ADB discloses volume of funding needed to modernize section of North-South railway corridor in Azerbaijan

The Asian Development Bank (ADB) is ready to provide additional financing of $131.5 million under the Azerbaijan Railway Sector Development Program. Report informs referring to the ADB's Report and Recommendation of the President to the Board of Directors.

The total cost of the project is $160.5 million, of which $29 million is covered by the Government of Azerbaijan.

The total climate finance is equal to the loan amount of $131.5 million, with an estimated $129.5 mitigation costs and $2 million adaptation costs. The proposed additional financing will complete the rehabilitation of about 166 kilometers (km) of double-track main line, civil structures, and level crossings of the Sumgait-Yalama rail line—a key link in the North–South Railway Corridor within the Central Asia Regional Economic Cooperation (CAREC) network—to improve rail network serviceability.

Road network expansions and pipeline network improvements brought competitive pressures to Azerbaijan’s railway sector, compounded by the difficulties that a lengthy dearth of investments had imposed on its infrastructure. Since 2000, following major investments in the oil and gas industry and a related boom in non-tradable sectors (construction and real estate), the railway sector has benefited from growing resource-related exports and imports of construction materials and consumer goods. But the market share of rail transport continued to decline. In 2006, at the peak of the economic cycle that Azerbaijan experienced, more than 26.5 million tons of goods were transported by railways. This volume dropped to 22.4 million tons in 2010 and to 15.5 million tons in 2016.

"Deteriorating infrastructure and rolling stock, as well as a lack of commercial orientation in management and planning decisions, affected railway service competitiveness and financial viability. The lack of supporting policy and institutional mechanisms—the deep root causes of those problems—aggravated the financial performance of Azerbaijan Railways Closed Joint Stock Company (ADY), and only rising indebtedness allowed company operations to continue. While the East–West rail corridor has been modernized since 2009, railway prospects had to be further enhanced on the North–South rail corridor. The latter has great potential once the network is upgraded between Yalama and Astara. The service improvements will enable ADY to capitalize on the country's crossroads location and provide safer, more energy-efficient, cheaper, and less road-intensive transport," reads the report.

ADB believes that the planned loan project to finance the digital transformation of ADY will improve the financial and operational performance of the railway sector in Azerbaijan and is expected to be approved by the third quarter of 2024.

"The additional financing of $131.5 million will cover the cost overrun in the ongoing works contract, and the implementation schedule of the works contracts will be extended by 1 year from 31 December 2024 to 31 December 2025. The current closing date of the original loan for the project component will be extended from 31 December 2024 to 30 June 2026 to provide continued financing for the supervision consultant and the operations of the project implementation unit (PIU) during the extended works contract implementation. The new loan will have a closing date of 30 June 2026, 6 months after the expected physical completion of the project," the ADB noted.

The loan will have a 22-year term, including a grace period of 2 years; an interest rate determined in accordance with ADB’s Flexible Loan Product; a
commitment charge of 0.15% per year; and such other terms and conditions set forth in the draft loan and project agreements. Based on the straight-line method, the average maturity is 12.25 years, and the maturity premium payable to ADB is 0.10% per year. The government contribution will increase by $29 million to $104 million, including $64.9 million for taxes and duties. Reallocations made from contingencies in 2022 and again during processing of additional financing are not shown in detail but in aggregates only.

The Asian Development Bank (ADB) approved the loans and technical assistance for the Railway Sector Development Program on 6 December 2017 for $401 million, consisting of a policy-based loan (PBL) of $250 million, a project loan of $150 million, and attached transaction technical assistance of $1 million (TASF-other sources).

The project is considered technically feasible and economically viable. It is a high priority for the Government of Azerbaijan and is in line with the ADB partnership strategy for 2024–2028. Future plans also include funding for the digital transformation of ADY, which should improve the financial and operational performance of the railway sector.

This updated contract cost estimate is for track rehabilitation works only, exclusive of price adjustments, estimated at $52 million (including value-added tax) by the end of the contract, and cost for consulting services, resulting in an estimated total project cost of $427.8 million ($485.5 million including contingencies and financial charges during implementation). The remaining works are expected to be completed by end 2025.