Middle East states explore rail funding alternatives

13 September 2011

While oil-rich Gulf states are developing rail projects with government funding, other countries in the region are seeking assistance from the private sector or exploring new financing options

Rail is currently the most active transport sector across the region, with governments developing passenger services, freight lines and metro systems.

Building railways is an expensive business. Some $250bn-worth of rail projects are being carried out or planned across the Middle East and North Africa (Mena) region. In oil-rich Gulf states, the governments are mostly footing the bill. Less affluent countries are looking to the public-private partnership (PPP) model for infrastructure development, while others, such as Iran, are having to be more creative in their approach. But alternatives to government and private financing are few, and finding private backers is challenging.

Investing into greenfield projects

“Because of the financial turmoil around the world, the private sector is choosing to invest more in brownfield than in greenfield [projects],” says a Dubai-based industry analyst.

To invest in the Middle East, where most projects are greenfield developments and returns are a long way off, is a risky business. Governments will have to work hard to convince investors to come on board and some cannot afford to wait.

“The priority of the project will determine which finance is used,” the analyst explains. “Even with the financial jitters around the world, rail projects in Mena are still going ahead. The question is not if [the governments] can finance them, but how they finance them.”

[Due to] the financial turmoil around the world, the private sector is investing more in brownfield [projects]

Dubai-based industry analyst

The majority of rail projects in the Gulf are being financed by the government either directly or indirectly in the form of soft loans. Saudi Arabia has several schemes under way, including the Jeddah metro, the $7.9bn Haramain high-speed railway, the Mecca Mass Rail Transit network, an industrial network at Jubail and the minerals freight railway.

After an initial false start, the Haramain project was relaunched in early 2008 on a build-operate-transfer (BOT) basis, with the state-owned Public Investment Fund providing interest-free loans to finance the work.

The US’ Bechtel will provide project management services and supervise the development of the first phase of the Jubail railway. The front-end engineering and design has already been completed on both contracts. Together, they will be worth about SR1.9bn ($507m). In July, Saudi Railway Company invited firms to submit prequalification documents for a contract to build a line between Ras al-Zour, Jubail and Dammam.

Financing the kingdom’s railway plans has proved difficult as banks remain cautious about an untried market. The Landbridge project has been the most difficult to get off the ground. Initially intended to be a 50-year BOT scheme financed through debt, it has been through a complicated tender process. In August 2009, the Saudi government decided to fund the scheme on its own after private banks proved unwilling to provide finance. The project was then retendered.

The civil uprisings [in] parts of the Middle East and North Africa will set back efforts to develop railways

Saudi Railways Organisation (SRO) has already reviewed the financial bids from four prequalified consortiums, which submitted bids to carry out the project in 2009. But it is not yet confirmed if the SRO will award the contract on a BOT basis or if it will retender the project using a simpler engineering, procurement and construction contract.

In the UAE, discussions are still under way over how to finance the planned $11bn Etihad Rail project. In September 2010, Swiss bank UBS was appointed to help develop a strategic financing plan for the railway.

“Etihad Rail is currently reviewing, with UBS, a number of options to determine the most cost-effective form of contract and finance,” says a spokeswoman from Etihad Rail.

A source close to the project adds: “The Roads & Transport Authority and the Finance Ministry are still actively looking at possible options and nothing is arranged yet, but this seems to be in the right track.”

Just because a government decides to fund
a project does not mean everything will run smoothly. There were severe problems with financing both the Dubai Metro and the emirate’s Al-Sufouh tram. The contracting consortium building the $1.1bn tram is still in talks over the project financing, with a deal expected at the end of September.

Private financing for Gulf rail projects

While Qatar and Oman are also looking to fund their rail projects themselves, Kuwait is determined to use private finance. The government has established the Partnerships Technical Bureau (PTB) to execute 28 schemes, including rail and metro projects, using the PPP model.

In August 2010, a consortium led by the UK’s Ernst & Young won the transaction advisory contract for the metro project. This August, the PTB awarded a consortium led by the US’ Booz & Company the transaction advisory contract for Kuwait’s $10bn national railway project. Booz & Company will assist the PTB in planning the technical aspects of the railway, developing feasibility studies and establishing project financing. The PTB will assign an independent operator at a later date to design, build, finance, operate and maintain the railway for a fixed duration. A huge challenge still lies ahead as Kuwait has a worrying track record of project delays.

Saudi Arabia is considering using the PPP model for the Mecca Mass Rapid Transit, but a final decision has yet to be made.

European backing of rail schemes

Elsewhere in the region, European governments have been helping to finance rail schemes, in the hope that improved transportation links will boost trade. In Morocco, one of the biggest developments is a $2.5bn high-speed line between Tangiers and Kenitra that will eventually link up to Casablanca. The Moroccan government is contributing an estimated $585m towards the project, with a further $122m coming from its Hassan II Fund for Economic & Social Development, $231m from France and $1.5bn from loans. Saudi Arabia has contributed $200m, but Rabat needs a further $492m and has appealed to the Gulf states for financial support.

Inevitably, the civil uprisings that have affected parts of the Middle East and North Africa this year will set back efforts to develop railways in the short term.

Once elected, Egypt’s new government will need to resume efforts to rehabilitate its railways. The previous government had requested funding assistance from the World Bank. Egyptian National Railways has said it intended to offer the development of railway stations to the private sector.

Iran is also exploring private-sector participation. Faced with tough international trade sanctions and a lack of funds from the government, rail operators are having to think of new ways to raise finance for plans to build 16,000km of new rail track by 2030.

Plans to develop metro projects across the country have been hit by financing problems and the Tehran Urban & Suburban Railway Company (TUSRC) has been unable to raise the $10bn it needs to complete the construction of the four urban lines of the Tehran metro.

Exploring solutions

One option being tested is to carry out the construction of some of the stations on a PPP basis. The TUSRC gives the plans for the station to a private investor, while the municipality provides the land and permits to build. The government then offers the private investor a loan to help fund the construction. Some $1.4bn of PPP development is under way for 16 stations.

A lack of funds is also hampering Iran’s mainline plans and, in August, the government announced it would look to issue participation bonds and obtain credit from national development funds.

With $250bn-worth of rail projects planned for the Mena region, demand for finance will be strong in the coming decades and investors will be able to pick which projects to support.

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