Riyadh set to bankroll $7bn Landbridge

21 August 2009

After months of speculation, Saudi rail authorities confirm they are retendering coast-to-coast rail link.

Riyadh is to fund the $7bn Saudi Landbridge project itself because private banks are unwilling to finance the scheme linking the kingdom’s Gulf and Red Sea coasts via the capital.

After months of speculation over the future of the stalled project, one source close to the Saudi rail authorities tells MEED Riyadh will now finance the scheme itself and retender it on an engineering, procurement and construction (EPC) basis.

The government planned to award the contract as a build-operate-transfer scheme on a 50-year concession, but it has now decided to scrap this structure.

Riyadh has already twice stalled the bidding process on the scheme (MEED 3:7:09).

“The Landbridge has been put on hold while it moves from build-operate-transfer to EPC,” says the source. “It is definitely happening now. It makes sense. This is a big project and during the financial crisis it sends a positive message that if [banks] cannot afford it then we can.”

The Public Investment Fund (PIF), part of the Finance Ministry, will now assume financial control of the project, with the Saudi Railways Organisation (SRO) likely to oversee bidding and construction.

“The project is now with the PIF,” says one SRO official. “We are waiting for instructions from the government on how to proceed.”

Because the future returns from tolls on the Landbridge are uncertain, the banks had been worried about the viability of the project even before the global financial crisis hit the region in mid 2008.

Since then, Saudi Arabia has slipped into recession and international credit markets have collapsed, intensifying the bankers’ fears.

“The main problem with the Landbridge is the scale,” says one banker involved in the bid process. “All big projects are having problems these days. Over $1bn, it is much harder to get funding. This project is about $7bn.

“The Saudi government has enough money to take the project by itself. To some extent, is has to restart the process anyway. It has been on hold for eight months now, and the world has changed in that time.”

The government’s decision to relaunch the railway should accelerate a project that has suffered repeated delays.

In March 2008, MEED reported that the SRO would name the consortium led by the local Acwa Power International as the preferred bidder and keep Saudi Binladin Group’s rival consortium in reserve. However, the project went quiet until December 2008, when the government and the SRO decided that the Saudi economy had deteriorated so rapidly that it would retender the project.

Acwa Power and Saudi Binladin joined forces, merging their consortiums to bid for the new tender. MEED revealed in February that a consortium led by the two companies was the lowest bidder on the scheme. The SRO passed the bid to the government for final approval, which has still to be granted.

The move to a public procurement model on the project means it will now be retendered again, with PIF likely to break the work into a series of packages.

The government set a precedent for altering the structure of rail projects when it relaunched the Haramain high-speed rail project between Mecca and Medina as an EPC scheme in February 2008.

The relaunched project has made rapid progress this year. The PIF awarded the civil works contract for Haramain in March, and the railways authority expects bidding to begin on the two main outstanding contracts by the end of 2009 (MEED 12:6:09).

“The project will be structured in the same way as Mecca-Medina, with the SRO overseeing construction and the PIF taking greater involvement,” says one official in the Acwa-Binladin consortium. “We do not know if the SRO will invite new bidders for prequalification or stick with the same consortiums, but we will wait and prepare again. Last time, we were very close and then every-thing was cancelled.”

Other major projects in the kingdom have also fallen back on state funding as international creditors have backed out.

In April, Riyadh decided to scrap private-sector involvement in its planned Ras al-Zour independent water and power project, choosing instead to appoint a government entity to oversee it (MEED 17:4:09).

Despite the repeated delays, all sides stress there is no question of the authorities cancelling the Landbridge. Besides its strategic importance, linking the kingdom’s east and west coasts, Riyadh would find it embarrassing to abandon such a flagship scheme. However, the new structure is likely to cause fresh delays.

“The project is not in doubt, but there will be a new prequalification process, and preparing for that means I cannot see anything happening until early next year,” says the industry source.

The PIF was unavailable for comment.

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