Lead Text: 
Can private finance improve delivery of the region's rail projects?

With many significant railway projects underway across the Middle East and North Africa, public spending on rail has dramatically increased in recent years.

Most existing projects fit into the traditional model of direct government procurement, but the scale of ambition of some governments in the region, or a change in oil or gas prices, may stretch their resources.

Therefore, public private partnerships (PPP) should be considered for key infrastructure projects, like railways.

PPP assists in ensuring the quality and reliability of a railway project. Traditional procurement involves a greater role and more risk-sharing by the government, and greater industry-specific professional expertise to be used.

Many Middle Eastern states have no significant history of railway operations. They are unlikely to have in-house expertise to make the best of traditional railway procurement, and it would be a challenge to create this quickly.

Various forms of PPP should be considered by government sponsors for railway projects. The three general variants are project finance PPPs, joint ventures and outsourcing contracts.

Project finance PPPs involve a special purpose vehicle being set up, funded by equity and debt, to create an off-balance sheet project. It generates long-term revenues for the facility provider and provides an equity stake that can be sold at a premium. The providers' portfolio becomes diversified rather than focused on one national industry.

Should the project fail, the idea is that only the private sector providers lose through the winding up of the special purpose vehicle.

A joint venture company established between government and a private sector entity can be designed for long durations to successfully enable funding, manpower, technology and expertise contributions from the private sector, however it does have an impact on the balance sheet of the parent entities.

Outsourcing contracts, meanwhile, permit certain activities to be provided by private firms for a finite period. These could be used to manage railway infrastructure, while allowing for public and central control of a railway network. To enable expert, often foreign, service providers to sign contracts, governments will have to ensure the effective and efficient rule of law through courts. Also, governments must ensure effective access to domestic and international commercial arbitration, so foreign service providers are willing to take on works in the confidence that disputes can be resolved.

PPP projects have already been used in the Middle East, often in the power and water sectors through a Build, Own, Operate, or Build, Own, Operate and Transfer model.

Therefore, it is possible that PPP could be applied to the railway industry.

A deal enabling the sharing of expertise, risk and a long-term commitment to a project by both sides, could create local, public sector expertise.

However, the advantages of PPP will need to be balanced by governments who want railway construction achieved quickly, and who have the finances to pay for this through current expenditure.

Such a scenario may be better served by traditional procurement, which will begin delivering results more quickly, without the time and effort spent on designing procurement arrangements.

Such traditional procurement will be at risk of less professional management of a project, by an inexperienced state, along with the risk of limited transfer of technology and expertise in the longer term from the project.

Clearly, the financial structure of each railway project will be of great practical, financial and political significance.

Article Context: 
CW Guest Columnist
Story Relations: 
Etihad Rail signs JV for UAE rail network
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Railways of the future
Media Embed: 
Published Date: 
Saturday, April 19, 2014 - 13:00
Parent Source id: 
Modified Date: 
Saturday, April 19, 2014 - 13:00
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