While this regional transport sector strategy is focused on corridor development, one of
the key environmental issues is the increasing number of vehicles and congestion in urban
centers. This points to the need for the individual countries to address urban transport systems
including public passenger networks from a near and long-term perspective. Land use planning
and urban master plans need to reflect environmentally sustainable transport systems that are
based on efficient land use (e.g., preserving productive farmlands) and reducing vehicle emissions.
                                                                                      199 Appendix 4

In addition, any new infrastructure projects and facilities (e.g, intermodal container depots)
recommended by the transport sector strategy should utilize the same principles.

51.     Road safety is another issue within the framework of safeguards. It is recommended that
a regional initiative is implemented to provide standardized audits and improvement measures. It
should be noted that unsafe driving practices such as overweight or poorly maintained vehicles,
drunk driving, and speeding have led to very high accident and fatality rates that generally cost
about 1-3% of GDP. Some countries in the region have 25% of the total number of hospital beds
in the country occupied by road accident victims at any one time. The opportunity costs arising
from the loss of GDP and allocation of scarce medical and health resources to road accident
victims are very high to all countries but especially those that are poor. Road safety has to be
emphasized, and commitments made across sectors to ensure that actions are taken to reduce
accidents.

52.     An environment-related road safety issue that needs to be addressed is the haulage of
hazardous materials. Conventions and agreements have been signed and there are rules in place.
Are these being adequately adhered to and enforced? In 1998, one of the CAREC countries had
a very unfortunate accident in which a truck that was reportedly carrying cyanide in unsafe
containers for a gold mine fell into a river when the bridge it was on collapsed. The result was that
downstream flora and fauna and communities were impacted with over 1,000 people hospitalized
and the local tourism industry basically shut down. Given that the CAREC region has an
expanding minerals industry and that with increasing traffic there will likely be more haulage of
hazardous materials, the recommended corridor management authorities should address whether
there are adequate measures in place to monitor movements of hazardous materials and enforce
the laws, standards, and legislation on their movement. Alternatively, a regional initiative on the
haulage of hazardous materials could be undertaken.

RECOMMENDED SAFEGUARDS INITIATIVES AND ACTIONS

53.     The recommended initiatives include

        (i)     common CAREC approach to road vehicle emission standards and reduction
                measures;
        (ii)    regional road corridor safety auditing and safety improvement measures;
        (iii)   reducing the environmental impacts of vehicles through recycling waste
                products;
        (iv)    promotion and zoning for road rest stops and local area economic development;
        (v)     mitigating HIV/AIDS/STI, communicable diseases and human trafficking; and
        (vi)    cross-border problems of migrant workers.

54.     The recommended actions include

        (i)     emphasizing soil conservation management;
        (ii)    implementing measures to curb desertification and sand dune migration as
                components of infrastructure projects where appropriate;
        (iii)   implementing the “Green Corridor” concept;
        (iv)    utilizing environmentally sustainable practices in transport planning; and
        (v)     assessing the monitoring and enforcement of hazardous materials haulage.
200 Appendix 4
                                                                                   201 Appendix 5

                                      CAREC CORRIDORS

A.5.1 INTRODUCTION

1.       This Section describes and discusses the rationale for and selection of the Central Asia
Regional Economic Cooperation (CAREC) transport and trade corridors. The Section also
presents data on the condition of the roads and railways that provide the connectivity within the
corridors and to external markets. Importantly, the Section additionally highlights the fact that a
corridor is not a final output but rather an “organic” entity, which is affected by competition from
other corridors and changes in terms of its role and characteristics over time. This final point is
central to the long term success of a corridor: performance and monitoring of a corridor are
essential components to ensuring that adjustments are made to reflect competing trade and
transit routes with respect to travel times, costs, and management, and without these adjustments,
what today may appear a vibrant and successful corridor could become an obsolete alternative to
corridors that generate income and jobs along their routes.

A.5.2 MAJOR TRADE AREAS AND CAREC CORRIDORS

A.5.2.1 Evolution of the Corridor Concept

2.      The CAREC 5th Ministerial Conference held in Urumqi on 20 October 2006 endorsed the
Comprehensive Action Plan (CAP) prepared by the CAREC Unit in consultation with CAREC
countries, development partners, and other stakeholders. Following a “corridor approach” was
one of the key components of CAP:111

           “Particular attention will be given to transport corridors, trade infrastructure
           and policy reforms and energy efficiency measures…CAREC will also ensure
           integrated approaches to transport, transit, and trade in support of business
           development. New approaches will be undertaken to strengthen
           competitiveness, including development of economic corridors and improved
           trade logistics.”

3.     The CAP provides in its Appendix 1 a progress report of the work realized by the
Transport Sector Coordinating Committee (TSCC) and endorsed by the Senior Officials’ Meeting
(SOM). In the progress report, it is stated that the TSCC, in 2007, “will be provided with a sector
strategy that will be instrumental in identifying transport corridors for the region.”112 The CAP
does not try to elaborate on the concept of “transport corridors” but goes into some length to
explain types of trade and transport movements and connectivity to take into account in a corridor
approach.

           “Connectivity reflects the need of CAREC countries to turn their land locked
           status into a land link for Eurasia and to enable business enterprises to more
           readily access regional and global markets.”113
           “Central Asia is viewed as a land link for Eurasia and South Asia. The primary
           focus of the CAREC Program will be the Eurasia link while recognizing and
           developing the opportunities provided by links to South Asia through
           Afghanistan.”114

4.     The CAP also states that regional initiatives will be of three varieties: (i) strengthening
linkages between two neighboring countries, (ii) strengthening regional linkages, and (iii)
strengthening linkages to external markets (Europe, Middle East, and East and South Asia).
According to the CAP, the Transport Sector Strategy is expected to select the corridors, but CAP

111
    CAREC Comprehensive Action Plan, Strategic Framework, p. 15, ADB 2007.
112
    CAREC Comprehensive Action Plan, Strategic Framework, p.33, ADB 2007.
113
    CAREC Comprehensive Action Plan, Strategic Framework, p. 8, ADB 2007.
114
    CAREC Comprehensive Action Plan, Strategic Framework, p.21, ADB 2007.
202 Appendix 5

already provides the broad parameters of the corridor approach. For instance, the transport
corridors are expected to turn CAREC countries into a land link for Eurasia as well as providing
links to South Asia through Afghanistan. Corridors will carry intra-regional trade, trade with
external markets, as well as Eurasia transit trade.

5.      CAREC is not the first organization to consider transport corridor development for Central
Asia, as the Transport Corridor Europe-Caucasus-Asia (TRACECA) and United Nations
Economic and Social Commission for Asia Pacific (UN ESCAP) have also utilized corridors in
their programs.

6.      TRACECA was established in Baku in September 1998, when 12 heads of government115
signed the “Basic Multilateral Agreement on International Transport for Development of the
Transport Corridor Europe-Caucasus-Asia (MLA). The objective of TRACECA, 116 originally
funded by the European Commission (EC), is to develop an integrated multimodal transport
system along the selected corridors. The signing of the MLA has been described as a major step
into the restoration of the Silk Road.

7.      As far as CAREC is concerned, TRACECA offers three main corridors, all starting in
Azerbaijan (Baku), either crossing the Caspian Sea to Aktau or Turkmenbashi. Access to Xinjiang
Uygur Autonomous Region (XUAR) is provided at Druzbah (Kazakhstan), and Torugart and
Irkeshtan (Kyrgyz Republic). In TRACECA terminology 117 this represents a total of 14 routes
(route 19 to route 34). There is some overlap between the TRACECA corridors and routes do not
indicate well-defined corridor directions.

8.     The Technical Aid to the Commonwealth of Independent States (TACIS) and TRACECA
continue to finance technical assistance projects, but TRACECA infrastructure projects since
2007 are entirely financed through national budgets. TRACECA corridors do not pretend to be the
only possible corridors passing through Central Asia, but it is claimed that they constitute118 the
shortest distance linking Europe to East Asia.

9.      UN ESCAP has been an active player in the development of integrated and harmonized
transport systems in Central Asia. The main contribution of UN ESCAP in transportation has been
for all participating countries to agree on a road and rail transport system referred in short as
Asian Highways and Trans-Asian Railways.


115
    Countries were: Azerbaijan, Armenia, Bulgaria, Georgia, Kazakhstan, Kyrgyz Republic, Moldova, Romania,
    Tajikistan, Turkey, Ukraine, and Uzbekistan. Turkmenistan has an observer status.
116
    TRACECA has a permanent secretariat in Baku which was established in 2001. The secretariat reports to the
    Intergovernmental Commission (IGC) which is the governing body of the organization.
117
    TRACECA considers a series of routes which are of different length with overlap. The TRACECA routes (and their
    corresponding route numbers)relevant for CAREC are the following:
     •    19: Tbilisi – Baku (rail and road);
     •    21: Turkmenbashi – Bukhara (rail and road);
     •    22: Turkmenabad – Tashkent (rail and road);
     •    23: Samarkand – Dushanbe/Kulab (rail and road);
     •    24: Dushanbe – Osh – Bishkek (road);
     •    25: Tashkent – Osh – Irkeshtan /Torugart (road);
     •    26: Samarkand – Osh/Jalal Abad (rail and road);
     •    27: Samarkand – Uchkuduk – Beyneu (rail and road);
     •    28: Samarkand – Bukhara – Beineu (road);
     •    29: Navoi – Uchkuduk – Beineu (rail);
     •    30: Turkmenabad – Dashavuz – Beyneu (rail);
     •    31: Beyneu – Aktau (rail and road);
     •    32: Aktau – Beineu – Almaty – Druzhba (rail and road);
     •    33: Lugovaya – Bishkek – Balykchy (rail and road); and
     •    34: Dushanbe – Kulyab – Rangul (road).
118
    TRACECA corridors as Eurasian corridors are 2,000 km shorter than the Trans-Siberian or the connection through
    Iran.
                                                                                                203 Appendix 5

10.     Obtaining agreement on the Asian Highways and Trans-Asian Railways among all
participating countries (28 countries) took time. First initiatives started in 1960. In 2004, the UN
General Assembly endorsed the Global Action Programme for Landlocked and Transit
Developing Countries, the so called “Almaty Programme of Action”. In July 2005, an
intergovernmental agreement was signed to put in force the Asian Highways network. In April
2006, in Jakarta, the Trans-Asian Railways network was finally adopted during the 62nd session of
the UN Commission. Recently (Busan declaration in November 2006), UN ESCAP has begun
pushing for a better integration of the road and railway systems through the emergence of more
inter-modal interfaces especially among developing countries.

