Rail contractors must focus on the medium term

28 February 2016

Steep decline followed spectacular growth of 2013

For the Middle East and North Africa (Mena) region’s rail sector, 2013 was a flagship year, with $33bn-worth of contracts awarded. This was mainly for work on the Riyadh and Doha metros.

In 2014, the deals let were valued at $11.5bn. This further declined to $7.4bn in 2015. The most significant award in 2015 was for the $4.1bn systems, rolling stock and track work for the first phase of the Doha Metro, awarded to a Japanese consortium of Mitsubishi Heavy Industries, Mitsubishi Corporation, Hitachi and Kinki Sharyo, as well as France’s Thales.

Major rail projects for which main contract awards have been delayed or cancelled include:

  • Mecca Metro lines B and C
  • Etihad Rail phase 2
  • Oman Rail segment 1

For 2016, the most likely contracts to be awarded include Route 2020 of the Dubai Metro and four deals for the Mecca Metro’s civil works, systems and rolling stock.

Industry observers tell MEED, however, that it is unlikely any of the mainline rail scheme contracts – including the Kuwait National Rail Road, Oman Railway and Qatar’s long-distance rail network – will be awarded in 2016.

There are more than $200bn-worth of planned mainline rail and urban light rail projects across the region, nearly all of which are understood to be currently undergoing greater scrutiny due to lower oil revenues eroding governments’ spending capability.

It is ironic that as recent as early 2015, the expected release of major rail schemes and the consequent demand for rolling stock was causing some major concerns in the market. With the Riyadh and Doha metro schemes, Japan’s Mitsubishi, Germany’s Siemens, France’s Alstom and Canada’s Bombardier were expected to have issues with capacity, if more orders were to come through.

One year on and the landscape has changed completely.

“It is possible for growth to return in two to three years,” a source working on some of the ongoing rail projects tells MEED. “Or at least we need to keep this perspective, otherwise we will have to exit this market.”

The source tells MEED they have enough work to keep them busy over the short term. While 2016 does not look very promising, things might turn for the better in 2017.

He argues that the GCC rail network, particularly the freight component, is a necessity. “Anyone who has been to the UAE-Saudi border, where heavy trucks pass through to move goods between the two states, will agree,” he says.

It is understood the time delay and road safety involved in transporting freight by trucks are among the key issues that justify a cross-border rail network. Indeed, the transport ministers across the six GCC states have not shown any indication the railway could be cancelled, although a major delay in its delivery is now certain.

Saudi Arabia remains the largest potential rail market in the region, with schemes such as the Jeddah, Medina and Dammam metros, and the Saudi Landbridge project in the pipeline. The kingdom, however, made a significant cut to its transport and infrastructure budget in 2016, reducing planned spending by more than half, to $6.4bn, compared with the previous year.

Turning to project finance and public-private partnerships (PPP) remains an option, but not without the attending challenges of requiring the government to provide sovereign guarantees, particularly for the mainline rail schemes.

Iran and Egypt, over the medium term, also present major potential opportunities. It is not unlikely that most of the memorandums of understanding (MoUs) the Iranian government signed with Chinese and European rail suppliers since nuclear-related sanctions were lifted will translate into actual schemes in two to three years.

Egypt’s plans to electrify significant segments of its rail network and build a high-speed line are also expected to proceed, although the pace of contract awards could be hard to predict and subject to the availability of private funding.

If most of the planned projects are awarded as expected, albeit with a two- to three-year time lag, growth in the sector will likely return, and with it the problem of overcapacity, particularly for rolling stock suppliers.

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