The vision of passengers and cargo travelling by rail across the GCC borders, much quicker and cheaper than by car or truck while minimising carbon emissions and improving road safety, is being tested harshly by the need to ensure the economic viability of these projects.

The difficulty faced in on-boarding lenders for the second phase of the Etihad Rail and the first segment of the Oman Rail projects is presumably underpinned by less than convincing business cases that the asset and the services arising from it will pay for itself.

Given that infrastructure projects like mainline railways are not necessarily profit-making investments, in good times the state can underwrite the construction investments and aim for the revenues arising from the services to sustain the asset’s operation and maintenance fees.

Thinning government budgets due to lower oil revenues, however, means that most GCC states’ wherewithal to underwrite capital expenses has been significantly eroded, and private lenders, primarily local and international banks, now need to step in.

But the banks ultimately do not wish to take risks and are known to conduct thorough due diligence on every project to assess their economic viability. This becomes especially challenging for most greenfield rail projects since they usually cannot offer revenue guarantees, unlike in independent power and water projects where a power purchase agreement (PPA) guarantees payback for the asset.

The frequently suggested solution to address the current market environment as far as the rail sector is concerned is to move into the PPP model. The missing element of guarantees in revenue, however, means the private developers will require sovereign guarantees from the client, normally a state or government entity, in order to secure credit.

This scenario is being seen as the key sticking point in the ongoing project review and negotiations process, causing the delay in contract awards or potentially a change in scope to make the projects and risks more manageable, or sometimes ultimately causing a change in procurement model.

Indeed it is now becoming apparent that the next segment of the Oman Rail could be procured as a PPP, and, that the planned Kuwait railway PPP, depending on the number of – or the lack of – developers that will respond to the tender when it is released later this quarter, could still risk reverting to a traditional procurement method.

It is going to be interesting how the various mainline rail projects will adjust their scope, timeline and procurement model in 2016 to fit the prevailing economic realities. It is also going to be an extraordinary challenge for key executives to make decisions amid circumstances that hardly have any precedent.