11.     The Trans-Asian Railways network is a system of over 81,000 km of routes. The network
is divided into four major corridors:

           (i)     Northern Corridor, linking the People’s Republic of China (PRC),
                   Kazakhstan, Korean Peninsula, Mongolia, and the Russian Federation to
                   Europe.
           (ii)    North-South Corridor, connecting Northern Europe to the Persian Gulf
                   through the Caucasus Region, Central Asia, and the Russian Federation.
           (iii)   Southern Corridor, including Sri Lanka and connecting Thailand and
                   Yunnan Province (PRC) with Turkey, through Myanmar, Bangladesh, India,
                   Pakistan, and the Islamic Republic of Iran.
           (iv)    Subregional Network of Indochina, connecting Singapore to Kunming
                   through the ASEAN Indochina region.

12.   Only the north-south corridor concerns CAREC. Three main transport routes exist
between Northern Europe and the Persian Gulf:

           (i)     Caucasus route (through the Russian Federation, Azerbaijan, and Iran).
           (ii)    Caspian Sea route (through the Russian port of Olya and Iranian ports).
           (iii)   Central Asian route (through the Russian Federation, Kazakhstan [Beineu],
                   Uzbekistan [Alyat], Turkmenistan [Sarahs], and Iran).
13.     Interesting projects from UN ESCAP have been the demonstration runs of container block
trains. Among the few demonstration projects, the Lianyungang – Almaty container block train of
April 2004 is worth mentioning.

14.     The constitutive treaty of the Eurasian Economic Community (EURASEC) was signed in
Astana in October 2000. Belarus, Kazakhstan, Kyrgyz Republic, Russian Federation, Tajikistan
and Uzbekistan are members of the organization. The main goal of the organization is to
establish a free trade area or a customs union among participating members. The organization is
governed by a permanent secretariat, an integration committee, and an interstate council.
Decisions at the integration committee require two-thirds majority. Voting power of participating
countries vary based on their respective contributions119 to the organization’s budget.

15.    Transportation is one of the four top priorities120 of EURASEC and one of the objectives is
to develop an integrated transport system offering common quality transport services. The
organization has defined a series of road and rail corridors.121 Infrastructure improvements along

119
      40% for Russia, 15% for Belarus, Kazakhstan and Uzbekistan, and 7.5% respectively for Kyrgyz Republic and
      Tajikistan.
120
      The other priorities are power transmission, labor migration, and agro-industry.
121
      EURASEC railway routes:
       •    1: Brest – Minsk – Moscow – Nizhni Novgorod – Perm – Yekaterinburg – Omsk – Novosibirsk – Krasnoyarsk –
            Irkutsk – Far Eastern ports of the Russian Federation;
       •    1a: Moscow – Ryazan – Syzran – Orenburg – Aktubinsk – Kandagash – Arys;
       •    2: Moscow – Kazan – Yekaterinburg – Kurgan – Petropavlovsk – Astana – Dostyk;
204 Appendix 5

the corridor are discussed at organization meetings. Participating countries are asked to report
annually on their respective corridor activities.

16.      Within the EU, there are different major transport corridors like the Pan-European-
Transport-Area (PETRA) and the Transport European Network (TEN). The ten Pan European
transport corridors were defined at the second Pan European transport Conference in Crete,
March 1994. These ten transport corridors were defined to better integrate Eastern European
countries with Western Europe before their accession to EU. Also these corridors would provide
connectivity to Eurasia trade. Some of these corridors have been successful while others have
failed to meet the expectations.122

A.5.2.2     Trade Directions and CAREC

17.    The first step in the selection of corridors identified major transit trade directions for
markets within and external to CAREC. Five major trade directions have been identified based on
current and potential trade opportunities. Some trade between these markets already transits
through Central Asia. Much more transit trade could be attracted if provided with complementary
transport and trade infrastructure.

A.5.2.3     Six CAREC Corridors

18.    The trade directions represent major trade origin and destination markets surrounding the
CAREC region. Almost all trade goes by sea with insignificant transit traffic passing through
CAREC. For example, less than 1% of the PRC exports to Europe go by rail through CAREC
region. Almost no trade from the Russian Federation to South Asia passes through CAREC

     •    2a: Dema – Kartaly – Tobol – Astana
     •    5: Valuiki – Penza – Kurgan – Presnogorkovskaya – Kokchetav – Aktogay – Dostyk;
     •    5a: Rtishevo – Ozinki – Arys – Lugovaya/Bishkek – Rybachie/Almaty – Aktogay;
     •    8: Krasnaya Mogila – Gukovo – Lihaya – Volgograd – Aksarayskaya – Makat – Oasis – Karakalpakya –
          Naimangul – Nukus – Uchkuduk – Navoi;.
      •   8b: Makat – Kandagash – Nikeltau – Kartaly;
      •   10a: Turkmenistan border – Bukhara – Djizzak – Khavast – Tashkent – Saryagash - Lugovaya/Bishkek –
          Aktogay – Lokot – Novosibirsk – Far Eastern ports of the Russian Federation;
      •   10b: Bukhara – Karshi – Kudukli (Saryasia) – Pakhtaabad – Dushanbe – Yangibozor;
                    Bukhara – Karshi – Amuzang – Kurgan Tyube – Kulyab;
                    Bukhara – Karshi – Termez – Galaba – Hairaton (Afghanistan); and
      •   10c: Khavast – Bekabad – Kanibadam – Kokand – Andijan – Karasu – Osh/Jalal –Abad.
    EURASEC Highway Routes:
      •   Ukrainian border – Volgograd – Astrakhan – Atyrau – Aktau – Beineu – Kungrad – Nukus – Bukhara – Navoi –
          Samarkand – Djizzak – Tashkent – Shymkent – Taraz – Bishkek – Almaty – Sary Ozek – Taldy Kurgan –
          Usharal – Taskesken – Ayagoz – Georgievka – Ridder (Ust Kamenogorsk) – Russian Border – access to Chui
          highways;
               1a. Bishkek – Almaty – Khorgos – PRC border;
               1b. Tashkent – Kokand – Andijan – Osh – PRC border;
               1c. Bukhara – Karshi – Guzar – Termez – Afghanistan border;
               1d. Bukhara – Alyat – Turkmenistan border;
               1e. Samarkand – Guzar – Termez - Afghanistan border;
      •   Poland border – Brest – Minsk – Smolensk – Moscow – Ryasan – Penza – Samara – Ufa – Chelabinsk –
          Kurgan – Petropavlovsk – Astana – Karaganda – Burubaital – Merke – Kordai – Bishkek – Naryn – Torugart –
          PRC border;
      •   Poland border – Brest – Minsk – Smolensk – Moscow – Ryazan – Penza – Samara – Uralsk – Aktubinsk –
          Kyzyl Orda – Shymkent – Taraz – Talas – Osh – Irkeshtan – PRC border;
               3a. Osh – Sary Tash – Karamik – Dushanbe – Tursunzade – Saryasia – Termez – Afghanistan border;
               3b. Osh – Sary Tash – Murgab – Kulma overpass – PRC border;
      •   Poland border – Brest – Minsk – Smolensk – Moscow – Ryazan – Penza – Samara – Ufa – Chelabinsk –
          Kostanai – Astana – Karaganda – Almaty – Kordai – Bishkek – Osh – Khadjent – Dushanbe – Dusti – Nizhni
          Pianj- Afghanistan border;
               4a. Tumen/Chelabinsk – Omsk – Pavlodar – Semipalatinsk – Maikapchagai – PRC border; and
      • Turkmenistan border – Alyat – Bukhara – Karshi – Guzar – Sherabad – Termez – Dushanbe – Jergital – Sary
          Tash – PRC border.
122
    According to a UNESCAP representative, Corridor 4 originating from Constanta on the Black Sea has failed to meet
    expectations.
                                                                                    205 Appendix 5

countries. Despite limited current trade movements, the trade directions constitute the basis for
selection of CAREC corridors because of the potential traffic, which is expected to materialize
when competitive CAREC corridors responsive to market needs become operational. Reflecting
these market opportunities, the following six CAREC corridors have been identified which
demonstrate this potential (Figure A.5.1):

       (i)     Corridor 1: Europe – East Asia,
       (ii)    Corridor 2: Mediterranean – East Asia,
       (iii)   Corridor 3: Russian Federation – Middle East and South Asia,
       (iv)    Corridor 4: Russian Federation – East Asia,
       (v)     Corridor 5: East Asia – Middle East and South Asia, and
       (vi)    Corridor 6: Europe – Middle East and South Asia.

A.5.2.4 Corridor Selection Criteria

19.     A corridor is a route or a set of parallel routes linking two gateways into CAREC (mostly
port to port or port to major economic activity center). The route can be a road, a railroad, a sea
route or any combination of modes. To be selected, the corridor must pass through at least two
CAREC countries.

20.     All corridors are transit corridors since their origin and destination points are outside the
CAREC region. This does not mean that the Transport and Trade Facilitation Strategy (the
Strategy) considers only transit trades. In fact, the current intra-regional movements of freight and
people along the corridors are mainly within or between CAREC countries with relatively few
transit movements. Although some corridors are already active transit conduits, others have the
potential to become so.

