POLİCY SUPPORT PROJECT

                                   

 

Railway Sector Development Program (RSDP) and related Reform Actions performed

 

General information:

Since late 2016 the Railway Sector Development Program (“RSDP”) aimed for performance of corporate, institutional, financial and human resources reform actions in the railway sector of our republic has been developed with the technical assistance (“TA”) of ADB and support from sources available in Azerbaijan Railways CJSC (“ADY”) .

The Government of the Republic of Azerbaijan and the Asian Development Bank concluded the Loan agreement (“Policy Loan”) for RS D Pdated  19 December 2017 in the amount of 250 million U.S. dollars and the Loan agreement (“Project Loan”) for R S D P in the amount of 150 million U.S. dollars. The Agence Française de Développement (AFD) has initially agreed to support both projects with counterpart financing.

The loan consists of two tranches. Each tranche requires particular reform actions to be taken by the Government and ADY.

Upon completion of 23 reform actions during 2017 Tranche 1 the amount of  175 million U.S. dollars was received, and the funds were used for the repayment of the debts borrowed by ADY without sovereign guarantee.

ADY is required to accomplish additional 22 reform actions according to Policy Matrix in order to receive Tranche 2 in the amount of 150 million U.S. dollars (75 million U.S. dollars from ADB and 75 million U.S. dollars from AFD) for further refinancing of the unguaranteed loans.

It is anticipated that after implementation of the reforms service quality and financial efficiency of the railway services in Azerbaijan will be improved by 2022.

The detailed outcome of the reforms will be as following:

  1. Establishment of the management system based on best international practice and complying with corporate governance standards;
  2. Railway operations direct regulation by the Railway Law;
  3. Stronger financial autonomy;
  4. Efficient refinancing of debts;
  5. Full implementation of Enterprise Resource Planning (“ERP”) system;
  6. Improvement of financial control and accounting system;
  7. Ensuring regular monitoring and updating of KPIs;
  8. Employee Skills Development;
  9. Implementation of corporate restructuring plan aimed for separation of core functions and establishment of clear chain of responsibilities;
  10. Establishment of Asset Management System.

Completed reform actions for Tranche 1:

 

  • Draft Railway Law was introduced to the Cabinet of Ministers defining legal, corporate and economic basis for railway operations and role of the state;Business Plan was prepared by international consultancy firms, which contains broad information about strategic goals and plans for their realization for 5 years; https://ady.az/az/content/index/77/42  (Azeri version)

 

 

  • Three-phase financial restructuring plan was prepared to strengthen current financial situation of ADY, and the first phase was executed by the Ministry of Finance of Azerbaijan Republic and ADY;
  • Single Escrow Account was opened in order to strictly supervise financial inflows, and all other bank accounts of ADY were shut down;
  • Internal Audit function was improved, and relevant unit was reestablished by Chairman’s order;
  • Single register for assets and properties was created;
  • Automated finance system was implemented at subsidiaries too;
  • Procurement was centralized;
  • Change Management Unit was created by Chairman`s order, dated 15th of September 2017 in order to facilitatethe implementation of the project;
  • Human resources strategy was approved.

 

 

Completed reform actions for Tranche 2:

 

Output 1: Enhanced governance, management and financial autonomy

 

Parliament approval of theRailway Law - A first draft of the railway law has been developed and submitted to the Government for approval.

 

Establishment by Cabinet of the Supervisory Board (“SB”) with appropriate number of independent members and Compliance with other corporate governance requirements for state-owned enterprises: Relevant proposals regarding establishment of SB, as a single supervising body, have been developed and presented to relevant government agencies. According to the requirements of Resolution No 257  of the Cabinet of Ministers of Azerbaijan Republic on “Corporate governance rules and standards for joint stock companies with controlling block of shares under state ownership” dated 4 June 2019 necessary actions regarding Corporate Governance are taken at ADY.  

https://cabmin.gov.az/media/files/c198f337d8b4de3f3d7bff80b637d630.pdf (Azeri version)

 

Issuance of ADY’s SB decisions on ADY’s pricing strategy for passenger services: Assessment of the costs required for rendering services and the existing gaps related to profitability (significantly differs from route / distance) have been conducted and cost information was collected from the Passenger Department and analyzed by local and foreign experts. Guidelines for initial pricing strategy have been received from an international consultant. A pricing strategy for passenger services has been developed and approved.

Approval by Cabinet and ADY to introduce public service obligation contracts, on a pilot basis, for ex-ante determined subsidy solutions for the passenger services that still operates with profitability gaps: Discussions were held with relevant state bodies regarding the possibility of a contractual subsidy solution for provision of passenger services, and for determination of the cost of passenger transportation, a working group was created at ADY. The Costs of the Passenger Department have been analyzed together with an international consultant and added to the contract envisaging reimbursement of passenger services for predefined pilot routes. The draft contract has been submitted to the Cabinet of Ministers.

