ARMENIA LOOKS TO THE PRIVATE SECTOR FOR RAIL NETWORK

Railway Gazette International, UK
Jan 16 2007

IN SEPTEMBER, the government of Armenia invited bids for a concession
to renovate and operate the country’s rail network, following an
initial prequalification announcement in June.

Armenia is currently implementing a wide range of economic reforms,
supported by the US government, the World Bank, the European Union
and the Asian Development Bank amongst others. Restructuring is
already underway in the energy, water and communications sectors,
and Armenian Railways has been established as a joint stock company
wholly owned by the Ministry of Transport & Communications.

‘Our desire is to make the railway more productive and less dependent
on government’, explained Transport Minister Andranik Manukyan,
addressing a pre-bidding roadshow held at the headquarters of
the European Bank for Reconstruction & Development in London on
September 6.

‘Armenia wants a successful railway’, he emphasised. ‘The government
has taken action to strengthen the railway, improve the regulatory
environment and reduce risks for the private sector. This concession
will protect the economy of Armenia and enhance the contribution that
will be made by rail transport.’

At the World Bank’s suggestion, US-based consultancy HWTSK was
brought in to assess the condition of the Armenian rail network
and advise on the scope for involving the private sector. The World
Bank and the Armenian government provided US$15m in 2002-04 to fund
the rehabilitation of 72 km of track, and the EU’s tacis programme
funded the installation of a new optic fibre communications network
by Siemens which was completed in 2005. The government is currently
negotiating funds for further infrastructure rehabilitation.

The concessionaire will also be expected to provide investment
funding. According to the consultants, AR needs around US$170m to
modernise the network, of which half would go on infrastructure
works and half on replacement of largely life-expired traction and
rolling stock.

Traffic bounces back The AR network is predominantly single-track,
with 736 route-km active and approximately 110 route-km out of service
due to the border closures and a landslide. The entire network is
electrified at 3 kV DC. AR has 41 main line electric locomotives,
mostly ex-Soviet designs of classes VL8, VL10 and VL11. There are
also 56 diesel locos, mostly used for shunting, together with 68 EMU
cars. Hauled stock comprises 189 coaches and 3657 wagons, of which
barely half are operational.

AR’s traffic statistics clearly show the problems under which the
railway has been labouring for the past 20 years. In 1988 the railway
carried 30 million tonnes of freight and 5 million passengers.

Traffic was hit badly by the Spitak earthquake in December 1988 which
severely damaged the line around Gyumri. Then came the breakup of
the Soviet Union, and Armenian independence in 1991. Harsh economic
conditions saw a 50% fall in traffic across all the railways in
the region.

The war between Armenia and Azerbaijan in 1992 led to the border with
Turkey being closed in 1993, cutting all transit traffic. However,
there has been an upturn in recent years, due in part to a booming
economy described by local business leader Arsen Ghazaryan as ‘a
Caucasian Tiger’. Armenia is currently recording double-digit GDP
growth year on year.

>From a low point of 1·4 million tonnes in 2000, AR’s freight traffic
has crept upwards to 2·7 million tonnes in 2006, and the target for
2007 was 2·8 million. According to AR’s First Deputy General Manager
Vahagn Karagiozyan, freight traffic in the first eight months was
400000 tonnes ahead of the previous year, and he was confident that
traffic would top the 3 million mark by the year-end. ‘We have the
potential to double our traffic in the next few years’, he predicted
confidently.

Around 60% of AR’s freight business is international, but with four
of the five border crossings closed, all traffic has to be routed
via Airum on the line to Tbilisi. Longer-distance traffic moves via
Georgia’s Black Sea ports of Poti and Batumi, which are linked by
train ferry to ports in Russia and Ukraine.

Passenger traffic, however, has been declining steadily since a
post-independence peak of 1·3 million passenger-journeys in 2002.

Rehabilitation of the local road network, coupled with the roundabout
rail routes, makes the typical road trip between three and five
times faster than rail. This has hit AR hard. Today the railway
runs just one local and five inter-city trains a day, plus a daily
international service to and from Tbilisi and a summer-only train
to and from Batumi. In 2006 passenger traffic totalled just 675 000
journeys, or barely 27 000 passenger-km.

Nevertheless, Manukyan insists that passenger operations should
continue. ‘A railway which does not have a passenger service
is incomplete as a transport undertaking’, he explains. ‘Despite
falling traffic in recent years, we still believe that passenger
operations are an integral part of the railway. When the tender bids
are assessed, advantage would be given to a bidder with a desire to
keep the passenger operations, all other things being equal.’

Concessioning process Having looked at various models for
privatisation, including the separation of infrastructure from
operations, HWTSK recommended that a vertically-integrated concession
would be the most appropriate model.

An initial concession period of 30 years is envisaged, with an
option for further extensions. CPCS Transcom is acting as transaction
adviser, preparing tender documentation and assisting the government
in assessing the bids.

As well as appointing external advisers, the Ministry of Transport
& Communications has established a Project Implementation Unit to
develop the concession, together with a separate working group dealing
with legal and regulatory issues. PIU Director Alexander Bakhtamyan
insists that ‘we intend to conduct an open, equitable and transparent
international tender.’

Prequalification bids were due by September 21, and groups led by
Russian Railways and Rites were shortlisted in October. However,
Rites has subsequently withdrawn from the process, leaving RZD as
the only party likely to have submitted a final bid on December 21.

Financial bids are to be opened on January 8, and the ministry hopes
to announce the winner on January 15, with a view to handing over
control of the network during 2008.

According to Gayan Torozyan, who heads the regulatory working group,
the new railway law setting the framework for concessioning was
‘almost ready to go to the national assembly for ratification’ at the
end of September. This will be followed in due course by secondary
legislation to put the detailed concession terms in place.

With World Bank support, the government will take responsibility for
funding the retirement or retraining of redundant staff, leaving
the concessionaire free to recruit only as many employees as it
feels necessary.

Manukyan insists that ‘the government does not want to interfere
in the business activities of the concessionaire’, although it is
planning to put in place some provision for open access, mainly so
that Georgian Railways could run to Yerevan or through to Turkey if
the border re-opens. The consultants believe that open access provision
would provide the concessionaire with a degree of competitive pressure,
although there is unlikely to be enough traffic to attract independent
operators.

‘The concessionaire will have exclusive rights to manage the
infrastructure, but a clause will provide rights for others to use
network at pre-determined access fees’, explains Torozyan. The
methodology for setting access charges ‘will be agreed by the
government and implemented by the concessionaire’, probably requiring
the production of some form of annual network statement.

The government also wants to retain the right to set maximum tariffs
for ‘commodities of strategic importance’, although Torozyan says
there will be a ‘regulatory commission’ to protect all parties.

According to Bakhtamyan, there will be no government subsidy for
the operation of passenger services, which will continue to be
cross-subsidised from the profitable freight business.

In parallel with the tendering process, PIU has started to draw up a
draft concession agreement, which will form the basis of negotiations
with the preferred bidder.

International connection Given the high proportion of international
traffic, maintaining a continuing relationship with Georgian Railways
will be critical to the success of the Armenian concession.

At the September roadshow, concerns were expressed about the Georgian
government’s announcement in August that it intended to award a 99-year
concession to run the country’s rail network to an international
consortium (RG 9.07 p524) through a negotiated procedure, rather than
by means of an open tender.

That proposal has since been withdrawn, and the Georgians are
now looking at some form of international tender with the aim of
privatising their railway by the end of 2008. The Armenian government
remains confident that any new owners would continue to honour the
current traffic arrangements. ‘International freight and passenger
tariffs have been set through a bilateral agreement between the
governments, and will be protected for the next three years’,
insists Manukyan.

He believes that the winning bidder of the Armenian concession would
be well placed to win a tender to operate the Georgian network as
well. That would permit closer integration of the two railways to
restore a truly international business, he suggests.

CAPTION: One of Armenian Railways’ few main line passenger services
links Yerevan with Yerashk. An EMU is seen here awaiting departure
from the capital CAPTION: Consultants have recommended withdrawal of
all passenger services in Armenia because of dwindling ridership, but
the government has pledged to retain them as part of an integrated
network. This is the station in Yerevan CAPTION: The key junction
and marshalling yard at Massis is controlled from a Soviet-era
signalbox. Despite four of Armenia’s five border crossings being
closed, international freight is seen as a potential growth market
for the railway in the future

ticle/2008/01/8075/armenia_looks_to_the_private_se ctor.html

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