21.     How corridors are selected merits explanation. Once trade directions had been identified,
the next step consisted of selecting the best routes to move trade flows along the designated
directions. Alternative routings could not be avoided, but have been limited in order to focus on
main routes. The following provided the basis for corridor selection:

       (i)     To the extent possible, routes will use UN ESCAP AH and TAR networks
               available for each country.
       (ii)    A corridor has to pass through at least two CAREC countries.
       (iii)   Since corridors are transit corridors, routing should originate from a
               “gateway” and reaching a destination “gateway” both within the CAREC
               region, with further connection to the ultimate origins and destinations
               outside CAREC.
       (iv)    For practical reasons, routings should follow to the extent possible existing
               international routes used by CAREC countries and be consistent with
               EURASEC corridors and North – South corridors of UN ESCAP.
       (v)     Since most intra-regional and transit trade is carried by railway, the
               railway network should be the “driving force” of the routing selection for
               long distance bulk traffic; and
       (vi)    All CAREC countries should benefit from the Strategy, therefore, routing
               selection should aim at creating a win-win situation among CAREC
               participating countries.
206 Appendix 5

                                       Figure A.5.1




                 Source: Consultant.
                                                                                             207 Appendix 5



22.        The reference gateways outside of the CAREC region are

           (i)     North Europe: Riga Port (Latvia), St Petersburg (Russian Federation),
                   Brest (Belarus) and Lviv (Ukraine). Brest and Lviv constitute the two
                   railway (and road) gateways to the Pan European corridors;117
           (ii)    Mediterranean and Black Sea: Istanbul and the ports of Poti and Batumi in
                   Georgia;
           (iii)   East Asia: ports of Lianyunyang, Tianjin, and Shanghai (PRC);
           (iv)    Persian Gulf: ports of Bandar Abbas and Chabahar (Iran);
           (v)     Arabian Sea and South Asia: Karachi, Port Qasim, and Gwadar Port
                   (Pakistan); and
           (vi)    West Siberia: Ports of Nahodka and Novossibirsk (Russian Federation).
23.      Screening criteria were simple and referred to seamless transportation. Corridors should
show positive present and future connectivity to CAREC population and economic centers and as
measured by current and future traffic intensity. All corridors have some bottlenecks (or
congestion points) and problems such as delays at border crossings that can be mitigated, and
these vary between corridors. Finally, corridors have the capacity to innovate by incorporating
technology improvements. Therefore the selection of the corridors is based on the following five
criteria:

           (i)     current traffic volume;
           (ii)    prospects for economic and traffic growth;
           (iii)   ability to increase connectivity between regional economic and population
                   centers;
           (iv)    potential for mitigating delays and other hindrances such as the number of
                   cross border points, the number of gauge changes, etc.; and
           (v)     economic and financial sustainability of infrastructure, management, and
                   technology improvements.
24.     To be selected a corridor must meet the following conditions: (a) either (i) or (ii) or both
criterion; and (b) at least one of the remaining three criteria. In addition, an inclusion rule was
applied to select corridors which pass through the territory of at least two CAREC countries.

25.     The matrix shown in Table 3.1 summarizes the application of the five criteria listed above
in the selection of the six CAREC corridors. The matrix uses qualitative analysis with selected
quantitative data. This is deliberate because quantitative information alone tends to de-
emphasize the importance of informed opinion. Detailed quantitative data on each corridor’s road
and rail network characteristics, condition, and traffic is included later in this Section. The
corridors serve the principal regional trade and transit directions, and also each PC’s internal and
cross-border transport needs.

26.     Maps 2.1 and 2.2 depict the existing traffic density on the road and rail networks along the
six CAREC corridors. The vast majority (about 80%) of external trade and freight transit is carried
by rail. Hence, the rail network dominates long-distance movements. Most Asian highways run
parallel to the rail routes and the corridors are sufficiently broad to accommodate both. Inter-
modal changes can bridge missing links in one or the other mode, so that these are also taken
into account.


117
      Lviv is the Pan European corridor 5 connecting to Venice or 3 connecting to Dresden. Brest is the Pan
      European corridor 2 connecting Moscow to Berlin.
208 Appendix 5

27.     The region already has a well-developed network of road, rail, and sea links, as well as
airports. These are not perfect, and in most cases their condition has deteriorated in recent years.
However, they remain a valuable regional asset, and are the platform from which further
infrastructure improvements can be implemented.

28.     As mentioned, corridors have been designated according to observed trade directions.
However, Central Asia in general, and the quadrangle of Almaty-Bishkek-Tashkent-Dushanbe in
particular, act in reality as “dispatching hubs”. For instance, shipments could be coming from
Aktau to Tashkent on CAREC 2a and continue to Karachi using CAREC 5 or 6 through
Afghanistan. This type of routing does not currently exist, but with competitive CAREC corridors
offering safe and reliable service, sea and rail transport to Poti, Georgia and all-sea transport to
Karachi via the Bosporus and the Suez Canal, would not be able to compete in time and cost with
CAREC corridors.

29.     Figures A.5.2 to A.5.9 show the corridors with respect to population density for each
CAREC country. The figures show that the corridors link main population centers and thus
provide further justification for their selection. In terms of population, it should also be noted that
CAREC countries are generally experiencing increasing urbanization of their populations, which
further points to the need to facilitate access to these growing markets.



                 Figure A.5.2: CAREC Corridors and Population Density: Afghanistan
                                                                   209 Appendix 5

Figure A.5.3: CAREC Corridors and Population Density: Azerbaijan




  Figure A.5.4: CAREC Corridors and Population Density: PRC
210 Appendix 5

                   Figure A.5.5: CAREC Corridors and Population Density: Kazakhstan




                 Figure A.5.6: CAREC Corridors and Population Density: Kyrgyz Republic
                                                                   211 Appendix 5

Figure A.5.7: CAREC Corridors and Population Density: Mongolia




Figure A.5.8: CAREC Corridors and Population Density: Tajikistan
212 Appendix 5

                   Figure A.5.9: CAREC Corridors and Population Density: Uzbekistan




A.5.3 THE SIX MAJOR CAREC CORRIDORS

30.      Figure A.5.1 above depicts the six CAREC corridors that are needed to support the trade
and transport strategy until 2017. A description of each corridor is provided below. The six
corridors may not satisfy every single one of the region’s cross-border traders and travelers, but if
fully functional to international standards, they will be able to

          (i)     open CAREC’s gateways to global trade,
          (ii)    increase CAREC’s share in Eurasian transit transport, and
          (iii)   support the rapid growth of intra- and inter-regional trade of CAREC
                  countries.

A.5.3.1           CAREC 1 (1a, 1b, 1c): Europe – East Asia

31.     CAREC 1, linking Europe to the PRC through Kazakhstan, is currently the most active
corridor (Figure A.5.10). The route traverses from the border with Russian Federation to the PRC
via Kazakhstan and Kyrgyz Republic (Table A.5.1).
                                                                                                                      213 Appendix 5

                                               Figure A.5.10: CAREC Corridor 1




     Source: Asian Development Bank, 2008.


                                                  Table A.5.1: CAREC Corridor 1 Routing
                          CAREC-1a                                       CAREC-1b                        CAREC-1c
        Country         Location                           Country        Location             Country    Location
        RUS             Troisk (rail & road)                               Orenburg            RUS        Troisk
                                                           RUS             Kos Aral-rail;
                        Kairak (rail & road)                               Novomarkovka                   Kairak
                                                                           (Sagarchin)-road

                        Kostanai                                           Zhaisan (rail & road)          Kostanai
        KAZ                                                                                      KAZ
                        Astana                                             Aktobe                         Astana
                        Karaganda                                          Kyzyl-Orda                     Karaganda
                                                           KAZ
                        Mointy                                             Shymkent                       Mointy
                        Aktogay                                            Taraz                          Shu
                        Dostyk (rail & road)                               Almaty                         Merke-rail
                        Ala Shankou (rail & road)                          Korgas (road)                  Chaldovar-rail
                        Kuytun                                             Khorgos (road)                 Bishkek
        PRC             Urumqi                                             Jinghe                KGZ      Balykchy
                        Turpan                                             Kuytun                         Naryn (road)
                        Hexi                               PRC             Urumqi                         Torugart (road)
                                                                                                          Torugart      (Topa)
        PRC             Lianyungang/Tianjin                                Turpan
                                                                                                          (road)
                                                                           Hexi                           Kashi
                                                                                               PRC
                                                           PRC             Lianyungang/Tianjin            Kuqa
        PRC=People's Republic of China; KAZ=Kazakhstan; KGZ=Kyrgyz Republic;                              Turpan
        RUS=Russian Federation.                                                                           Hexi

        Note: Border crossing names are for rail crossing points if rail connection exists.    PRC        Lianyungang/Tianjin
        Source: Consultant.


32.   Freight traffic along Corridor 1 is intense with high local and international traffic. Most of
the PRC-Europe land bridge trade transit through this corridor as well as the large volume of
Kazakhstan exports and imports with the Russian Federation, as shown in Map 2.2 above.
214 Appendix 5

33.     Rail characteristics with traffic intensities by major rail lines were obtained from
Kazakhstan Temir Zholy, Kyrgyz Railways, and China Railway. Similar data for the road
segments were also obtained from the road authorities in the relevant countries. This data were
plotted in Figures A.5.11 (road) and A.5.12 (rail). The summary information is given in the
following Table A.5.2 for rail and Table A.5.3 for road characteristics.

                                          Table A.5.2: Summary Rail Characteristics of Corridor 1
                                         Corridor 1a              Corridor 1b                      Corridor 1c
                                    Kazakhstan PRC-XUAR Kazakhstan PRC-XUAR Kazakhstan Kyrgyz Rep. PRC-XUAR
    Length (km)                          2,504         1,216      2,543        1,142         2,285          262 2,025
    Double track (km)                    1,061           976      1,791        1,520         1,622            0   580
    Electrified (km)                     1,061             0        798             0        1,622            0     0
    Average freight flow
                                           12,115              19,650            13,424            19,650     14,844                3,225            7,104
    (1,000 T)
    PRC=People's Republic of China; XUAR=Xinjiang Uygur Autonomous Region
    Source: Consultant.

