Rail industry on track in the Middle East

By Joss Dare

Traditionally the Middle East has faced many perceived barriers to the implementation of public transport networks, such as the difficult summer climate and the perceived cultural preference for private over public transport. However, whether it has been the mass influx of ex-pats accustomed to a daily train commute, the congested roads and high frequency of traffic accidents, or a recognition of the potential socio-economic benefits that mass transit can bring, there has recently been a seismic shift in the region. Almost every country in the Middle East region has now announced plans for massive infrastructure spending in the transport sector.

“It is reported that more than US$100 billion of rail schemes are planned or under way in the GCC.”
-Joss Dare

Rail has definitely become the buzzword of the Middle East since Dubai's launch of its US$4.2 billion metro on 9 September 2009.  The Dubai Metro Red and Green lines (upon which Ashurst advised) followed on from the emirate's successful delivery of the US$381 million Palm Monorail (another Ashurst project).  The Dubai Government has recently announced that it is looking at delivering connecting lines of the metro (the "Blue" and "Purple" lines, on hold) by utilising a PPP project structure.

The current economic downturn and the difficulties in sourcing long-tenor project finance have clearly impacted the market. That said, most Middle Eastern countries have advanced public transport plans of which rail normally takes a central role. It is reported that more than US$100 billion of rail schemes are planned or under way in the GCC. Some Middle Eastern governments are able to call on a healthy cushion of petrodollars to procure their projects; others are pursuing the public private partnerships (PPP) model. These factors, together with an increase in Islamic and multilateral financings, mean that the pipeline of deals, however they are structured, looks strong again post-financial crisis.

The UAE has one of the most ambitious transport plans in the Gulf region - the US$11 billion Union Railway project is the first stage of the wider plan to develop a US$25 billion GCC rail network. The Union railway project aims to link the seven emirates of the UAE by rail, initially for freight and then for passenger traffic. A high-speed section linking Abu Dhabi to Dubai is also under construction.

Kuwait has vast reserves of petroleum that have provided recent budget surpluses. Despite its natural resources wealth, development in the region has been stifled by poor transport links and political gridlock. The elections in May 2009, however, ushered in a much needed culture for reform and in February the Kuwaiti Parliament approved the Cabinet's US$102 billion four-year development plan designed to improve the nation's infrastructure across strategic sectors including US$17 billion on rail projects - all delivered by way of PPP under the aegis of the new PPP law and the new body created to administer it, the Partnerships Technical Bureau.  The first of these projects was the US$7 billion Metro system (Ashurst has recently been appointed to advise the authority).

Qatar Railway's development plans form part of a colossal US$25 billion investment to upgrade transport infrastructure in the country by 2014. Deutsche Bahn International won the US$1.1 billion consultancy deal for the project in August 2008, and the Qatar Railways Development Company (QRDC) was launched in November 2009 to oversee the national rail network. Qatar's rail plans, now being driven by the fixed completion target provided by the World Cup but also aiming to aid diversification of the economy by boosting tourism, are extensive - a metro system, a series of tram links and a national network; all from scratch.

The fundamentals for growth of the rail industry in the Middle East are very strong. The populations of many countries within the region are young and rapidly expanding and the strain on the existing road infrastructure is increasingly apparent. The drivers for the rush towards rail solutions are clear: improved economic performance, enhanced quality of life and the desire to develop rail networks in countries that are currently in an incredibly dynamic phase of their evolution. The challenges are also apparent: the effects of the credit crunch on public and private finances, frequently inefficient tender processe; and often a lack of sufficient regulatory cohesion to name but a few. It remains to be seen how many of the transport projects in the region will be structured as PPP projects in one form or another. Clearly many will not but, that notwithstanding, the short to medium term pipeline looks strong.

About

Joss Dare is managing partner, Ashurst Dubai, and Head of Ashurst's MENA Infrastructure and Transport team. With wide-ranging experience of infrastructure transactions including landmark PFI/PPP projects, Dare has taken a leading role in advising public sector clients, sponsors, lenders and sub-contractors across the region and globally.