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Sat 11 Dec 2010 12:00 AM

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All aboard

Global and local contractors are scrambling to jump onto the Gulf’s next gravy train – the implementation of a region-wide rail network worth billions.

All aboard
Population pressure in Gulf countries is likely to drive rail development, in order to ease a potential transport crush.

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 outfir 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.

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
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 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 10-15 years about 80% 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 within the next 15 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.

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. But from long-term business scenario, that
type of link is pretty much a safe bet. 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. This means 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.

“Rail projects are notoriously difficult to finance
privately. The upfront costs are huge and at least 60% 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.

“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,” says Plowman.

Plowman says that in other sectors, the appetite for that
kind of deal is relatively healthy, due to financing arrangements taking place
in conjunction with what are effectively AAA+ 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. 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.

“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.”

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.

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 10%
and although similar figures are not yet available for Dubai’s Salik road toll scheme, it is to be
expected that other GCC planners will adopt similar moves.

Needless to say, competition for these contracts is fierce.
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 so 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
countries 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 nations 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% of your
transport demand, but for example in Europe we
are currently at 16% and this is far too low,” says Hoegler. “My personal
estimate is that there is case in Europe for
about 20% 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%, it will certainly have been money well spent.

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