                                        Table A.5.3: Summary Road Characteristics of Corridor 1
  Corridor 1a
          Road Characteristic                  Kazakhstan                         XUAR                      Total
  Total Length (km)                                              2,738                          1,458                      4,196
  Surface Condition (km-%):
                                Good                      2,185-79.8%                     1,422-97.5%                3,607-86.0%
                                 Fair                       553-20.2%                         36-2.5%                  589-14.0%
  No of Lanes (km-%):
                                   2                      2,523-92.1%                       948-65.0%                3,471-82.7%
                                   4                         215-7.9%                       510-35.0%                  725-17.3%
      Surface Condition (km-%):
                                  AC                      1,930-70.5%                     1,065-73.0%                2,995-71.4%
                                  PM                        808-29.5%                       393-27.0%                1.201-28.6%
                AADT                                             3,415                           7,917
  Corridor 1b
          Road Characteristic                  Kazakhstan                         XUAR                      Total
  Total Length (km)                                              2,983                          1,534                      4,517
  Surface Condition (km-%):
                                Good                      1,607-53.9%                    1,534-100.0%                3,075-78.4%
                                 Fair                     1,376-46.1%                          0-0.0%                  847-21.6%
                                 Bad                           0-0.0%                          0-0.0%                     0-0.0%
  No of Lanes (km-%):
                                   2                      2,869-96.2%                     1,037-67.6%                3,332-85.0%
                                   4                         114-3.8%                       497-32.4%                  590-15.0%
         Surface Type (km-%):
                                  AC                        774-26.0%                     1,149-74.9%                1,923-42.6%
                                  PM                      2,131-71.4%                       385-25.1%                2,516-55.7%
                                  CG                          78-2.6%                                                    78-1.7%
                AADT                                             3,716                          8,218
  Corridor 1c
          Road Characteristic                  Kazakhstan                     Kyrgyz Republic               XUAR                            Total
  Total Length (km)                                              2,013                            631                      2,231                          4,875
  Surface Condition (km-%):
                                Good                      1,415-70.3%                      262-41.5%                2,231-100.0%                    3,908-80.2%
                                 Fair                       598-29.7%                      180-28.5%                      0-0.0%                      778-16.0%
                                 Bad                           0-0.0%                      189-30.0%                      0-0.0%                       189-3.8%
  No of Lanes (km-%):
                                   2                      1,970-97.9%                       556-88.1%                1,847-82.8%                    4,373-89.7%
                                   4                          43-2.1%                        68-10.8%                  384-17.2%                      495-10.2%
                                   6                           0-0.0%                          7-1.1%                     0-0.0%                         7-0.1%
         Surface Type (km-%):
                                  AC                        1,440-71.5%                     399-63.2%                1,724-77.3%                    3,563-73.1%
                                  PM                          573-28.5%                     114-18.1%                  507-22.7%                    1,194-24.5%
                                  CG                             0-0.0%                     118-18.7%                     0-0.0%                       118-2.4%
                AADT                                               3,661                         2,231                      6,951
  AADT=average annual daily traffic; XUAR=Xinjiang Uyguy Autonomous Region.
  Source: Consultant.
                                                                                                                                                                                                                                                                                                                                                                                                                                   215 Appendix 5




                                                                                                                                          Figure A.5.11: Road Corridor Characteristics and Traffic Density
CAREC CORRIDOR 1a: EUROPE - EAST ASIA VIA DOSTYK BY ROAD
                                                                                                                                                                                                                               KAZAKHSTAN
AADT                                                         1,297                                    1,102                       502                    1,045                       3,284                         4,747                      6,105                               7,781                      6,684                        5,625                          1,338                    11,762                       3,672                     738
Surface Condition-Length (km)                                G-170                                 G-172; F-75                 G-80; F-39                 G-85                     G-42, F-72                   G-10; F-123                   G-87                                 G-93                      G-362                        G-298                       G-93; F-223                G-12; F-1                 G-497; F-20                  G-184
                                 Trotsk (RUS)-Kairak



AH Reference                                                 AH 7                                      AH 7                      AH 7                     AH 7                       AH 7                          AH 7                       AH 7                                 AH 7                      AH 7                         AH 7                          AH 60                      AH 5                       AH 60                     AH 68




                                                                                                                                                                                                                                                                                                                                                                                                                                                                    Dostyk (Border of
Design Standard                                               II, III                                 I, II, III                  II, III                I, II, III                   II, III                     I, II, III                   I, II                                I, II                      II                          II, III                        II, III                    I                        I, II, III                 II, III
                                 (KAZ) Border




                                                                                                                                                                                                 Astrakhanka
Section Length (km)                                            170                                      247                        119                      85                         114                          133                         87                                  93                        362                          298                            316                       13                          517                      184




                                                                                                                                                                                                                                                          Osakarovka




                                                                                                                                                                                                                                                                                             Karaganda




                                                                                                                                                                                                                                                                                                                                                        Burybaital
                                                                                                                   Ruzaevka
Terrain                                                         F                                         F                         F                        F                          F                             F                         F                                    F                         F                             F                              F                       H                         F, H, M                      H




                                                                                                                                                                                                                                                                                                                                                                                      Kaskelen
                                                                          Kostanai




                                                                                                                                                                                                                                                                                                                                                                                                                Aktogay
                                                                                                                                                                                                                                                                                                                         Balkash
                                                                                                                                                                      Atbasar




                                                                                                                                                                                                                                                                                                                                                                                                                                           Ucharal
                                                                                                                                             Zhaksy




                                                                                                                                                                                                                                Astana
No. of Lanes-Length (km)                                     2-170                                  2-244; 4-3                   2-119                    2-85                       2-114                         2-133                    2-82; 4-5                           2-58; 4-35                   2-362                        2-298                          2-316                     4-13                    4-159; 2-358                 2-184




                                                                                                                                                                                                                                                                                                                                                                                                                                                                    China)
Surface Type-Length (km)                                  AC-147; PM-23                           AC-100; PM-147              AC-62; PM-57            AC-58; PM-27                AC-111; PM-3                  AC-90; PM-43                 AC-87                               AC-93                      AC-362                     AC-285; PM-13                 AC-93; PM-223                AC-13                   AC-253; PM-264             AC-176; PM-8

Traffic Density (AADT) and
Surface Condition (Green-Good;
Yellow-Fair; Red-Bad)

                                                                                                           XINJIANG UYGUR AUTONOMOUS REGION
AADT                                                          1,506                                   8,482                      14,611                  6,810                       6,810                         6,810                     6,810                                                                                                     Summary
                                 Ala Shankou (Border of




                                                                          Jct. AH5/AH68 (Jinhe)




Surface Condition-Length (km)                              G-74; F-36                                 G-227                      G-233                   G-113                       G-54                          G-375                     G-346                                                       Road Characteristic              Kazakhstan                       XUAR                      Total




                                                                                                                                                                                                                                                          Anxi (Gansu border)
AH Reference                                                 AH 68                                    AH 5                       AH 5                    AH 5                        AH 5                          AH 5                      AH 5                                                        Total Length (km)            2,738                                1,458                     4,196
Design Standard                                               II, III                               Primary, I                  Primary                 Primary                     Primary                         II, III                   II, III                                                    Surface Condition (km-%):
                                                                                                                                                                                                                                                                                                                        Good       2,185-79.8%                          1,422-97.5%               3,607-86.0%
                                 Kazakhstan)




Section Length (km)                                            110                                     227                        233                     113                          54                           375                        346




                                                                                                                                                                      Xiaocaohu
Terrain                                                          F                                      F                          F                       F                           F                              F                         F                                                                         Fair      553-20.2%                             36-2.5%                  589-14.0%


                                                                                                                                             Urumqi
                                                                                                                   Kuytun




                                                                                                                                                                                                 Turpan
No. of Lanes-Length (km)                                     2-110                                    2-227                      4-233                   4-113                       4-54                          2-375                     2-346                                                       No of Lanes (km-%):




                                                                                                                                                                                                                                Hami
Surface Type-Length (km)                                  AC-74; PM-36                               AC-227                     AC-233                  AC-113                       AC-54                     AC-247; PM-128            AC-117; PM-229                                                                            2      2,523-92.1%                    948-65.0%                3,471-82.7%

Traffic Density (AADT) and                                                                                                                                                                                                                                                                                                         4       215-7.9%                      510-35.0%                 725-17.3%
Surface Condition (Green-Good;
Yellow-Fair; Red-Bad)                                                                                                                                                                                                                                                                                    Surface Type (km-%):

Design Standard Codes and Surface Types: Primary=Access-controlled highway with 4 or more lanes divided by a median strip, design speed of 120 kph on level terrain and asphalt concrete (AC) or
                                                                                                                                                                                                                                                                                                                          AC              1,930-70.5%                   1,065-73.0%               2,995-71.4%
cement concrete (CC) pavement surface. Class I=Same as primary

                                                                                                                                                                                                                                                                                                                         PM                808-29.5%                     393-27.0%                1.201-28.6%

AADT=average annual daily traffic; for surface type, AC=asphalt concrete, PM=paved; AH=Asian Highway; for terrain, F=flat, H=hilly, M=mountainous; for surface condition, F=fair,
G=good, B=bad; XUAR=Xinjiang Uygur Autonomous Region.
Source: adapted by the Consultant from UN ESCAP, 2006.
 216 Appendix 5




                                                                                                                                                 Figure A.5.11: Road Corridor Characteristics and Traffic Density
  CAREC CORRIDOR 1b: EUROPE - EAST ASIA VIA KHORGOS BY ROAD
                                                                                                                                                                                                                                                                                     KAZAKHSTAN
  AADT                                                      991                     590                                       1,368                                  1,449                    1,746                         632                              584                         542                           567                                 833                    2,785                       2,475                           5,259                      9,467                        5,451
  Surface Condition-Length
                                                        G-100; F-2               G-123; F-8                                     G                                  G-12; F-93                   G                      G-60; F-124                             F                           F                        G-12; F-82                          G-55; F-20             G-22; F-147                G-146; F-143                          F                      G-28; F-58                  G-128; F-63
                               Kos Aral (RUS)-Zaishan
  (km)
  AH Reference                                            AH 61                    AH 61                                     AH 61                                   AH 61                   AH 61                         AH 61                            AH 61                       AH 61                         AH 61                               AH 61                   AH 61                       AH 61                           AH 61                      AH 61                        AH 5
  Design Standard                                            III                    II, III                                   II. III                                 II, III                I, II, III               II, III, Below III               II, III, Below III                  III                           III                                III                    II, III                     II, III                          III                      I, II, III                  I, II, III




                                                                                                                                                                                                                                                                                                    Novokazalinsk
  Section Length (km)                                       102                     131                                       226                                     105                     212                           188                              204                         117                            94                                 75                      169                         289                             64                          86                          191
                               (KAZ) Border




                                                                                                Zhambeity
  Terrain                                                    F                        H                                         H                                       H                       H                            H                                 F                           F                             F                                  F                        F                           F                              F                           F                           M




