Future of rail rests on funding and political will

02 January 2017

Several rail projects have stumbled in 2016, but contractors remain hopeful governments will consider alternative financing models

The past 12 months are likely to be remembered for the transport projects that were not awarded rather than for those that were, particularly in the rail sector.

Several contracts worth up to $8bn for Saudi Arabia’s Mecca Metro that were originally due to be let in 2015 were not awarded for the second year in a row. The cancellation in January of the tender for the second phase of the UAE’s Etihad Railway likewise disappointed the market, following the successful implementation of the rail network’s first phase a few years back.

Funding gap

Limited interest from banks to plug the funding gap is understood to be the main reason for the stoppage of the second phase of the UAE project. Its cancellation has had a knock-on effect on long-standing plans to build a region-wide rail network, with the other GCC countries, particularly Oman, also delaying the construction of their mainline railways.

As a result, the GCC Secretariat says member states have now agreed “in principle” to move the target completion date of the GCC railway from 2018 to 2021.

According to regional projects tracker MEED Projects, an estimated $30.2bn-worth of transport contracts were awarded across the Middle East and North Africa (Mena) region in 2016. This was about 49 per cent of the value expected at the start of the year. The most significant rail deals awarded were the $2.9bn, 15-kilometre extension of the Dubai Metro to the Expo 2020 site and the $1.2bn main contract for the third phase of Line 3 of the Cairo Metro in Egypt.

Road schemes accounted for the largest share of contract awards (48 per cent) in the transport sector, with Qatar, the UAE and Kuwait the biggest spenders in this area. Delivering an integrated transport infrastructure in time for the 2022 Fifa World Cup is the main driver behind Qatar’s continuing efforts to upgrade existing roads and construct new ones.

 Transport awards

Transport awards

Transport awards

The aviation sector also saw some significant awards in 2016, with deals on two major projects signed during the year: the expansion of Kuwait International airport and the $1.1bn airport modernisation programme at Bahrain International.

In January, the UAE’s Arabtec Construction and Turkey’s TAV won the $780m contract for the main civil works for the upgrade of Bahrain International; deals were also let for other components of the project, including the baggage-handling system, passenger loading bridges and security systems.

Individual countries need a… transport board that sets a long-term objective

Meanwhile, the $4.3bn contract to build the new Terminal 2 building at Kuwait International was finally officially awarded to Turkey’s Limak Insaat Sanayi and the local Kharafi National at the end of May, after investigations into the bidding process delayed the approval for nearly a year. This was followed by the award in August of the $174m contract for the temporary passenger support facility at the airport, which is expected to be completed before the end of 2017.

Whether the delayed rail awards will materialise in 2017 largely depends on access to financing. The size of the upfront investment required for greenfield rail schemes, as well as the lack of precedence in using public-private partnerships or project finance in the region’s rail sector, are seen as major stumbling blocks in this new era of low oil prices.

The expectation a year ago that rail schemes that have not yet reached the procurement stage would be broken down into smaller, more manageable packages to attract investors has not proven true.

Alternative financing

Contractors and sub-contractors remain hopeful the Gulf countries will move to re-scope or consider alternative funding models for their rail projects.

“[They] need [the infrastructure as much] now as they needed it five years ago, and they will [continue to] need it five years down the road,” says Mac Motraghi, director of the international business development department of technology and rail at Japan’s Hitachi, referring particularly to urban rail schemes planned in Saudi Arabia, the region’s largest potential market for rail.

With government revenues severely reduced following the collapse in oil prices from mid-2014, strong political will is required even for the most economically feasible proposed rail schemes to progress. “Individual countries need an infrastructure or transport board that sets a long-term objective that says this is where we are today and this is where we want to be tomorrow,” says Motraghi.

Some $500bn-worth of transport projects are planned across the region. Rail schemes account for more than half of the total, while Saudi Arabia has the biggest pipeline of transport projects, representing 29 per cent of the total planned in the Mena region.

 Transport projects by status

Transport projects by status

Transport projects by status

In the current climate, there is a chance a significant proportion of these planned projects, particularly in the rail sector, will be cancelled or delayed following a review of their economic feasibility and depending on how they sit with each government’s overall development priorities.

However, the economic, social and environmental consequences of greater urban congestion, which range from reduced productivity, lower quality of life and road fatalities to a growing need for car parking facilities, will mean most governments will not be able to avoid indefinitely implementing some form of metro or light rail system in their cities, or at least expanding existing facilities.

The business case for a mainline railway may not be as urgent for some countries, but the long-term feasibility in terms of offering a cheaper, safer and more efficient option for transporting goods and passengers remains in place.

Aviation growth

With air passenger traffic in the Gulf region growing by an average of nearly 8 per cent a year since 2010 (and at double-digit rates for some airports), there is a stronger argument for investment in the aviation sector.

Many airports across the region are already operating close to or are exceeding their capacity. This potential threat to safety means expansion projects will remain viable regardless of a short-term slowdown in economic growth or travel demand. Furthermore, with Dubai and Qatar hosting global events in 2020 and 2022 respectively, it is expected that the key airports will continue to expand.

The biggest single project in the region’s aviation sector is the $32bn expansion of Al-Maktoum International, Dubai’s second airport. Bids for the infrastructure packages that will support the construction work have already been submitted. In July, the local Tristar was awarded the contract to complete the enabling works, which covers earthmoving works for the entire 36-square-kilometre site.

In terms of the sheer number of airport projects, Saudi Arabia and Iran are expected to be the biggest markets in the coming years. About $22.7bn-worth of airport schemes are planned to be executed in Saudi Arabia between 2015 and 2035.

Iran, meanwhile, has 54 airports that have been starved of investment for decades and denied access to the latest international technologies. Now that most nuclear-related sanctions have been lifted on the Islamic Republic, a major new projects market is expected to open up, and the expansion of Imam Khomeini International airport in Tehran is expected to be a priority. Iran will also be looking to modernise its rail and seaport infrastructure.

A MEED Subscription...

Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications