Railway does not keep up with sea and car

Last year, after the outbreak of the war in Ukraine, a rather serious excitement began in the Caspian Sea, South Caucasus and Central Asia region due to expectations of a "large transit". And, indeed, last year, starting in March, new cargoes went through the countries of the region, including Azerbaijan. This resulted in a significant growth in freight traffic. According to the State Statistics Committee, in 2022, the volume of cargo transportation in Azerbaijan by rail grew by 24.3%, by road transport – by 12%, by sea transport – by 37.5%. According to various estimates, transit cargo transportation through Azerbaijan rose nearly 1.5 times last year.

However, already in 2023, the picture turns out to be not so rosy. According to the State Statistics Committee, the volume of cargo transportation in January-October 2023 by rail declined by 0.3% as compared to 10 months of 2022, while by road transport rose by 5.2%, by sea – by 21.1%. In other words, the railway does not keep pace with sea and road cargo transportation.

So what's the problem?

This week, the World Bank released a special report on Azerbaijan, Georgia and Kazakhstan as well as on the volume of cargo transit through their territories along the Middle Corridor.

The report showed that, for a number of reasons, the countries of the region failed to maintain the positive dynamics of cargo transportation along the corridor. In this respect, the World Bank highlights 5 main challenges to ensure the effectiveness of the Middle Corridor. At the same time, these issues were identified on the basis of a special survey.

The first and, perhaps, the most significant problem is the lack of coordination in management. According to World Bank estimates, the absence of a single, primarily railway operator leads to the fact that there are temporary losses and the corridor becomes too expensive. Another problem is related to the problems of railway operations caused by delays at unloading/loading points, etc., which leads to increased costs and delays in the timing of cargo transportation. Another problem is the lack of integration between the information systems of the countries. This leads to duplication of documents and the lack of standardized data requirements.

In turn, World Bank surveys are indicative that, on average, cargo transportation along the corridor in 2022 took 53 days, which is 2 times longer than alternative routes.

The World Bank adds that in 2022, after the outbreak of the Russian-Ukrainian war, the container cargo transportation along the Middle Corridor grew by 33% in March-October 2022. However, according to regional transport associations, in the first 8 months of 2023, the volume of container cargo transportation declined by 37% as compared to the same period of the last year due to operational inefficiency and high cost of transportation costs.

So, from the WB report, we can conclude that there are cargoes, but the countries of the region have not yet been able to arrange their work so that they go along the Middle Corridor, even a small part of them.

To understand what the problem is, it is necessary, first of all, to assess the situation on competitive routes.

Thus, the main route between East and West was and remains the sea route from China. For comparison, the volume of container traffic on it is more than 200 million TEU per year. Despite the fact that, even in a good year, the number of containers on our route does not exceed the threshold of 100.000. That is, the Average Corridor accounts for 0.05% of containers. Yes, of course, transit is not only containers, but also bulk and bulk cargo. Still, it must be remembered that the global transport trend of recent decades is precisely the containerization of goods. So the country that wants to become a significant player in the transport market should work on this area.

The northern route, which runs mainly through Russia, has reached a symbolic 1 million containers per year in recent years, and although in absolute figure it also accounts for less than one percent of the sea route, it is many times larger than our Average Corridor.

We must not forget another, albeit somewhat exotic route - the Northern Sea Route, along which icebreaker ships have been actively transporting cargo for the past few years. In 2021, it was announced that more than 30 million tons were transported along the route. It turns out that even this route is notable for much more cargo than on our route.

All of the above routes are global competitors of the Middle Corridor. Besides them, there are also regional routes that are in direct or indirect competition with our corridor: Iran-Central Asia and Georgia (Georgian military road-Russia).

Both of these routes are built on road transport, do not have a railway solution, and therefore have natural limitations in terms of volumes. However, both of these routes are showing significant growth in the first half of 2023. For instance, the Iranian transit to Central Asia rose by 40%. This is another wake-up call regarding our transit. This confirms our thesis that there are loads on the route, but they just bypass our corridor for some reason.

For a more complete picture, it makes sense to look at the dynamics of rail and road transport on our route. In 2023, despite stagnation and slight drop in transit volumes in general, mainly due to the railway, road transport continued to grow. For example, the number of transit trucks in the direction of Alyat rose from 8 to 12.000 in 4 months of 2023, i.e. the increase was 1.5 times. All this allows us to draw the sad conclusion that the Middle Corridor is still not able to become a real competitor to alternative routes.

Let's look at another trend that has manifested itself recently. Total volume of transit includes a growing number of bulk cargoes, mainly petroleum products from Central Asia. The number of transit containers transported by rail in Azerbaijan declined by 40% in 10 months of 2023 (!), and the total volume of transit by rail declined by 8%. At the same time, the volume of rail transit of petroleum products for 10 months amounted to about 38% of the total volume against 35% a year earlier, which means an increase in the share of bulk cargo in the total volume of transit rail traffic. Without this volume, which obviously appeared as a result of the redirection of part of the volumes due to the Russian-Ukrainian war, the transit results would have been even more modest. The main problem of petroleum products is that their volumes largely depend on the political situation. Of course, additional cargo can be expected, but it is very likely that they will end up in the pipe, and not on the railway. This means a heavy workload for tankers and ports, but a small effect for railways. Cargo transportation data for 10 months confirm this thesis: the decline in freight transportation by rail showed 0.3%, while the volume of oil transportation via the Baku-Tbilisi-Ceyhan (BTC) pipeline grew by 3%, including volumes of transit oil from Kazakhstan and Turkmenistan’ growth by 3.4%.

Therefore, diversification and long-term and sustainable growth of cargo transportation can be provided mainly by containers.

There is another factor that strongly affects the volume of cargo transportation – it is the price or tariff. The price of shipping containers by sea has dropped significantly over the past year. If in 2020, against the background of the outbreak of the coronavirus pandemic and the actual closure of the Chinese economy, the price of a container reached $ 15-17.000 per container on the China-Europe route, today the price has returned to $ 2.000. This is undoubtedly one of the factors why large volumes of Chinese transit do not go to the Middle Corridor, which is confirmed in the World Bank report.

Another problem of the Middle Corridor is the preservation of a large number of technical bottlenecks. In fairness, it should be added that most of them are located outside Azerbaijan - in Georgia and Kazakhstan. But, ultimately, this also affects Azerbaijan, as the presence of such bottlenecks scares off potential shippers. The point is that bottlenecks are additional costs and delays in the delivery period.

As a result, many market players have switched from the strategy of raising volumes to the strategy of increasing revenue. Transit rates on our route have been increasing over the past 2 years, and this is despite the fact that Azerbaijani and Georgian railway tariffs have been among the most expensive in the region for many years. On average, our tariff per ton/kilometer is 2-3 times higher than that of our neighbors in the region. The price limits demand, and transiters are looking for alternatives, including trucks and other routes. Moreover, there is an alternative; besides, the price situation there is more profitable.

To summarize the above, it turns out that a number of factors indicate that the main weak link in the complex transit chain of Azerbaijan today is the railway, which, in fact, has not yet been able to fully take advantage of the opportunities that the current situation has given it. The positive dynamics of international truck transportation through our country, the growing volumes of transshipment at ports and the stagnating volumes of rail transportation are vivid evidence of this.

What should we do next?

The World Bank forecasts an increase in cargo transportation along the Middle Corridor to 11.385 million tons by 2030 due to the growth of container transportation and transportation of oil and petroleum products. In 2021, the volume of cargo transportation along the corridor amounted to 3.688 million tons, i.e. an increase of 3.1 times.

It seems to be a good growth rate. But the volumes of cargo transportation, as well as the structure of cargo transportation, show that in fact, not everything is so smooth. According to World Bank forecasts, by 2030, the volume of other container cargo transportation along the corridor will reach 4,074 million tons (a share of 35.8% versus 22.7% in 2021), which is 2.5 times higher than in 2021. Transportation of oil and petroleum products by 2030 will amount to 3.553 million tons (a share of 31.2% versus 30% in 2021), which is 3.2 times higher than in 2021.

Thus, these two commodity items will provide 67% of all freight traffic along the corridor by 2030. As noted above, the main thing in transport competition is to achieve an increase in container traffic. So, the figures show that their growth rate will be lower than the growth in the transportation of oil and petroleum products.

The WB estimates are only a forecast. To achieve it, it is necessary to correctly assess the current problems, but the most important thing is to solve them in time.

Based on the existing problems, WB analysts focus on the importance of completing a number of tasks to improve the efficiency of the corridor. First, the adoption of an institutional mechanism to promote the corridor as an integrated trade route. Second, it is important to apply new logistics solutions, including standards, tariffs, and increased predictability of operations. Third, it is important to simplify procedures and processes, improve coordination between border and customs authorities for the processing of transit goods, and improve coordination between the railways of the countries. Fourth, raising the level of digitalization along the corridor. Fifth, it is important to continue improving the infrastructure along the corridor. As you can see, there is a lot of work, the volume of freight traffic is growing weakly; however, problems remain. If problems are not solved promptly, especially on the railway, then the volume of cargo transportation in 2024 may be less than this year.

Besides, in order to avoid excessive dependence on neighboring countries in transit, it seems logical to shift the focus from transit logic to the logic of connecting with the main transport centers of the region. We need to create conditions for efficient and fast exports, as well as the development of active two-way routes with our main neighbors. Transit is unstable, and well-established trade with neighbors in Central Asia and the Caucasus is a much stronger foundation for sustainable transport links. As the quality and competitiveness of such transport arteries improve, transit will also grow. For which, however, you need to keep a set of benefits and privileges. In addition, it is necessary to continue working on the creation, finally, of a real national transit product that will lead to the formation of a healthy and long-term, rather than a conjunctural transit market. At the same time, the main transit axis should remain the railway of Azerbaijan, which is still lagging behind the main global trends in freight transportation.

Rufat Suleymanov, transport and logistics expert