                                                                                                                                                                                                          Karabutak




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       Shymkent
                                                                                                                                                                                                                                                                                                                                                                                              Kyzylorda




                                                                                                                                                                                                                                                                                                                                                                                                                              Turkestan
                                                                                                                                                                                                                                                                                                                                  Tyuratam




                                                                                                                                                                                                                                                                                                                                                                     Zhusaly
                                                                                                                                          Khodba
  No. of Lanes-Length (km)                                 2-102                   2-131                                      2-226                                  2-105                 2-192; 4-20                   2-188                           2-204                           2-117                         2-94                               2-75                    2-169                       2-289                            2-64                     2-83; 4-3                   2-185; 4-6




                                                                                                                                                                                                                                                                                                                                                                                                                                                            Torktol
                                                                                                                                                                                 Aktobe
                                                                       Uralsk




                                                                                                                                                                                                                                                                            Aralsk




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   Taraz
                                                                                                                                                                                                                                           Irgiz
                                                                                                                                                                                                                       AC-60; PM-                      PM-130; CG-
  Surface Type-Length (km)                                PM-102                AC-61; PM-70                              AC-16; PM-210                           AC-76; PM-29            AC-17; PM-195                                                                                 PM-117                        PM-94                              PM-75                 AC-6; PM-163               AC-17; PM-272                       PM-64                   AC-10; PM-76                AC-68; PM-123
                                                                                                                                                                                                                       124; CG-4                           74
  Traffic Density (AADT) and
  Surface Condition (Green-
  Good; Yellow-Fair; Red-
  Bad)


                                                                                                                                                                                                                                                                                                                                                                                                                                                          Summary

                                                               KAZAKHSTAN                                                                                                                     XINJIANG UYGUR AUTONOMOUS REGION                                                                                                                                                                            Road Characteristic                 Kazakhstan                     XUAR                         Total

  AADT                                                     7,528                   3,681                                      6,611                                  8,482                   14,611                        6,810                            6,810                        6,810                         6,810                                                                              Total Length (km)                      2,983                        1,534                       4,517
  Surface Condition-Length
                                                                                                Khorgos (Border of PRC)




                                                        G-299; F-80             G-37; F-314                                  G-186                                   G-227                   G-233                         G-113                            G-54                        G-375                         G-346                                                                               Surface Condition (km-%):
  (km)
                                                                                                                                          Jct. AH5/AH68 (Jinhe)




                                                                                                                                                                                                                                                                                                                                  Anxi (Gansu border)
  AH Reference                                             AH 5                     AH 5                                      AH 5                                   AH 5                     AH 5                         AH 5                             AH 5                         AH 5                          AH 5                                                                                               Good                1,607-53.9%               1,534-100.0%                 3,141-69.5%
  Design Standard                                         I, II, III               I, II, III                                  I, II                               Primary, I                Primary                      Primary                          Primary                       II, III                       II, III                                                                                             Fair               1,376-46.1%                   0-0.0%                   1,376-30.5%
  Section Length (km)                                       379                     351                                       186                                     227                     233                           113                               54                         375                           346                                                                                No of Lanes (km-%):




                                                                                                                                                                                                                                           Xiaocaohu
  Terrain                                                    H                        H                                    M-40; H-146                                  F                       F                             F                                F                           F                             F                                                                                                                2   2,869-96.2%               1,037-67.6%                  3,906-86.5%




                                                                                                                                                                                                          Urumqi
  No. of Lanes-Length (km)                              2-331; 4-48             2-314; 4-37                                2-89; 4-97                                2-227                    4-233                        4-113                             4-54                        2-375                         2-346                                                                                                              4    114-3.8%                  497-32.4%                    611-13.5%




                                                                                                                                                                                                                                                                            Turpan
                                                                       Almaty




                                                                                                                                                                                 Kuitun
                                     Taraz




                                                                                                                                                                                                                                                                                                    Hami
                                                        AC-196; PM-             AC-147; PM-                               AC-158; PM-                                                                                                                                                 AC-247; PM-                   AC-117; PM-
  Surface Type-Length (km)                                                                                                                                          AC-227                   AC-233                       AC-113                            AC-54                                                                                                                                         Surface Type (km-%):
                                                            183                     204                                       28                                                                                                                                                          128                           229
  Traffic Density (AADT) and                                                                                                                                                                                                                                                                                                                                                                                                   AC             774-26.0%                 1,149-74.9%                  1,923-42.6%
  Surface Condition (Green-
  Good; Yellow-Fair; Red-                                                                                                                                                                                                                                                                                                                                                                                                     PM              2,131-71.4%                385-25.1%                   2,516-55.7%
  Bad)
                                                                                                                                                                                                                                                                                                                                                                                                                              CG               78-2.6%                      0-0.0%                     78-1.7%

  Design Standard Codes and Surface Types: Primary=Access-controlled highway with 4 or more lanes divided by a median strip, design speed of 120 kph on level terrain and asphalt concrete (AC) or cement concrete (CC) pavement
  surface. Class I=Same as primary


AADT=average annual daily traffic; for surface type, AC=asphalt concrete, PM=paved; AH=Asian Highway; for terrain, F=flat, H=hilly, M=mountainous; for surface condition, F=fair,
G=good, B=bad; XUAR=Xinjiang Uygur Autonomous Region.
Source: adapted by the Consultant from UN ESCAP, 2006.
                                                                                                                                                                                                                                                                                                                                                                                                                                     217 Appendix 5




                                                                                                                                 Figure A.5.11: Road Corridor Characteristics and Traffic Density
 CAREC CORRIDOR 1c: EUROPE - EAST ASIA VIA TORUGART BY ROAD
                                                                                                                                                                                                              KAZAKHSTAN
 AADT                                                          1,297                          1,102                       502                    1,045                        3,284                          4,747                         6,105                                      7,781                           6,684                                        5,625                       2,373                      1,439                      4,148




                              Troisk (RUS) Kairak (KAZ)
 Surface Condition-Length
                                                              G-170                        G-172; F-75                 G-80; F-39                 G-85                      G-42, F-72                   G-10; F-123                       G-87                                       G-93                            G-118                                       G-542                        F-113                     F-160                     G-16; F-16
 (km)




                                                                                                                                                                                                                                                                                                                                                                                                                                                                   Merke (border of KAZ)
 AH Reference                                                  AH 7                           AH 7                       AH 7                     AH 7                        AH 7                            AH 7                         AH 7                                       AH 7                             AH 7                                        AH 7                        AH 7                       AH 7                       AH 5
 Design Standard                                               II, III                       I, II, III                   II, III                I, II, III                    II, III                       I, II, III                      I, II                                      I, II                           II                                         II, III                       III                      II, III                     II, III
 Section Length (km)                                           170                             247                        119                      85                          114                            133                            87                                         93                             118                                         542                          113                       160                          32




                                                                                                                                                                                          Astrakhanka




                                                                                                                                                                                                                                                           Osakarovka




                                                                                                                                                                                                                                                                                                                                         Aksu-Ayuly
                                                                                                                                                                                                                                                                                                      Karaganda
 Terrain                                                         F                              F                           F                       F                            F                              F                             F                                          F                              F                                            F                           F                          F                           F




                                                                                                                                                                                                                                                                                                                                                                                Burybaital




                                                                                                                                                                                                                                                                                                                                                                                                                                       Lugovaya
                                                                                                           Ruzaevka
                                                                           Kostanai




                                                                                                                                                               Atbasar
 No. of Lanes-Length (km)                                      2-170                        2-244; 4-3                   2-119                    2-85                        2-114                          2-133                       2-82; 4-5                                 2-58; 4-35                         2-118                                        2-542                       2-113                      2-160                       2-32




                                                                                                                                     Zhaksy




                                                                                                                                                                                                                             Astana
                              Border




                                                                                                                                                                                                                                                                                                                                                                                                             Birlik
                                                                                           AC-100; PM-
 Surface Type-Length (km)                                  AC-147; PM-23                                              AC-62; PM-57            AC-58; PM-27                 AC-111; PM-3                 AC-90; PM-43                       AC-87                                      AC-93                          AC-118                                    AC-529; PM-13                  PM-113                  AC-35; PM-125               AC-10; PM-22
                                                                                               147
 Traffic Density (AADT) and
 Surface Condition (Green-
 Good; Yellow-Fair; Red-
 Bad)



                                                                                                                                               KRYGYZ REPUBLIC
 AADT                                                          2,650                          7,198                      8,239                   3,076                         910                            584                           643                                        438                             304




                                                                                                                                                                                                                                                                                                                                  Torugart - Topa (border of
 Surface Condition-Length
                                                               G-32                           G-60                       G-60                    G-110                         F-60                          F-120                          B-45                                      B-136                            B-8
 (km)
                              Chaldovar (Border of




 AH Reference                                                  AH 5                           AH 5                       AH 61                   AH 61                        AH 61                          AH 61                         AH 61                                      AH 61                           AH 61




                                                                                                                                                                                                                                                                                                                                  China)-AADT 304
 Design Standard                                                 II                            I, II                        II                    II, III                        II                     II, III, Below III            II, III, Below III                         II, III, Below III                  Below III
 Section Length (km)                                            32                              60                         60                     110                           60                            120                            45                                        136                              8
                              Kazakhstan)




 Terrain                                                         F                              F                           F                       M                            M                              M                             M                                         M                               M
                                                                           Kara Balta




                                                                                                                                                                                          Kocxhkor
                                                                                                                                                               Balykchy




                                                                                                                                                                                                                                                                                                      Torugart
                                                                                                                                                                                                                                                           At Bashi
                                                                                                           Bishkek




                                                                                                                                     Tokmok
 No. of Lanes-Length (km)                                      2-32                         4-53; 6-7                     2-60                 2-95; 4-15                      2-60                         2-120                         2-45                                       2-136                             2-8




                                                                                                                                                                                                                             Naryn
                                                                                                                                                                                                        AC-70; PM-43;                 AC-18; PM-23;                              AC-25; PM-12;
 Surface Type-Length (km)                                   AC-26; PM-6                      AC-60                       AC-60                AC-80; PM-30                    AC-60                                                                                                                                   CG-8
                                                                                                                                                                                                            CG-7                          CG-4                                      CG-99
 Traffic Density (AADT) and
 Surface Condition (Green-
 Good; Yellow-Fair; Red-
 Bad)



