Font Size

- Aa +

Sun 21 Nov 2010 12:33 PM

Font Size

- Aa +

All aboard

Contractors are scrambling to jump onto the Gulf’s next gravy train – implementation of a region-wide rail network

All aboard
All aboard
Final contracts for Saudi Arabia’s Haramain rail line will be handed out before the end of the year.
All aboard
Gulf-wide rail network is becoming a reality.
All aboard
Mecca Metro is the first dual-track light railway in Saudi Arabia.

Government spending plans in the Gulf tend to come in big numbers. Anything below a billion dollars is considered pretty small fry, and given that the region is trying to spend its way out of a recession, it has also become a honeypot for some of the world’s best contractors, all itching to shore up their backlogs while business elsewhere teeters. Airports, roads, power stations, water desalination plants; deals that have always been the bread and butter of many contractors have become all the more important since the regional collapse in the real estate market.

On top of those areas, the Gulf-wide rail network is slowly becoming a reality as well. Estimates vary as to how much the entire project will cost, but it’s somewhere in the region of $100bn. When that sum is put into the context of Saudi Arabia’s entire stimulus package over the next five years — recently confirmed as about $375bn — there can be little doubt as to how the region views this next step on the road to developing its economy.

And that’s just in the Gulf. Under ambitious plans being drawn up by other MENA countries, Iraq will be connected to the Mediterranean Sea via Syria, and a 2,300km track will connect Egypt with Sudan. Thoughts have even turned to a mammoth 6,200km railway that will link Egypt to Mauritania, via Libya, Tunisia, Algeria and Morocco. Further into the future, there is also an aspirational plan to develop a network that will connect Somalia and Djibouti to Yemen and the rest of the Gulf via a Red Sea ferry.

Further afield, a $177m plan to link the northern Afghan city of Mazar-i-Sharif to Asia’s extensive rail network via Uzbekistan will come to fruition by the end of the year when the 47 mile link is completed. Despite the gloomy headlines, the central Asian country has a 25-year plan to build a rail ‘ring road’ with several interconnecting tracks. Afghanistan has even cannily signed a deal with a Chinese mining that will grant the company access to copper deposits after it builds a track to the site.

If all these countries can have, and can develop, their rail aspirations, then the time is certainly ripe for this region. The Middle East is one of the few parts of the world that is almost entirely a greenfield site from the railway perspective. Other than two lines in Saudi Arabia, which were built in the 1950s and 1980s, respectively, and a link in Jordan, the concept is new to the region. This provides opportunity and a certain degree of disadvantage. While the GCC can now build perhaps the world’s truly 21st century rail network, it will also have to cope with a gigantic financing conundrum and concerns about the unknown. What sort of demand will there be for these projects in an area where there are no previous benchmarks? Will a Gulf-wide passenger network really work? Can governments be trusted to cooperate with each other over the developments of the network? Finally, and perhaps most vitally — given the leviathanic cost of the project — does the Gulf really need a rail network at all?

As to the final question, while it may be hard for some observers to see the business case in the short term, it is a government’s responsibility to take a long-term view. And that long-term view, as envisaged by most countries’ economic plans, will see massive increases in population and trade, burdening what are already tightly squeezed transport networks.

“A lot of these economic development programmes circle around basic materials, downstream oil, meaning petrochemicals and other refined products,” says Ulrich Hoegler, a partner with Booz & Company. “Of course you can transport these products on trucks but who wants to have hundreds of thousands of trucks running on these roads, when you can be much more efficient and environmentally friendly by putting them on railways?”

A key element here is speed. With logistics infrastructure already developed to a high level in the UAE, a rail link gives the country even greater options. By linking Abu Dhabi’s Al Gharbia region to Fujairah, for example, the UAE can bypass the Strait of Hormuz in the event of geopolitical activity closing down that chokepoint. Similarly, Saudi Arabia’s Landbridge line will be able to ship materials from the Arabian Gulf overland to the Red Sea — again avoiding both Hormuz and the pirate-infested waters of the Gulf of Aden.

A further consideration, from the passenger perspective, is that the Gulf’s population is expected to double in the next 20-30 years, putting the focus not just on international, or inter-emirate services, but metros as well.

“We’re expecting in that in ten-fifteen years about 80 percent of the population of the GCC will be living in cities,” adds Hoegler. “If you just look at population growth and increasing wealth, based on our analysis, there will be four times as much mobility demand as we have today in the cities within the next fifteen years or so.”

Put simply, already horrific rush-hours in major Gulf urban areas will quadruple in intensity, as cities like Abu Dhabi and Doha grow to accommodate around three million people each; there are already around five million residents in Riyadh.

