Oman considers PPP for rail network

09 July 2015

Private sector could fund most profitable sections of the network

  • Oman Rail to study project finance option for $12-$15bn national rail project
  • Only most commercial sections will have potential

Oman Rail is working with financial advisers and banks to study the possibility of developing sections of its 2,135-kilometre national rail project on a public-private partnership (PPP) basis.

It is expected to seek financial advisers soon.

Bids for a legal advisory role have already been submitted.

“The rail project moved from being a government scheme to a project company in the middle of last year,” says Iain Morrison, head of commercial banking at UK bank HSBC’s Oman branch. “We are aware that tenders are in for the first engineering phases and expect this to generate banking opportunities in the near future.”

The experts are studying different sections of the rail project to identify those with the highest potential for profits.

These are likely to be sections between growing industrial areas and ports or other logistics hubs. They are expected to have a high demand for freight as companies move their goods to market.

Due to the difficult, mountainous terrain that the railway will cross, some sections will have a higher construction cost than their potential for profit.

Only a small proportion of the $12bn-$15bn project is likely to be suitable for PPP deals.

“The overall rail project is large and complex,” says Morrison. “Some phases will lend themselves extremely well to project finance. However, we suspect the full range of funding options will need to be leveraged. The profile of the various segments will, of course, differ in commerciality and complexity, and hence will require appropriate structures to ensure bankability.”

Many Oman-based experts doubt that any sections of the project could be suitable for project finance under current conditions.

“They would have to relax the restrictions on where financing comes from,” says an engineering consultant involved in the project. “It would be difficult to identify small sections – most are long and horrendously costly. I can’t see financiers going for it.”

Others see more potential for private sector involvement, if the client and developers are prepared to be creative and flexible with the structures.

“Of course, a conventional PPP will not work,” says a project finance consultant. “So one has to think out of the box on this case.”

The first phase of the rail network will probably be directly financed. Main contract bids are under evaluation for the 127km line linking Sohar to Buraimi.

Prequalification for the second phase has started, comprising two design, engineering, procurement and construction packages on segments 2 and 4.

Oman is investing in transport infrastructure as it attempts to diversify its economy. The sultanate’s aim is to become a logistics hub for the region.

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