                                                                                                       XINJIANG UYGUR AUTONOMOUS REGION                                                                                                                                                                                                                                                       Summary
 AADT                                                          889                            3,399                      5,664                   10,141                       6,810                          6,810                         6,810                                                                  Road Characteristic                             Kazakhstan                 Kyrgyz Republic                XUAR                         Total
                              Torugart - Topa (border of




 Surface Condition-Length
                                                              G-150                           G-17                       G-677                   G-612                        G-54                           G-375                         G-346                                                                  Total Length (km)                                   2,013                            631                   2,231                       4,875
 (km)




                                                                                                                                                                                                                                                           Anxi (Gansu border)
 AH Reference                                                 AH 61                           AH 4                       AH 4                     AH 4                        AH 5                            AH 5                         AH 5                                                                   Surface Condition (km-%):
                              China)-AADT 304




 Design Standard                                                 III                             II                         II                Primary, I, II                 Primary                          II, III                       II, III                                                                                Good                           1,415-70.3%                  262-41.5%                2,231-100.0%                3,908-80.2%
                                                                           Jct. AH4/AH61




 Section Length (km)                                           150                              17                        677                     612                           54                            375                           346                                                                                            Fair                    598-29.7%                   180-28.5%                    0-0.0%                   778-16.0%
                                                                                                                                                               Xiaocaohu




 Terrain                                                         M                              H                           H                       F                            F                              F                             F                                                                                    Bad                               0-0.0%                    189-30.0%                    0-0.0%                    189-3.8%
 No. of Lanes-Length (km)                                      2-150                          2-17                       2-677                2-282; 4-330                     4-54                         2-375                         2-346                                                                   No of Lanes (km-%):
                                                                                                                                                                                          Turpan
                                                                                                           Kashi




                                                                                                                                     Kuqa




                                                                                                                                                                                                                             Hami
                                                                                                                                                                                                         AC-247; PM-                   AC-117; PM-
 Surface Type-Length (km)                                     PM-150                         AC-17                      AC-677                  AC-612                        AC-54                                                                                                                                                                      2        1,970-97.9%                  556-88.1%                 1,847-82.8%                 4,373-89.7%
                                                                                                                                                                                                             128                           229
 Traffic Density (AADT) and
                                                                                                                                                                                                                                                                                                                                                        4           43-2.1%                     68-10.8%                  384-17.2%                  495-10.2%
 Surface Condition (Green-
 Good; Yellow-Fair; Red-
                                                                                                                                                                                                                                                                                                                                                                     0-0.0%                                                 0-0.0%                      7-0.1%
 Bad)                                                                                                                                                                                                                                                                                                                                                  6                                         7-1.1%
                                                                                                                                                                                                                                                                                                                  Surface Type (km-%):
                                                                                                                                                                                                                                                                                                                                               AC                 1,440-71.5%                  399-63.2%                 1,724-77.3%                3,563-73.1%
 Design Standard Codes and Surface Types: Primary=Access-controlled highway with 4 or more lanes divided by a median strip, design speed of 120 kph on level terrain and asphalt
                                                                                                                                                                                                                                                                                                                                              PM                   573-28.5%                   114-18.1%                  507-22.7%                 1,194-24.5%
 concrete (AC) or cement concrete (CC) pavement surface. Class I=Same as primary
                                                                                                                                                                                                                                                                                                                                              CG                     0-0.0%                    118-18.7%                    0-0.0%                    118-2.4%

AADT=average annual daily traffic; for surface type, AC=asphalt concrete, PM=paved; AH=Asian Highway; for terrain, F=flat, H=hilly, M=mountainous; for surface condition, F=fair,
G=good, B=bad; XUAR=Xinjiang Uygur Autonomous Region.
Source: adapted by the Consultant from UN ESCAP, 2006.
  218 Appendix 5




                                                                                                                                    Figure A.5.12: Rail Corridor Characteristics and Traffic Density
CAREC-1a Europe to China via Dostyk (Druzhba) by Rail
      Section Length (km)                     378                              223                           188                       296                         218                      359                    524                     318                                                                              216                         240                            180                          580




                                                                                          Novoishimskaya
                                    Troisk(RUS)-
                                    Kairak (KAZ)




         Gauge Width                         1520                              1520                          1520                      1520                        1520                     1520                   1520                    1520                                                                            1 435                       1 435                          1 435                        1 435




                                                                                                                                                                                                                                                                                                           Ala Shankou
             Terrain




                                                                                                                                                                                                                                                                                                                                                                                                                              Hexi (Anxi)
                                                                                                                                                                              Karaganda
                                                                                                                        Kokshetau




                                                                                                                                                                                                                                                      (Druzhba)
    F-Flat, H-Hilly, M-Mount.                  F                                 F                             F                        F                           F                        F, H                    F                       F                                                                               F                           F                              F                            F
                                                                  Kostanai




                                                                                                                                                                                                                               Aktogay




                                                                                                                                                                                                                                                      Dostyk
                                               S                                 S                             D                        D                           D                         D                      S                       S                                                                               D                           S                              D                            D




                                                                                                                                                                                                                                                                                                                                                                         Urumqi
     Single / Double Track




                                                                                                                                                                                                                                                                                                                                                                                                        Turpan
                                                                                                                                                   Astana




                                                                                                                                                                                                                                                                                                                                      Kuytun
                                                                                                                                                                                                        Mointy




                                                                                                                                                                                                                                                                                   BCP
         Electrified Y/N                       N                                 N                             Y                        Y                           Y                         Y                      N                       N                                                                               N                           N                              N                            N
           Traffic, tons                   2,723,304                         15,696,168                    15,835,300               22,847,555                  19,492,916                16,138,276             7,052,786               7,320,752                                                                       11,611,000                  15,221,000                     35,203,000                   47,621,775


                                                                                                                                                                                                                                                                        Gauge
                                                                                                                                                                                                                                                                        change




CAREC-1b Europe to China via Khorgos by Rail

       Section Length (km)                              99                      94                           273                        666                         473                      203                    543                     192                                                                                                                                        382                         180                         580
                                 1) RUS - Zhaisan
                                 Kos Aral (Iletsk-




                                                                                                                                                                                                                                                                                           Khorgos (KAZ)
          Gauge Width                                  1520                    1520                          1520                      1520                        1520                     1520                   1520                    1520                                                                                                                                       1 435                        1435                       1 435




                                                                                                                                                                                                                                                                         Construction In




                                                                                                                                                                                                                                                                                                                                                       Construction In
                                                                                                                                                                                                                                                                                                                                      Korgas (PRC)
              Terrain
                                      (KAZ)




                                                                                                                                                                                                                                                                                                                                                                                                                                                         Hexi (Anxi)
                                                         F                       F                             F                         F                          F                        F, H                   F, H                    F, H                                                                                                                                           F                         F                          F
                                                                                          Kandagash




                                                                                                                                                   Kyzyl Orda




                                                                                                                                                                                                                                                          Sary-Ozek
                                                                                                                                                                              Shymkent
     F-Flat, H-Hilly, M-Mount.




                                                                                                                                                                                                                                                                         progress




                                                                                                                                                                                                                                                                                                                                                       progress
                                                         S                       D                             D        Shalkar     D-330; S-336                D-156;S-317                   D                      D                       D                                                                                                                                          S                            D                          D




                                                                                                                                                                                                                                                                                                                                                                                                        Urumqi
      Single / Double Track




                                                                                                                                                                                                                                                                                                                                                                                                                              Turpan
                                                                  Aktobe




                                                                                                                                                                                                                               Almaty




                                                                                                                                                                                                                                                                                                                                                                         Jinghe
                                                                                                                                                                                                        Taraz




                                                                                                                                                                                                                                                                                                                             BCP
          Electrified Y/N                                N                       N                             N                         N                      E-52; N-421                   Y                      Y                       N                                                                                                                                          N                            N                          N
            Traffic, tons                            17,102,505              23,401,777                    29,961,903                26,151,619                 25,335,103                26,858,141             29,217,897              16,270,543                                                                                                                                 15,221,000                   35,203,000                 47,621,775




CAREC-1c Europe to China via Kyrgyzstan by Rail

       Section Length (km)                             378                     223                           188                       296                         218                      359                    446                     115                            62                                                90                         172                                                          705                        740                        580




                                                                                                                                                                                                                                                      (Lugovaya) KAZ




                                                                                                                                                                                                                                                                                                                                                                                      Road Section of
                                                                                          Novoishimskaya




                                                                                                                                                                                                                                                                                           Chaldovar KGZ
                                    Troisk(RUS)-
                                    Kairak (KAZ)




          Gauge Width                                  1520                    1520                          1520                      1520                        1520                     1520                   1520                    1520                          1520                                              1520                        1520                                                        1 434                      1 435                      1 435




                                                                                                                                                                                                                                                                                                                                                                                      the Corridor
              Terrain




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    Hexi (Anxi)
                                                                                                                                                                              Karaganda
                                                                                                                        Kokshetau




     F-Flat, H-Hilly, M-Mount.                           F                       F                             F                        F                           F                       F, H                   F, H                      F                             F                                                 F                        F, H, M                                                        F                          F                          F




                                                                                                                                                                                                                                                                                                                                                                         Balykchy
                                                                  Kostanai




                                                                                                                                                                                                                                                                                                                                      Bishkek
      Single / Double Track                              S                       S                             D                        D                           D                        D                       D                       D                             S                                                 S                           S                                                           S                          S                          D




                                                                                                                                                                                                                                                                                                                                                                                                                                                         Turpan
                                                                                                                                                   Astana




                                                                                                                                                                                                        Mointy




                                                                                                                                                                                                                                                      Merke




                                                                                                                                                                                                                                                                                                                                                                                                        Kashi




                                                                                                                                                                                                                                                                                                                                                                                                                              Kuqa
          Electrified Y/N                                N                       N                             Y                        Y                           Y                        Y                       Y                       Y                             N                                                 N                           N                                                           N                          N                          N




                                                                                                                                                                                                                               Shu
            Traffic, tons                            2,723,304               15,696,168                    15,835,300               22,847,555                  19,492,916                 16,138,276             14,887,275             14,887,275                    4,993,000                                         4,993,000                   1,664,333                                                   2,165,000                  11,810,000                 47,621,775



                                                                                                                                                                                                                                                                                                                                                                                      ROAD




Lines in RED are electrified
Single line

Double line

Three lines

Four or more




Source: adapted by the Consultant from UN ESCAP, 2006.
                                                                                                      219 Appendix 5

34.     Corridor 1a is the present corridor from Ala Shankou for freight between the Russian
Federation and the PRC with an average of 12.1 million tons per year on the Kazakh corridor and
19.6 million tons on the XUAR corridor. The rail corridor is 39% double tracked (mostly in
Kazakhstan) and 34% electrified. Corridor 1b, passing through Almaty, has higher average traffic
on both the Kazakh and XUAR 118 sections of the corridor and higher percentages of double
tracking and electrification).

