May 17, 2018

Gulf states eye private finance to fuel rail expansion

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The oil price crash of 2014-2015 had a huge impact on government revenues of the petrostates of the Persian Gulf, forcing a rethink of ambitious rail development plans. Now private financing is gaining ground in the region as a means of pushing projects forward, as Keith Barrow reports from Dubai.

RAIL development in the Gulf States has been characterised in recent years by the implementation of a string of groundbreaking projects which have brought world-class rail infrastructure to the region. From Saudi Arabia’s Haramain high-speed line and North South Railway to the UAE’s Shah-Habshan Railway and metro networks in Dubai, Doha and Riyadh, the Gulf States have embraced rail as an efficient and sustainable way of moving goods and people.

GulfHowever, ambitious plans for national networks and urban rail systems have been checked by plunging oil revenues. The average price of Brent crude crashed from $US 114 a barrel in June 2014 to just $US 31 a barrel in January 2016. For the hydrocarbon-dependent economies of the Persian Gulf the impact on public finances was profound, with $US 360bn wiped off the revenues of the six member states of the Gulf Cooperation Council (GCC), which collectively hold around a third of the world’s proven oil reserves.

Procurement activities were swiftly scaled back. In January 2016 Etihad Rail suspended tendering for the 628km second phase of the UAE’s national railway network, which included the country’s section of the 2177km GCC Railway. Four months later, tenders for work on Oman’s section of the international route were also cancelled.

By March 2018 the average price of Brent crude had recovered to $US 64 a barrel, sufficient to quell fears of an economic crisis in the region but not nearly enough to close the holes in government budgets. According to data from RBC Capital Markets, Saudi Arabia will need prices to reach an average of $US 83 a barrel to balance public spending this year, while the figure is $US 68 in Qatar, $US 63 in Kuwait and $US 61 in the UAE. In December 2017 the Saudi government projected that it would be running a deficit of $US 52bn this year.

“The last few years have been relatively tough out here,” Mr Joss Dare, head of the Middle East practice for law firm Ashurst, said at Terrapinn’s Middle East Rail conference in Dubai in March. “There was huge economic expansion when the oil price was above $US 100 a barrel, and that resulted in a huge pipeline of infrastructure projects. After the collapse there was certainly a need for change and value engineering. Gold-plating is no longer the norm, and the size and scope of projects has been downsized in many cases.”

Dare explains that while market activity subsided somewhat as a result of the oil price decline, many of the drivers behind the upswing in infrastructure investment in the Gulf have not gone away. With the need to diversify economies currently dependent on oil and accommodate huge demographic changes - the population of the GCC states has increased six-fold since 1970 - the pressure remains for infrastructure development to ensure youthful societies can gain access to economic activity.

Little wonder then, that alternative forms of financing have rapidly gained traction in the region. According to Dare, most, if not all GCC governments are seeking to implement public private partnerships (PPPs), or have confirmed their intention to do so.

In Saudi Arabia, PPPs are a central element of the government’s long-term Vision 2030 plan, which seeks to boost private sector investment from 40% of GDP in 2016 to 65% by 2030. The medium-term National Transformation Programme (NTP) envisages increasing private sector involvement in the development and operation of new railways from 5% to 50% by 2020.

Mr Khalid Al Sultan, Saudi Railway Company (SAR) vice-president for infrastructure, told delegates at Middle East Rail that he sees a much a greater role for the private sector, both in the delivery of new infrastructure and operations and maintenance (O&M) activities.

SAR is currently evaluating the use of PPPs to finance a 40km connection between the SAR and Saudi Railways Organisation (SRO) networks on the outskirts of Riyadh, which will include a link to a new dry port for the capital, and a 340km line from Yanbu to Jeddah and King Abdullah Port, which will form part of the Western Rail Freight Corridor.

Al Sultan also confirmed that SAR plans to launch tenders “soon” for construction of the 958km Landbridge, which will link Riyadh with Jeddah on the Red Sea coast. Transport minister Mr Nabeel al-Mundi said in an interview with CNBC in January that this project will be implemented on a PPP basis. This brings the Landbridge full circle as the government had originally intended to procure the project as a PPP and even got as far as selecting a preferred bidder for a 50-year build-operate-transfer contract in 2008. However, the government and the contractor failed to reach an agreement on financial terms, and the Council of Ministers decreed in 2011 that the project should be funded by the state.

In July 2017 the Saudi Public Transport Authority (PTA) invited expressions of interest for private sector participation in the operation of passenger and freight services as well as the management of stations and maintenance of rolling stock through what is described as “a long-term partnership with leading international railway companies and investors of different kinds.” According to the EOI prospectus, the proposals encompass operations on the existing Riyadh - Dammam line and the North-South Railway, and could also be extended to new lines such as the 628km Saudi section of the GCC Railway.

