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Will GCC rail projects face further delays?

by CW Guest Columnist on Mar 11, 2017

With their potential to reconfigure trade corridors and dramatically improve metropolitan public transport, it’s no surprise that major railway and metro projects represent a growing priority for Gulf states, in concert with plans to drive economic development and diversification.

Metro projects are underway in key cities across the region, including Riyadh, Dubai, and Doha. Meanwhile, countries like the UAE and Saudi Arabia are continuing to make headway with their national railway networks.

Proof of concept comes from the UAE. Dubai Metro carried more than 190 million passenger rides in 2016, demonstrating the popularity of rail as a form of public transport. Meanwhile, the opening of Phase 1 of Etihad Rail, which links Shah and Habshan to the Port of Ruwais, removed significant truck traffic from the roads and, in doing so, highlighted the benefits of moving goods and material by rail.

Despite such upsides, the construction of rail infrastructure is expensive, and the GCC’s macroeconomic climate – recast by the post-2014 oil price decline – has brought the progress of planned projects, and the prioritisation of new developments, into question. Most obvious is the deferred delivery timeline of the GCC Railway Network. Originally slated for 2018, an updated target of 2021 was agreed upon following a ministerial-level meeting in 2016.

The timeline for the pan-regional rail infrastructure has been hampered by a lack of clarity from Saudi Arabia in terms of when it will build its portion of the network connecting with the UAE border, according to Helmut Scholze, partner at Roland Berger Middle East, a consultancy that specialises in transportation, civil economics, and infrastructure. In effect, this ambiguity meant that there was little point in the UAE’s Etihad Rail proceeding with its planned Phase 2, which would link to Saudi Arabia. In turn, there was less of an incentive for Oman to connect with the UAE, since it would not be able to connect to the kingdom – the GCC’s largest market.

Now, both the UAE and Oman are focusing on building rail sections that can be used to move aggregates and reduce heavy vehicle traffic on a domestic level, Scholze adds. Even so, given rail’s potential to facilitate economic diversification, he is confident that the GCC Railway Network will be completed.

Another industry source, who asked to remain anonymous, is also optimistic that the regional network will materialise, but questions the current delivery targets. “The earliest [completion date for the GCC Railway Network] will be 2025 but, if you look at it realistically, the most likely completion date will be 2030,” the source commented.

When it comes to alternatives to financing rail from state budgets, public-private partnership (PPP) agreements are unlikely to be feasible in the rail sector. The large amount of risk that corporate stakeholders would be expected to take on, coupled with a lack of proven market demand, make it difficult to attract private investment, according to Scholze. “If you don’t have an existing network, and demand projections are not [very] clear, it may be difficult to bring in investors for PPP,” he explains. Scholze believes a more viable option is for rail operators to develop diversified business models – such as non-fare box revenue streams – or a national rail company that integrates logistics and other services within its operations.

Successful models can be found on the international stage. In Hong Kong, metro developer, MTR, receives 60% of its revenue through non-fare box streams. In Germany, privatised national rail operator, Deutsche Bahn, has developed a logistics business that extends beyond rail alone.