35.      Corridor 1b rail and road is a promising route for Europe–East Asia transit. Road and rail
are parallel and near each other from northeast Kazakhstan to the Syr-Daya River. From Almaty
onwards, Corridor 1b will use the new Zhetygen–Khorgos–Jinghe rail line when constructed (298
km in Kazakhstan and 180 km in XUAR). This will cut the distance from Urumqi to Almaty by 421
km, or 32%. Railway traffic is expected to be 7 million tons in 2010 with 1.6 million tons of transit
traffic. Corridor 1c follows 1a but has Kyrgyz rail and road sections before reaching the Kashi-
Turpan rail line in XUAR. Traffic intensity is low in the Kyrgyz Republic on rail and road and
relatively low in XUAR between Kashi and Korla. Both rail and road traffic increases significantly
between Korla and Turpan.

36.      Corridor 1a crosses by rail to the PRC from Kazakhstan at Ala Shankou after changing
gauge. Ala Shankou is currently the main rail gateway between Central Asia and the PRC. In
2005, the total volume of exports119 to the PRC from Kazakhstan was 9.2 million tons, while
imports reached 1.9 million tons. Container traffic is limited, being only 31,000 20-foot equivalent
container units (TEUs) in 2005 with 86% in the PRC-Kazakhstan direction. It is also estimated
that 60% of the Ala Shankou traffic from the PRC stays in Kazakhstan with 40% being transited.
Traffic for 2010 is forecast at 20 million tons with at least 1 million tons of transit traffic.

37.    The three CAREC 1 routes described above are principally rail corridors with some road
sections where rail is not available. But, in parallel, there is a road network (Asian Highways)
which complements and competes with the dominant rail corridor.

38.    Traffic intensity in Kazakhstan on all road corridors is on average quite similar varying
from 3,415 to 3,716 vehicles per day. As expected in Kyrgyz Republic, the average daily traffic is
along corridor 1c at a maximum of 2,231 vehicles per day. In XUAR, average daily traffic varies
from 7,000 to 8,000 vehicles per day. High volume in XUAR is largely due to traffic from Urumqi
to Turpan and Anyi.

39.    CAREC 1c, in Kyrgyz Republic crosses to XUAR at Torugart. Traffic at Torugart has been
increasing, overtaking Irkeshtan traffic in 2005 with 360,000 tons.

A.5.3.2           CAREC 2 (2a, 2b): The Mediterranean-East Asia

40.      CAREC Corridor 2 (Figure A.5.13) connects East Asia with southern Europe, Iran, and
Turkey via Central Asia. Figures A.5.14 and A.5.15 illustrate the corridor characteristics and
traffic density for road and rail, respectively on CAREC 2. Both 2a and 2b are rail corridors from
the Black Sea until Osh in the Kyrgyz Republic with rail ferry passage across the Caspian. In
Azerbaijan, the annual rail traffic on the corridor is high, averaging 17 million tons (Figure 3.18).
Traffic on ferries120 to Aktau and Turkmenbashi (90% on rail) is, however, quite low, 125,000 tons
and 1.45 million tons, respectively in 2005. Along the corridor in Tajikistan, on the North Line,
traffic has been estimated at 12 million tons in 2005 (13.9 million tons in 2006).121 In Azerbaijan
50% of the traffic is oil related and it also constitutes a major commodity carried by the ferry,


118
    In XUAR, AADT calculations are made up to Turpan only.
119
    Among Kazak exports, petroleum was 21%, metal ores 27%, steel and iron 40%, fertilizer 5%. Kazak imports from
    China were more diversified with containers representing 27% and coke 23%.
120
    There is one ferry per week between Baku and Aktau and five between Baku and Turkmenbashi.
121
    With the construction of the envisaged Agren-Pap (Angren) railway, the Tajikistan rail connection on this Corridor is
    expected to be drastically reduced since Uzbekistan Temir Yollari (UTY) would be unwilling to interchange traffic and
    prefers using all-UTY track.
220 Appendix 5

though large volumes of cotton are also transited on the Azerbaijan’s railways mostly from
Uzbekistan to export markets in Europe.

                                Figure A.5.13: CAREC Corridor 2




    Source: Asian Development Bank, 2008.
                                                                                                      221 Appendix 5

                                             Table A.5.4: CAREC Corridor 2 Routes
                                         CAREC-2a                            CAREC-2b
                          Country      Location                  Country     Location
                                       Gabdabani-rail; Red Bridge-           Gabdabani-rail; Red
                          GEO                                          GEO
                                       road                                  Bridge-road
                                       Beyuk Kesik-rail; Red Bridge-         Beyuk Kesik-rail; Red
                                       road                                  Bridge-road
                          AZE          Agstafa                         AZE   Agstafa
                                       Yevlakh                               Yevlakh
                                       Baku                                  Baku
                                       Aktau                                 Turkmenbashi
                          KAZ
                                       Beyneu-rail; Tazhen-road        TKM   Ashgabat
                                       Karakalpakya (rail & road)            Farap (rail & road)
                                       Nukus                                 Alyat (rail & road)
                                       Navoi                                 Bukhara
                          UZB          Samarkand                             Navoi
                                       Djizzak                         UZB   Samarkand
                                       Khavast                               Djizzak
                                       Bekabad                               Khavast
                                       Nau                                   Bekabad (rail)
                          TAJ          Khujand                               Nau (rail)
                                       Kanibadam                       TAJ   Khujand
                                       Suvanobad                             Kanibadam
                                       Kokand                                Suvanobad
                          UZB
                                       Andijan                               Kokand
                                       Savay (Karasu)                  UZB   Andijan
                                       Kara Suu                              Savay (Karasu)
                                       Osh                                   Kara Suu
                          KGZ          Gulcha (road)                         Osh
                                       Sary Tash (road)                KGZ   Gulcha (road)
                                       Irkeshtan (road)                      Sary Tash (road)
                                       Yierkeshitan (road)                   Irkeshtan (road)
                                       Kashi                                 Yierkeshitan (road)
                          PRC
                                       Turpan                                Kashi
                                       Hexi (Anxi)                     PRC   Turpan
                          PRC          Lianyungang/Tianjin                   Hexi (Anxi)
                          AZE=Azerbaijan; PRC=People's Republic of
                          China; GEO=Georgia; KAZ=Kazakhstan;
                          KGZ=Kyrgyz Republic; TAJ=Tajikistan;         PRC   Lianyungang/Tianjin
                          UZB=Uzbekistan.
                          Source: Consultant.


41.     Summary data on road characteristics is shown below in Table A.5.5. In terms of road
conditions, the length of 4-lane and paved sections indicates that Corridor 2b is currently superior
to 2a; however, road improvements and upgrades are planned in Kazakhstan for these sections.

42.      Rail border crossing traffic between Georgia and Azerbaijan is high, reaching 17 million
tons in 2006.122 This traffic is dominated by outbound traffic (export and transit) of oil, cotton and
grain products. The inbound traffic is 2.4 million tons, with 0.6 million tons consisting of inbound
transit. In other words, relatively little trade from the Black Sea and South Europe transit by rail
through Azerbaijan to reach Central Asia.

43.   The volume of traffic at the Irkeshtam border with XUAR is also still quite limited, at
340,000 tons, or less than 100 trucks per day (both directions).




122
      This 17 million breaks down as follows: 8.8 million tons outbound (export), 5.2 million tons transit outbound, and
      2.4 million tons inbound (import) with 0.6 million tons transit inbound.
222 Appendix 5

                                      Table A.5.5: Road Characteristics along CAREC 2
 Corridor 2a
 Road Characteristic                 Azerbaijan   Kazakhstan    Uzbekistan     Kyrgyz Rep.      XUAR           Total
 Total Length (km)                            534         547         2,000             285        2,298           5,664
 Surface Condition (km-%):
                             Good      352-65.9%     60-11.0%   1,564-78.2%         23-8.1% 2,298-100.0%     3,937-69.5%
                              Fair     182-34.1%    487-89.0%     272-13.6%        80-28.1%       0-0.0%     1,381-24.4%
                              Bad         0-0.0%       0-0.0%      164-8.2%       182-63.9%       0-0.0%        346-6.1%
 No of Lanes (km-%):
                                2      242-45.3%   547-100.0%   1,212-60.6%      285-100.0%   1,914-83.3%    4,200-74.2%
                                4      292-54.7%       0-0.0%     788-39.4%          0-0.0%     384-16.7%    1,464-25.8%
 Surface Type (km-%):
                              AC      534-100.0%    205-37.5%   1,510-75.5%       184-64.6%    1,724-75.%    4,157-73.4%
                              PM          0-0.0%     61-11.2%     323-16.2%          0-0.0%    574-25.0%       958-16.9%
                              CG          0-0.0%    281-51.4%        0-0.0%       101-35.4%        0-0.0%       382-6.7%
                              CC          0-0.0%       0-0.0%      167-8.4%          0-0.0%        0-0.0%       167-2.9%
 AADT                                     10,237        1,220          6,679            889         4,644
 Corridor 2b
 Road Characteristic                 Azerbaijan   Uzbekistan Kyrgyz Rep.         XUAR            Total
 Total Length (km-%)                          534       1,114        285             2,298           4,231
 Surface Condition (km-%):
                             Good      352-65.9% 1,114-100.0%       23-8.1%    2,298-100.0%   3,787-89.5%
                              Fair     182-34.1%       0-0.0%      80-28.1%          0-0.0%      262-6.2%
                              Bad         0-0.0%       0-0.0%     182-63.9%          0-0.0%      182-4.3%
 No of Lanes (km-%):
                                2      242-45.3%    245-22.0%    285-100.0%     1,914-83.3%   2,685-63.5%
                                4      292-54.7%    869-78.0%        0-0.0%       384-16.7%   1,545-36.5%
 Surface Type (km-%):
                              AC      534-100.0%     915-82.1%     184-64.6%      1,724-75.% 3,357-79.3%
                              PM          0-0.0%        32-2.9%        0-0.0%      574-25.0%     606-14.3%
                              CG          0-0.0%         0-0.0%    101-35.4%           0-0.0%     101-2.4%
                              CC          0-0.0%     167-15.0%         0-0.0%          0-0.0%     167-4.0%
 AADT                                     10,237         11,891           889           6,838
 AADT=average annual daily traffic; AC=asphalt concrete; CC=cement concrete; CG=gravel; PM=paved; XUAR=Xinjiang Uygur
 Autonomous Region.
 Source: Consultant.