Approval of the Railways Investment Plan by the Cabinet of Ministers of Azerbaijan Republic, and its implementation by ADY remains on target: ADY's investment plan, prepared according to the requirements of the Decree of the President of Azerbaijan Republic No 239 dated 15 March 2010, has been submitted to the relevant state body. Each public organization must submit its investment plan for the next four years to the Ministry of Economy. Following the development and consolidation of investment plans, the Ministry of Economy presents the initial investment expenditure plan to the President of the Republic of Azerbaijan and the Cabinet of Ministers. After the state budget covering investment expenditure for the next year is approved in December of each year, the detailed investment expenditures for the current year will be approved by the President in January of the following year. Additionally, the investment expenditure planned to be covered at the expense of the state budget in 2019 has been approved by the Order of the President of the Republic of Azerbaijan No. 890 dated 15 January 2019.

 http://www.e-qanun.az/framework/42149 (Azeri version)

   

 

ADY and Government introduce, on a pilot basis, performance-based contractual solutions for O&M cost sharing between ADY and Government: The possibilities of applying performance based contractual solutions for operations and maintenance costs of railway infrastructure in general use between the ADY and the Government have been analyzed, best practice has been investigated and draft contract prepared by a working group and international consultants. Additionally, the maintenance costs of the infrastructure have been analyzed by the established working group and added to the draft contract. The draft agreement on consistent financing for the maintenance of the railway infrastructure in general use for 2020-2030 has been submitted to the Cabinet of Ministers.

 

Output 2: Effective financial restructuring of ADY`s debt liabilities

 

Validation, by a reputable audit company, of the assumptions and financing requirements of the original financial restructuring plan: Three-phase Financial Restructuring Plan (“FRP”) has been validated by a reputable international consulting firm, in order to improve current financial condition;

 

Implementation of second phase of FRP : Implementation of the second phase of FRP has been implemented and bank receipts have been presented to international expert as evidence.

 

A special bank account (“Escrow Account”) to serve debts, analyses of its conditions and relevant changes to it: The terms of the single bank account and accounts to serve debts, opened to control cash inflows of ADY have been accepted after a joint analysis made by ADY and the Ministry of Finance by making changes to decrease the amount of funds transferred to the escrow account in compliance with current situation. With regard to this, the Cabinet of Ministers signed an order No 468S dated 3 July 2018 year. In response to the issue raised under this task, respective information has also been presented to ADB. 

 

Output 3: Improved financial and management control and reporting

 

Appointment of CFOs and chief accountants for all corporate entities under ADY: Management structure of finance and economy sector of ADY has been improved.  For the sake of recruitment of professional accounting staff in the units of ADY, as well as, Freight, Passenger and Infrastructure Departments and their subsidiaries together with an international consulting firm respective job interviews have been conducted and relative appointments have been made to the positions of CFOs, chief accountants and senior economists in the abovementioned units.

Establishment by ADY of a risk management system: Local and international experts have been involved in order to render support in establishment of the risk management system. Preliminary discussions with lawyers and international experts have been conducted to define working principles. ERM risk management strategy and policy document, as well as numerous risk management procedures for different railway sectors have been developed. Risk management guidelines and policy documents have been approved. A risk management unit has been established. Risk coordinators have been appointed in the structural units to ensure the transition from fragmental management to more progressive and systematic management, and to enhance the risk culture and risk management skills in the organization. A local specialist has trained risk coordinators on the topic of ISO 31000 standard. A risk register was created by risk coordinators and risk assessment was made. 

Public disclosure of information regarding ADY performance (quarterly reporting on selected KPIs) on ADY’s website: KPI list has been prepared with the participation of an international consultant and approved by and order of Chair No15S dated 15 February 2019. Approved KPI list filled up with information of 2015, 2016, 2017, 2018 years and Q1 2019 has been disclosed on ADY’s website.

https://ady.az/az/content/index/66/42 (Azeri version)

 

Full-fledged commencement of the operation of ADY’s integrated financial and management accounting, and financial reporting and control system (ERP-IFRS): ERP system for financial accounting was established in ADY and relevant financial statements were published. Additionally, as a result of reforms conducted in ADY during the last one year (see the point related to corporate restructuring), major modifications were necessary to be implemented in ERP system and an alternative system has been approved to be implemented temporarily, until ERP system is modified. Moreover, cost and revenue centers were created for current business units.  

Optimization of finance staff headcount: Examination of finance staff has been conducted by an international consulting firm and staff assessment has been finalized and according to relevant order signed by the Chairman, relevant instructions have been given for implementation of performance of employees in a centralized manner and in compliance with single standards and execution of such instructions have been commenced.

