ADB sets six recommendations to improve railway performance in Azerbaijan

Railways across the Central Asia Regional Economic Cooperation Program (CAREC) region must consider implementing key reforms that will make them more efficient and financially sustainable, according to the new study by the Asian Development Bank (ADB), Report informs.

A new study by the Asian Development Bank (ADB) assesses the state of CAREC railways and identifies opportunities for investment, commercialization, and reform. Here are six policy recommendations that can improve the sustainability of railways across the region.

"The railways in the Central Asia Regional Economic Cooperation Program (CAREC) region often struggle to compete with other long distance railway corridors and other modes of transport," ADB notes.

The bank offers six key recommendations to for the railway administrations of the region.

1. Modernize commercial accounting systems.

Most CAREC railways currently use accounting systems that do not follow internationally recognized commercial standards. These old systems cannot accurately measure the true financial performance of railway entities or separate the financial performance of each business activity.

"The region’s railways must develop modern commercial accounting systems that provide reliable and transparent real‑time information about costs, revenues, and financial performance. Strengthening staff expertise in operating the system and using it to analyze railway performance is also crucial," the report says.

2. Use of enterprise resource planning

Railways need to introduce enterprise resource planning systems to help them adopt more commercial approaches that would increase productivity and profitability. These systems also help railway planners to maintain an overview of existing railway resources such as staff or rolling stock and determine more efficient ways of using them. They can be used to determine the full cost of operating railway services and routes, which is necessary to optimize tariff levels and understand which routes are most profitable. They are used to monitor and improve productivity and asset utilization, and ultimately increase profitability.

3. Liberalize tariffs

Nearly all CAREC member countries regulate railway freight tariffs. While CAREC railways do not face competition from other railways operating in their domestic market, they compete with road transport and long-distance railway freight services using other railway corridors. For railways to operate in this competitive setting, CAREC countries should consider liberalizing tariff regulations so the railways can adjust their tariffs in line with market conditions. This will help them to attract more customers and optimize revenues.

4. Introduce public service obligations

Most CAREC governments require their railways to continue providing services, especially passenger services, even if they are loss-making. This also leads to more unprofitable passenger traffic and less profitable freight traffic. As a result, some railways cannot generate enough retained earnings to regularly upgrade their assets.

To address this, CAREC governments can consider introducing a public service obligation. This could for example take the form of a contract between the government and the railway operator obliging the latter to offer certain services, while the government reimburses the operator for any losses incurred in running those services. Since accurate information is needed on costs and revenues of particular services, introducing this kind of reimbursement mechanism should go hand in hand with the establishment of modern commercial accounting and enterprise planning systems.

5. Examine non-core activities

CAREC countries need to examine the non-core activities of their railways and progressively separate or privatize them so that operators can focus on running railway services on a commercial basis. Non-core activities may include health services and housing, and various non-railway businesses. Since many non-core activities are loss-making, they are often a significant drain on the railway’s limited financial resources.

6. Boost private sector participation

Including private companies in the operation of freight and passenger services can create competition within the railway market, leading to improved efficiency and service quality. But to establish a fair and transparent basis for competition, most CAREC countries will need to reform their policy and legal frameworks to allow the private sector to perform additional roles in the railway sector.

Many CAREC railways have aged rolling stock fleets that need to be upgraded or expanded to meet demand. Due to their poor financial performance, railways generally lack sufficient funds to finance the needed investments. A possible solution is to invite the private sector to supply rolling stock on a lease or rental basis.

Overall, as markets change over time, railways also face further competition from other modes of transport. Implementation of reforms can lead to railways that are commercially fit and ready to adapt to changing markets.