44.    Kazakhstan is currently building a rail line between Zhezkazgan and Saksaulskaya and
between Shalkar and Beineu. In the future, traffic between the Mediterranean and the PRC will
save more than 1,000 km on this new rail line plus the time saved by reducing multiple border
crossings.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                        223 Appendix 5

                                                                                                                      Figure A.5.14: Road Corridor Characteristics and Traffic Density
 CAREC CORRIDOR 2a: MEDITERRANEAN-EAST ASIA BY ROAD VIA AKTAU
                                                                                                                                                AZERBAIJAN                                                                                                                                                                                                                                                                             KAZAKHSTAN
 AADT                                                           8,733                         9,100                   7,992                     9,620                               8,660                                8,422                            9,860                    19,126                         19,732                                                                               2,678                                1,098                            424




                                                                                                                                                                                                                                                                                                                                                               (400 KM)-AADT 160




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            Karakalpakya (border of
 Surface Condition-Length (km)                               G-20; F-19                    G-79; F-50               G-40; F-30               G-37; F-16                          G-22; F-24                            G-38; F-43                         G-46                      G-54                           G-16                                                                                F-78                             G-60; F-325                          F-84




                                                                                                                                                                                                                                                                                                                                                                BY SEA ACROSS
                                  Red Bridge (border of




                                                                                                                                                                                                                                                                                                                                                                  THE CASPIAN
                                                                                                                                                                                                                                                                                                                                       Baku (Ferry terminal)
 AH Reference                                                    AH 5                         AH 5                    AH 5                      AH 5                                AH 5                                  AH 5                            AH 5                      AH 5                           AH 5                                                                               AH 70                                 AH 70                           AH 63
 Design Standard                                                   II                           II                       II                       II                                  II                                     II                             II                       I                              II                                                                                   II                            II, III, Below III              II, III, Below III




                                                                                                                                                                                                                                         GazI Mammed
 Section Length (km)                                              39                          129                       70                       53                                  46                                     81                             46                        54                             16                                                                                  78                                   385                              84




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            Uzbekistan)
                                                                                                                                                                                                                                                                                                                                                                                   Aktau Port
                                                                                                                                                                                                    Kyurdamir
 Terrain                                                           F                            F                        F                        F                                   F                                      F                              F                        F                              F                                                                                   F                                      F                              F




                                                                                                                                                                                                                                                                                                 Lokbatan
                                  Georgia)




                                                                                                                                                                                                                                                                                                                                                                                                                     Zhetybai
                                                                                                                                  Yevlakh




                                                                                                                                                                                                                                                                                                                                                                                                                                                            Beyneu
                                                                              Gazakh
 No. of Lanes-Length (km)                                        2-39                         2-129                    2-70                     2-53                                2-46                                  2-81                             2-46                     4-54                           2-16                                                                                2-78                               2-385                            2-84




                                                                                                          Ganja




                                                                                                                                                                                                                                                                       Alyat
                                                                                                                                                                                                                                                                                                                                                                                                                                       AC-125; PM-                      AC-2; PM-9;




                                                                                                                                                           Ujar
 Surface Type-Length (km)                                       AC-39                        AC-129                   AC-70                    AC-53                               AC-46                                 AC-81                            AC-46                    AC-54                          AC-16                                                                               AC-78
                                                                                                                                                                                                                                                                                                                                                                                                                                       52; CG-208                         CG-69

 Traffic Density (AADT) and
 Surface Condition (Green-Good;
 Yellow-Fair; Red-Bad)



                                                                                                                                                                                                                              UZBEKISTAN
 AADT                                                           2,018                         2,215                   1,972                     2,379                               3,671                                6,735                            8,796                    8,657                           7,844                                        12,689                                12,635                               23,901                          13,736
                                  Karakalpakya (border of




 Surface Condition-Length (km)                              F-164; B-164                   G-33; F-63               G-95; F-45                  G-30                               G-295                                  G-95                            G-105                     G-89                           G-81                                          G-100                                G-102                                 G-75                            G-90
 AH Reference                                                   AH 63                        AH 63                    AH 63                    AH 63                               AH 63                                 AH 63                            AH 5                      AH 5                           AH 5                                           AH 5                                 AH 5                                 AH 5                            AH 7
 Design Standard                                                 II, III                      II, III                  II, III                  II, III                             II, III                              I, III, III                        I                        I                               I                                                I                                  I                                     I                             I, II
 Section Length (km)                                             328                           96                      140                       30                                 295                                     95                             105                       89                             81                                             100                                 102                                    75                              90




                                                                                                                                                                                                                                                                                                 Karta-Kurgan
                                  Kazakhstan)




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  Achangaran
                                                                                                                                                                                                                                                                                                                                       Samarkand
 Terrain                                                           F                            F                        F                        F                                   F                                      F                              F                        F                              F                                                 F                                 F                                      F                              H




                                                                                                                                                                                                                                                                       Jct Navoi




                                                                                                                                                                                                                                                                                                                                                                                                                                                            Tashkent
                                                                              Kungrad




                                                                                                                                                                                                                                         Bukhara




                                                                                                                                                                                                                                                                                                                                                                                                                     Syrdaria
 No. of Lanes-Length (km)                                       2-328                         2-96                    2-140                     2-30                                2-295                              2-78; 4-17                         4-105                     4-89                           4-81                                          4-100                                 4-102                                 4-75                        2-65; 4-25




                                                                                                                                                                                                                                                                                                                                                                                   Djizzak
                                                                                                                                                           Turtkul
                                                                                                                                  Beruni
                                                                                                          Nukus




                                                                                                                                                                                                    Gazli
                                                                                                                                                                                 AC-170; PM-
 Surface Type-Length (km)                                   AC-40; PM-288                 AC-56; PM-40             AC-70; PM-70              AC-22; PM-8                                                             AC-75; PM-20                      AC-100; CC-5                AC-89                        AC-79; CC-2                                    AC-100                                 CC-102                           AC-33; CC-42                        AC-90
                                                                                                                                                                                     125


 Traffic Density (AADT) and
 Surface Condition (Green-Good;
 Yellow-Fair; Red-Bad)



                                                                                            UZBEKISTAN                                                                                                                                                     KYRGYZ REPUBLIC                                                                                                               XINJIANG UYGUR AUTONOMOUS REGION
 AADT                                                          14,173                        13,244                   11,538                    3,718                               2,119                                1,035                            1,745                     675                            255                                           1,143                                 3,399                                3,399                           5,664
 Surface Condition-Length (km)                                   G-45                        G-135                    G-104                     G-45                                G-45                                     G                              F                        B                              B                                                G                                  G                                     G                               G




                                                                                                                                                                                                                                                                                                                                 Irkesthtam (Border of
 AH Reference                                                    AH 7                         AH 7                    AH 7                      AH 7                                AH 7                                     -                            AH 65                    AH 65                          AH 65                                          AH 65                                AH 61                                 AH 4                            AH 4




                                                                                                                                                                                               Kara Suu (border of




                                                                                                                                                                                                                                                                                                                                 XUAR)- AADT 126
                                                                                                                                                                                               Kyrgyz Republic)
 Design Standard                                                 II, III                      II, III                     I                       I                                    I                                     -                              II                       II                          Below III                                                                                                                     II                              II




                                                                                                                                                                                                                                                                                                                                                                                   Jct. AH 61/AH 65
                                                                                                                                                                                                                                                                                                                                                                     III                                III




                                                                                                                                                                                                                                                                                                                                                                                                                     Jct. AH 4/AH 61
 Section Length (km)                                              45                          135                      104                       45                                  45                                     23                             80                       104                             78                                             177                                  40                                    17                             677
                                        Achangaran




 Terrain                                                         M, H                           M                        F                        F                                   F                                      F                              M                        M                              M                                                M                                  H                                     H                                F




                                                                                                                                                                                                                                                                                                 Sary Tash
                                                                                                                                  Margilan




                                                                                                                                                                                                                                                                       Ghulcha
                                                                                                          Kokand




                                                                                                                                                           Andijan
                                                                              Angren




 No. of Lanes-Length (km)                                        2-45                         2-135                   4-104                     4-45                                4-45                                  2-23                             2-80                    2-104                           2-78                                          2-177                                 2-40                                  2-17                           2-677




                                                                                                                                                                                                                                                                                                                                                                                                                                                            Kashi




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  Kuqa
                                                                                                                                                                                                                                         Osh
 Surface Type-Length (km)                                   AC-13; PM-32                  AC-119; CC-16              AC-104                    AC-45                               AC-45                                 AC-23                            AC-80                    AC-104                         CG-78                                        PM-177                                 PM-40                                AC-17                           AC-677

 Traffic Density (AADT) and
 Surface Condition (Green-Good;
 Yellow-Fair; Red-Bad)


                                                XINJIANG UYGUR AUTONOMOUS REGION                                                                                                                                                                                                                                     Summary

 AADT                                                          10,141                         6,810                   6,810                     6,810                                                                Road Characteristic                  Azerbaijan               Kazakhstan                      Uzbekistan                                  Kyrgyz Republic                           XUAR                                       Total
 Surface Condition-Length (km)                                  G-612                         G-54                    G-375                    G-346                                                                  Total Length (km)                          534                      547                            2,000                                             285                            2,298                                     5,664