The document states that the discussions with potential bidders will inform decisions on what shape private sector participation in rail options should take. The EOI is also intended to support a review of the Saudi railway governance structure.

Kuwait

Like neighbouring Saudi Arabia, Kuwait is turning to private finance to kick-start its railway construction programme, and the Public Authority for Roads and Transportation (Part) is planning to implement the first phase of the country’s national rail network as a PPP as it seeks to complete its section of the Gulf States Railway by the mid-2020s.

Part board member Mr Mohammad Saud Alhadba told delegates in Dubai that the Kuwait Authority for Partnership Projects (Kapp) will establish a public joint stock company to tender individual project packages for the Kuwait National Rail Road (KNRR) project.

Kapp will tender construction as two design-build-maintain packages, one covering civil works and the other encompassing railway infrastructure and stations. Locomotives and rolling stock will be procured directly by Part and leased to separate passenger and freight operators.

A private consortium will hold up to 44% of shares in the project company, with a minimum of 50% of shares being sold to Kuwaiti nationals through an IPO. The government will hold the remaining 6% stake. Part will pay availability-based unitary charges to the PPP contractor over the 30-year operating period, after which ownership of the infrastructure will transfer to Part.

Phase 1 will comprise a 111km line from Kuwait City to Nuwaiseb on the Saudi border, which will form part of the Gulf States Railway, and a 153km line linking Kuwait City with Boubyan port. Part expects to appoint a technical consultant for Phase 1 in the third quarter of this year. The estimated cost of the first phase is Dinars 900m ($US 3bn) at 2016 prices and construction is expected to take four to five years.

Freight is forecast to generate more than 70% of revenue, although the first phase will also host passenger services from Kuwait City to Dammam, which will operate at up to 225km/h on the Kuwaiti section.

Ultimately a 575km network is envisaged, with a link to Iraq and lines serving the ports of Shuwaikh and Shuaiba.

Private finance is also being actively considered in Oman, where the suspension of tendering on the UAE’s section of the GCC Railway two years ago prompted a rethink on timescales and phasing of the 2135km national railway network. Nonetheless, planning for the national network has reached an advanced stage and Mr Philip Marquis, director, rail development for Oman Rail, says preliminary design has been completed for the entire 2135km system.

In February, Oman’s General Authority for Mining and the Oman Metals Development Company were granted a royal decree to explore the feasibility of a 375km mineral line which will carry gypsum and limestone from mines in the Al Shuwaymiyah and Manji areas of Dhofar governate to the port of Duqm. In a second phase, the line will be extended 276km to serve mines in the Thumrait area. The largely-single-track line will have a maximum axleload of 40 tonnes and will be interoperable with the GCC Railway.

Oman Rail is working on the project with Minerals Development Oman (MDO), the Sultanate’s mining investment and development company, which has carried out studies into mineral quality and volume in Dhofar. This will support the development of a bankable PPP structure for the railway.

Oman Rail says it expects to award a contract shortly for PPP advisory services. “We’ll be going through the PPP process over the next 18 months to two years, so it’s all going to be financial and legal work in the short-term,” Marquis explains “We’re working with the resource market so this project is very much demand-driven. We’re looking to start the design and construction phase around 2020 and we expect it will take 36-40 months to build the line, which is on a relatively level alignment.”

Experience around the globe shows that infrastructure PPPs do not always deliver successful outcomes, and an appropriate balance needs to be struck when it comes to the delicate matter of sharing risk between the public and private sector. Developing a workable PPP structure, providing a firm foundation for a long-term relationship between the tendering authority and concessionaire, will be essential for Gulf States looking for healthy competition between bidders and rapid delivery of projects.

 

GCC Railway to link four Gulf states by 2021

THE United Arab Emirates has reaffirmed its commitment to the Gulf Cooperation Council (GCC) Railway project, confirming that it will complete its connection to the Saudi network within four years.

Dr Abdullah Salem al-Kathiri, director general of the Federal Authority for Transport Land and Marine (FTA-LM) told a press conference at Middle East Rail in Dubai on March 13 that all six GCC countries are moving forward with national rail plans which include links to neighbouring states.

Mr Khalid al-Olayan, representative of the General Secretariat of the GCC, said that the transport ministers of the GCC member states want to complete the first phase linking Oman with the United Arab Emirates, Saudi Arabia and Qatar by December 2021 with Kuwait and Bahrain joining the network by December 2023.

“It’s important to remember that rail connectivity between the GCC member states is not a new proposition,” Olayan says. “It is going ahead according to the timeline for the project recommended by the GCC transport ministers in June 2016.”

 

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