Riyadh makes up for lost time with rail

29 September 2009

Saudi Arabia has launched one of the largest and most ambitious rail construction programmes ever undertaken.

If the GCC has been slow to recognise the importance of rail to the region’s economic development, Saudi Arabia is making up for lost time. The government has woken up to the importance of an integrated rail network to capitalise on hosting the holiest sites in Islam and the world’s largest oil reserves.

As a result, Riyadh has launched one of the largest and most ambitious rail construction programmes ever seen. Some $30bn of rail projects are under construction or at a bidding stage, with many more under development.

Riyadh has already signalled it is prepared to spend through the downturn to keep major projects on track, and railways remain high on the list of priorities. Principle among these are the three heavy rail projects that will transform the kingdom’s freight and passenger network: the Saudi Landbridge, the Haramain high-speed line between Mecca and Medina, and the North-South minerals railway.

The government’s willingness to stand behind these projects has been critical to maintaining progress as credit markets collapsed.

Government backing

In August, MEED revealed that the government had decided to bankroll the Landbridge itself. The scheme to link the Gulf and Red Sea coasts via Riyadh had begun to drift indefinitely. After bid rounds over two years failed to deliver a winner, the project’s future was being openly questioned in some quarters, despite repeated denials from the Saudi Railways Organisation (SRO) and the government.

The original build-operate-transfer structure will now be scrapped and replaced with an engineering, procurement and construction (EPC) model. The Public Investment Fund (PIF) of the Finance Ministry, which already oversees the North-South and Haramain projects, will take on greater oversight for the bidding and construction of the Landbridge.

A consortium led by local groups Acwa Power International and Saudi Binladin Group was the lowest bidder following the second round of bidding in February but banks attached to the group have continued to voice concerns.

“The main problem with the Landbridge has always been its sheer size,” says one banker involved in the bid process. “If it had cost $1bn or less we would not be having this conversation, but any project above that size has been struggling to find funding.”

With projected future revenues from the Landbridge uncertain, the banks’ concerns about the viability of the project predate the economic crisis. However, their fears of getting involved with the project have intensified as Saudi Arabia has slipped into recession and international credit markets have collapsed.

Between February and July, communication appeared to break down entirely between the government, the SRO and bidders. Officials at the leading consortium heard nothing from the SRO, which in turn was left waiting for the PIF to endorse the Acwa-Binladin bid. By July, an official at the SRO admitted to MEED he had “absolutely no idea” when the project would move forward.

The government’s intervention has therefore saved the project from an embarrassing impasse. The move from a build-operate-transfer contract to an EPC structure will cause further delays as new work packages are defined and bidding restarted. But overall, the move sends a strong signal to the market that Riyadh is not prepared to wait for the project finance market to recover to move these critical projects forward.

“It makes sense to restart the process anyway,” says the banking source. “The logic behind retendering the Landbridge at the end of 2008 was that the world had changed completely since bids went in the first time [in February last year]. Another year on and the world has changed again.”

The government set a precedent for such a move when it relaunched the Haramain railway as a public procurement scheme early in 2008. Companies waiting without news of the Landbridge must have looked enviously at the financial security enjoyed by contractors working on the line between the holy cities.

“The Landbridge almost got forgotten about,” says Mohammed Hassan, head of transport at Egypt’s Orascom Construction, part of the Acwa-Binladin consortium for the Landbridge. “Everyone has been focusing on the Haramain project. That has been the hot topic in Saudi rail this year.”

Since the shift to an EPC structure, the Haramain project has made rapid progress. The civil works package was awarded to the Al-Rajhi Alliance in March this year. Led by the local Al-Rajhi and Mada groups and featuring China Railway Engineering Corporation and France’s Alstom Transport, the consortium broke ground on the land corridor for the railway in July. The work should take three years, with the Saudi government buying up any buildings and other property on the required land for demolition.

Operations deal

In August, the SRO launched prequalification for the next main package, the $1.4bn contract to provide operations, signalling and telecoms. The six international consortiums prequalified for the Haramain project in June 2007 have spent the summer reordering themselves and, as MEED went to press, the SRO had said bidding would begin in the weeks after Ramadan.

Haramain will provide a new transport option for the 10 million annual visitors to Mecca and Medina. Given the importance of the sites, the SRO decided in April to draw new ‘world-class’ designs for four of the five stations. A UK joint venture of architects Foster & Partners and engineering group Buro Happold is working on the designs, which are due to be completed by November. The SRO hopes to begin prequalification for the contract to build the stations by the end of the year.

Contractors expect the new designs to push up the cost of building the stations, originally anticipated at SR6bn ($1.6bn). However, Riyadh is ultimately picking up the tab and has made it clear that money is no object.

“Everything is on schedule with the stations contract,” says one SRO official. “It was decided that for a project of this size and importance, it was important to have stations appropriate for the sites. The station at Mecca will be very close to the Sacred Mosque so yes, we want outstanding designs for the project.”

To complement the high-speed railway, there has been swift progress on the $1.8bn monorail system connecting Mecca to the holy sites at Mina, Arafat and Muzdalifah, providing a mass transit system for the thousands of pilgrims to visit the area each year.

China Railway Company won the contract to build the monorail in February this year and is already at work. As a key member of the Al-Rajhi Alliance carrying out the civil works for the Haramain scheme, the state-owned -Chinese rail group has had a successful year.

The monorail is scheduled for completion in 2011, but will be operating at 35 per cent capacity in time for the Hajj pilgrimage season in 2010. A proposed extension would connect the monorail to the Haramain railway at Mecca station near the Sacred Mosque.

A report by the Supreme Hajj Committee says that when it is fully operational, the system will be capable of handling 500,000 pilgrims every six to eight hours. The committee also says that once up and running, the monorail will have a massive impact on traffic congestion on the roads in and around Mecca, with up to 53,000 buses and other vehicles removed from the roads.

Like the Haramain and Mecca monorail projects, which tap into Saudi Arabia’s focus as a tourist destination across the Arab world, the North-South minerals line has also made rapid progress because it serves a clear purpose.

Linking the phosphate and bauxite mines in the north of the kingdom with the industrial complex at Ras al-Zour, future cargo loads and revenues on the 2,400km projects can be predicted with greater accuracy.

As with any project on this scale, the railway has not been without its difficulties, particularly the logistics for contractors of getting staff and equipment onsite in the hostile terrain of the Saudi desert. The fourth main construction package was retendered last summer after the front runner, Russian Railways, was acrimoniously dropped from the project.

The local joint venture of Al-Ayuni Trading & Contracting Company and Al-Abdulaziz al-Omer Establishment for Trading & Contracting, along with China Civil Engineering Construction, is in line for the retendered $720m contract to build the 480km passenger line between Al-Zabirah junction and King Khaled International airport in Riyadh.

The US’ Electro-Motive Diesel and China South Locomotive & Rolling Stock Corporation will supply locomotives and wagons respectively for the project. A decision is also close on whether India’s Rites or Australia’s Pacific National will act as operator.

Most key contracts are almost in place. -Riyadh has shown it can deliver a massive rail construction programme on time and on budget. Moreover, with the main sections of the North-South railway open, the full benefits of an industrial heavy rail network will become clear to the rest of the region.

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