 

Output 4: Enhanced operational efficiency and effective corporate restructuring

 

Implementation by ADY of an infrastructure traffic planning system (time-tabling): Meetings have been held with relevant departments and technical requirements have been collected and the technical specifications have been  discussed and adopted by the Technical Council. The procurement process has been conducted for purchase of a software. Based on the results of the conducted tender, the winner has been selected. A contract has been signed with this company and application of the software and trainings have been commenced. Technical information on stations and blocks is included in the program for the purpose of optimizing the timetable for freight transportation, carrying out calculations, and optimal planning of technological intervals.

 

Adoption by ADY of the detailed plan to establish an Operations Management System with customized MIS features (e.g. a Freight Management System with RFIDs and GPS-based monitoring of rolling stock) and commence procurement: A detailed plan for ADY's Information Management System (e.g. RFID and GPS) has been adopted and its application has been commenced to implement the Operations Management System. According to the international consultant's analysis, ADY SMART program implemented by ADY meets all the requirements of this task.

https://smart.ady.az/(Azeri version)

  

 

ADY undertakes a study of industry operational standards and the feasibility of establishing Operational Performance Auditing requirements: An international consultant has been involved for implementation of the task. After determining key strategic objectives of ADY, the consultant developed appropriate operational standards, conducted comparative analysis and submitted the report to ADB. For implementation of pilot projects on outsourcing various services to private entrepreneurs, cleaning services at Ganja railway station and Baku-Sumgait train have been outsourced. Cost-benefit study of operation of wagon and locomotive depots in joint venture with a private partner has been completed;

 

Approval by Cabinet/Supervisory Board of ADY’s Business Plan, with its Executive Summary disclosed on ADY website. Issuance by the Change Management Unit of internal quarterly reports on achievement of KPIs and on the implementation of reforms across ADY: ADY website provides information on the implementation of reforms within the framework of the Railway Sector Development Program and on projects (regarding Policy and Project Loans). ADY’s Business plan was approved by the Cabinet of Ministers according to Order 187S dated 12 March 2019 and published on ADY`s website.

 https://ady.az/az/content/index/77/42 (Azeri version)

 

 

ADY establishes an electricity commercialization unit (or subsidiary) to reduce potential commercial leakages: Electric power consumption was investigated at ADY and a unit was established to control efficiency of power supply and sales. Functionality in this sphere will be improved further.

ADY integrates warehousing inventory records to reduce instances of wasteful procurement: ADY has established a Supply chain Department, Warehouse Centre in Baku and regional Warehouse in Ganja for managing warehousing and inventory records more efficiently and in a centralized manner, and information on warehouse resources has been included in the system. Moreover, a single handover act sample was created, and information about warehouse reserves was input into electronic system.

ADY’s implementation of the time-bound organization/corporate restructuring plan remains on track: In order to create an efficient management towards main operations, a corporate restructuring plan has been developed together with international consultants and discussed with ADY Management Board. The proposed choice was agreed with the Board. A detailed plan was prepared to realize the first stage of a two-staged corporate restructuring plan and presented to the Board. Later the plan was sent to departments of ADY. The restructuring process has been initiated based under the order of the Chairman No. 27/S dated 7 March 2019. All the requirements of the plan regarding the shift of functions and personnel have been realized. Also, structural changes were made, functional and direct dependency mechanism was established.     

ADY reduces the number of wagon depots and locomotive depots: To improve efficiency, ADY has already reduced the number of wagon depots from 8 to 4 and relevant documents were submitted to ADB.

Commence the implementation of a skills development program with at least 30% women participation: the Chairman’s order No. 47S dated 23 April 2017 was signed for development of knowledge and skills of employees at ADY and respective rules have been approved. Trainings related to different areas have been started and due attention was paid to ensure at least 30% female participation in the trainings.  

            ADY approves the Asset Management Policy (with a full set of guidance instructions) and completes the property assets’ inventory (and valuation program in selected assets) across the country (with full clearance of their legal ownership): A policy document for the asset management system has been prepared and approved. At the same time, according to the ADY Chairman’s order No. 48 / S dated 5 May 2017 year, inventory of all properties in the balance of ADY across the country was finalized and ADY Property LLC regularly monitors the property per each geographical direction.   

 

           ADY approves and starts implementing a time-bound plan for a comprehensive asset management strategy, which shall include separate formal plans for core (i.e. railways administration and operations property) and non-core property assets:  Asset Management Strategy and Property Strategy, which envisage plans for both core and non-core assets, have been developed and approved by ADY.

 

ADY Supervisor Board approves commercialization proposals for the non-core assets that are not identified for outright sales (e.g. stations and warehouses) and initiates their implementation: Non-core assets that are intended for outright sales have been identified by ADY and approved by the Chairman. At the moment approved non-core assets are used for commercial purposes and bring income to ADY.

 

ADY submits to Cabinet a proposal for outright sales of non-core assets that are not identified for commercialization (e.g. lands and old buildings) and initiates its implementation (conditional on Cabinet endorsement): The number of non-core assets in the balance of the Company have been identified as 27 and a proposal on their outright sales has been submitted to the Cabinet of Ministers.