“People drive past railways and don’t necessarily see the value, but to be quite honest, it’s absolutely super-critical with regard to the economy, connectivity, trade with the outside world, and within the GCC,” says David Plowman, major projects director with Al Habtoor Leighton Group (HLG). Plowman’s firm is one of the many seeking to take advantage of the prospects on offer in the burgeoning rail industry. In September, HLG launched a joint venture with Australia’s John Holland Group to try and push for the many tenders set to be announced over the next decade or so. The joint venture — called Advance Rail Group, has already expressed interest in the UAE’s first freight line and is openly touting for business in Qatar and Jordan as well.

That first freight line, which will transport granulated sulphur from a gas field deep in the Empty Quarter to Abu Dhabi National Oil Company (ADNOC)’s giant facility in Ruwais, is certainly a formidable undertaking (see box). But from long-term business scenario, that type of link is pretty much a safe bet. As long as there is a continuing supply of feedstock for the route — which is the case with most ‘pit-to-port’ lines, there are no worries about the ebb and flow of demand. Having said that, even for countries as rich as those in the resource-rich GCC, the money to fund the project has to come from somewhere.

While no-one would deny that the funds are there, should the Gulf nations wish to use them, cash spent on the railway means money diverted from other areas, which many might see as being more socially pressing in the short term. Education and healthcare, not to mention rising consumer demand for power and water, are all vying for the attention of what are not inexhaustible public treasuries. All that means that opportunities for private sector investment are plentiful, but experts say it’s unlikely that outside agents will be knocking on the doors of Gulf government transport departments. In any event, the project financing sector is currently licking its wounds due to the travails of the depression.

“Rail projects are notoriously difficult to finance privately. The upfront costs are huge and at least 60 percent of the total lifetime costs of a rail system are incurred in construction, so they’re really high,” says Marc Fevre, a finance counsel for law firm Freshfields Bruckhaus Deringer. “Internationally, the experience is that rail PPP [public private partnership] structures aren’t terribly successful unless the private finance element is strongly supported by the government — so you don’t have the risk transfer from the government to the private sector.”

Elsewhere around the world, the attempted PPP on the London Underground ended badly when Metronet Rail, the brand set up to undertake work on several Tube lines over a 30-year period went bust.

Despite promises over $27bn in investment over that three-decade period, the firm cited an $885m shortfall due to cost overruns in 2007 and promptly went into administration, costing the taxpayer millions. A planned PPP arrangement to build the Channel Tunnel also failed to materialise.

“I think we need to get some clarity from the governments because this cannot just be funded on the back of sovereign funds,” says HLG’s Plowman. “It could happen, but it would be at the cost of a lot of other social infrastructure that’s needed. From the commercial point of view, and with regard to a business case, I think rail will probably prevail. But, like anything, you have these other competing projects.”

Problems associated with PPP aren’t limited to rail infrastructure. Last year, Saudi Arabia’s plan to build the world’s largest combined power and water desalination plant at Ras Al Zour — originally estimated at around $6bn – hit the buffers when the consortium hired to carry out the work fell apart. The government was forced to take the project under its own wing, and the ensuing delay meant that the final contracts have only just been handed out. Saudi Arabia tried the same approach on the Haramain high-speed link and the Landbridge line but the ensuing expense and complexity of the proposed deals meant that the country found it easier to finance the projects itself.

Kuwait is the latest Gulf state to propose a PPP model for its small network, but even there the government has put off the publication of a dossier on the potential project until November next year.

“I would expect that, initially, most of the projects will have to be financed by the governments and potentially once the systems are up and running, the governments may shift towards more PPP on the pure investment side,” says Booz & Company’s Hoegler. “So overall, while it’s an interesting case for private investment, I would expect that given the uncertainty and potentially more conservative approach in the region, most of the systems will be initially be government-financed.”

However, there are ways and means through which governments can still share the risk with outside contractors.

“There are options — we could take potentially an equity play and formulate a PPP with the government to take it off their books, so to speak, and have a Take or Pay arrangement for a freight line, (ie) pit to port, or mine to port,” says Plowman. “It’s similar to having a concession under a Metro. We as the private sector are taking on that risk, and the government will pay us a concession for that; the government will be paying a monthly installment for an availability charge.”

Plowman says that in other sectors, the appetite for that kind of deal is relatively healthy, due to the fact that the financing arrangements are taking place in conjunction with what are effectively triple-A-plus sovereign-funded entities. For ARG, the plan is to convince governments that their procurement policies can still be delivered in a cost-effective way that is not a burden on their operating or capital budgets.

But the troubles aren’t over when financing is in place. Given the unique make-up of the Gulf climate, extensive logistical challenges are presenting themselves to contractors formulating their plans. Scientific data produced by HLG shows that 90-metre high dunes in the Gulf can travel up to 500 metres a year, more than enough to swamp railway infrastructure.

“That’s our biggest technical challenge out here — we’ve experienced sand on the track in Australia and we’ve been able to manage that, but it’s a much bigger challenge here,” says Plowman. “But there are a range of ways to deal with that, such as planting out, or physically building walls.”

Union Railways is seeking to combat this specific concern by commissioning a Sand Pilot study that will test and monitor the behaviour of sand and its interaction with infrastructure. The scheme will involve building sections of track between 25 and 40 metres long over proposed routes and then finalising engineering designs based on that data. Elsewhere, major problems also stem from the difficulties of shipping millions of tonnes of material, not to mention an extensive workforce, out to remote desert locations.

“There will be a lot of work that’s done on this job that will either be supplementary — meaning it will ultimately become redundant — or complementary,” adds Plowman. “For example, there will probably be a road running parallel to the railway line that may be used in the future. Add to that the logistics, climate conditions, the need for camps and new offices, not to mention communication. In these areas there is no cellphone coverage, so we need to look at UHF- or VHF-type radio systems.”

On the light rail side, GCC governments will be seeking to take advantage of the lessons thrown up by Dubai, which launched the region’s first metro service in 2009. While the Dubai Road and Transport Agency (RTA) funded the construction costs of the project upfront, it then brought in British firm Serco to manage operations and maintenance.

“Dubai is quite a good model, notwithstanding the fact that some of the contractors haven’t been paid yet,” says Freshfields’ Fevre. “The Serco concession means that the government has shifted that risk and brought in all the advantages of private sector participation, including performance incentives, innovation and so on. That contract is linked to performance, accuracy, running trains on time and interruptions due to maintenance and so on.”

However, as Doha and Riyadh start to lay out their plans for metro services, they will also need to learn from Dubai’s experience in terms of integration. While Dubai’s Red Line largely follows a straight path alongside the emirate's Sheikh Zayed Road, experts say that the route should have been planned with more urban development in mind.

“The technical term is transit-oriented development — metro stations need to be practically in the key areas of the city,” says Hoegler. “In Dubai, it’s worth asking, why is the Dubai Mall not integrated into the network? Instead of having the metro in a straight line along the highway, it should connect all the key developments, and I think that’s a lesson learned.”

Elsewhere, local governments may also consider the model first launched by London, which introduced a congestion charge to coax more passengers onto public transport. That move led to usage of public transport increasing by five to ten percent and although similar figures are not yet available for Dubai’s Salik road toll scheme, it is to be expected that other GCC urban planners will adopt similar moves.

Needless to say, competition for these contracts is fierce (see box). ARG has been set up specifically to undertake Gulf railway work, a move that stems from a decision on the part of the Al Habtoor Leighton Group to diversify away from the tricky construction market in the UAE. Various firms from different areas of the world will believe that they have an edge, but the pit-to-port expertise shown by Australian and American contractors may well be a trump card for them. It will also be tough to look past Chinese involvement.

“I think you're definitely going to see a large Chinese attempt to get into this market,” says Fevre. “Chinese companies have a lot of experience in high-speed links, and they also have experience over long distances, providing basic rolling stock at lower costs and cheaper civil works. Chinese investment supported by Chinese export credit financing is going to be potentially interesting.”

With many contractors fighting to get their feet in the door with regard to new rail deals, the Gulf has a fantastic opportunity to build the most up-to-date network in the world.

“A key advantage is the flexibility and definition of the rail corridor,” says ARG’s Plowman. “However, a huge issue will be the alignment of the GCC on operational issues such as electrification versus diesel, regulatory authorities and interoperability. We are confident that there is already common ground on the infrastructure design — at least we are going to have the same track.”

As long as interoperability and cooperation between the various countries in the region remains strong, the outlook remains fair. With a technical committee set up by the GCC secretary-general to oversee interoperability, and given the billions that will be poured into these projects, it would certainly be a wasted opportunity if the various nations were descend into bickering over connections. The region only needs to look at the European experience, where the rail system is only just recovering from decades of neglect that left nations unable to connect with each other.

“You don’t expect that the rail system covers 80 percent of your transport demand, but for example in Europe we are currently at 16 percent and this is far too low,” says Hoegler. “My personal estimate is that there is case in Europe for about 20 percent share, but you need to develop the system accordingly.”

It’s far too early to say what sort of percentage of demand the Gulf will hope to ship via its brand new rail systems, but if it can reach that high of 20 percent, it will certainly have been money well spent.

For all the latest transport news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.