19
December 2003
Middle East Economic Digest
Of all the human endeavours that have contrived to change the geography
of the planet, the construction of the Panama Canal has arguably been
the most successful - it connected two oceans and divided America's northern
and southern continents. Saudi Arabia's own plan to connect its Red Sea
and Gulf coasts by rail is modest by comparison, but the economic effects
could be just as significant. "The project is of strategic importance
for the region as a whole. It could have a Panama Canal effect on a regional
scale," says Khalid al-Yahya, president of Dammam-based Saudi Railways
Organisation (SRO). "There could be huge savings if vessels could drop
their cargo bound for the Gulf in Jeddah."
Implementation
By the time the Panama Canal opened in 1914, the US had paid a high price
for the project, both in terms of financial cost and human life. The
price Al-Yahya will pay for the successful implementation of the east-west
railway project will be his job.
"If I am successful my job will be abolished in two-three years," Al-Yahya says.
His career is now linked to a project that will be of significant strategic and
economic importance for the kingdom and for the Gulf region as a whole. In his
role as SRO's president and as the head of an inter-ministerial steering committee
set up by the Supreme Economic Council (SEC) in 2002, Al-Yahya is overseeing
a comprehensive network expansion programme that will involve bringing on board
private concessionaires and abolishing the state monopoly. As part of the programme,
Al-Yahya will also ensure the transformation of state-owned SRO into a private-sector
entity that will run a major part of the kingdom's future railway network. At
that point, SRO will cease to exist - as will the position of the company's president.
For the time being, however, Al-Yahya, a former executive director and
member of the board representing Saudi Arabia at the World Bank in Washington,
has other, more pressing, issues on his mind. "We are working on an expansion
programme that calls for the installation of 3,000 kilometres of new
tracks," says Al-Yahya. "The SEC has just approved the appointment of
the financial advisers to work with us on this programme."
Expansion
The planned network expansion will almost quadruple the length of Saudi
Arabia's existing railway system, which comprises a mere 1,000 kilometres
of tracks. The network includes a 556-kilometre line, built in the early
1950s, which is now used for freight transport between the port of Dammam
and Riyadh, and a more modern 449-kilometre line built in the 1980s for
passenger services on the same route. By comparison, the total length
of the Iranian railway network is almost 10,000 kilometres.
"In the past it was the government's strategy to expand highways and roads," Al-Yahya
says. "But things have changed. The Saudi demography and the size of the economy
have changed, and diversification has become government policy. All these developments
have dictated a fresh look at the railway sector."
As a result of the review, the expansion programme has been divided into
three main components. The core of the programme will be the construction
of the east-west railway, or Saudi landbridge, between the Red Sea city
of Jeddah and Dammam, on the Gulf. The coast-to-coast link will integrate
the existing Dammam-Riyadh tracks with two new sections. The longer of
the sections will cover the 950 kilometres between Jeddah and Riyadh,
while a second segment will connect Dammam with the industrial city of
Jubail, 115 kilometres north. On completion, the railway will transport
freight between the kingdom's two largest ports and its two largest industrial
cities, Jubail and Yanbu.
The second component of the expansion scheme, the western railway, calls
for the construction of a 570-kilometre line linking Jeddah, Makkah,
Madinah and Yanbu. The western railway will primarily serve passenger
traffic but - with the exception of the Jeddah-Makkah link - will also
provide for some freight transport.
The programme's third and largest element is the north-south link, which
will cost an estimated $1,200 million-1,500 million. Also known as the
minerals railway, the project will run from Al-Jalamid in the far north
of the country to Riyadh, where it will connect to the east-west railway.
In total, it will stretch more than 1,300 kilometres and pass close to
the Al-Zabirah bauxite mines near Hail, north of Riyadh. The main purpose
of the railway will be to transport bauxite and phosphate ores to the
Eastern Province, although some passenger traffic is also expected.
Final decision
The government has yet to make a final decision on how to proceed with
this component. Two options are being studied at present - carrying the
project out as a government project or on a build-operate-transfer (BOT)
basis.
While this third project is still some way from execution, the expansion
programme's first two components are moving ahead. In 2002, the government
made a strategic decision towards private-sector participation in the
railway programme, after the SEC evaluated and approved an implementation
strategy for this model. Al-Yahya says it has been decided that components
one and two will be managed and operated by two international consortia
based on 30-50-year concessions - a model that may be adopted for the
minerals railway.
"As far as the method of attracting [private] investment is concerned, it was
decided that it is not best done through an IPO [initial public offering], but
by offering concessions to consortia,"
Al-Yahya says. "[As part of this process] SRO's assets will be transferred
to the winning concession for the Saudi landbridge project."
The latest step towards implementation was taken in early December when
SRO announced the appointment of National Commercial Bank (NCB) and UBS
Warburg as financial advisers on the scheme. A technical adviser has
yet to be appointed. Together, the advisers will consult on the next
steps of the expansion programme and the establishment of a regulator.
The argument for the expansion plan is straightforward. At present, ships
from the US or Europe have to travel all the way around the Arabian peninsula
to reach Gulf destinations such as Kuwait, Bahrain, Dubai and Dammam.
With a freight railway between Jeddah and Dammam in place, transit times
of a container discharged at the Red Sea city for the east coast could
be reduced by eight to 10 days for international container traffic, according
to a World Bank study.
While this is a strong argument to support the economic feasibility of
the railway project, there will also be benefits for the shipping industry.
Recent years have seen a shift towards the deployment of ever-larger
ships such as post-Panamax container ships - new generations of vessels
that can carry up to 8,000 20-foot equivalent units (TEUs) but cannot
be handled in conventional ports. Instead, they serve regional hub ports
such as Jeddah, which provide the required post-Panamax facilities. The
time saving for Gulf-bound carriers dropping their cargo in Jeddah would
result in cost reductions, as vessels would be freed up earlier to take
new cargo aboard for the return journey.
"The value for the carrier would involve vessel savings and faster service, which
is typically most valuable to high-value cargo shippers that are prepared to
pay a premium for expedited ocean shipping service," says Al-Yahya.
Positive factor
Al-Yahya says the volume of cargo generated by Saudi Arabia itself is
another factor positively affecting the economics of the rail link. "Due
to the lack of an efficient and cost-effective rail link between Jeddah
and Riyadh, a significant proportion of Riyadh-destined cargo moves via
Dammam, even when such cargo originates in Europe or North America."
There is a similarly strong rationale for the implementation of the western
passenger railway. Most significantly, the line could provide transport
for the 9 million Hajj and Umrah visitors that now pour into the kingdom
every year. With a dedicated passenger link between Jeddah and Makkah
in place, pilgrims could divert to a safer and more comfortable mode
of travel than by road. Moreover, interconnections with other Western
Province hubs - Madinah and Yanbu - are expected to provide an incentive
for commuters to abandon road transport in favour of rail.
Encouraging signals
There are encouraging signals for railway planners from recent figures
for freight traffic, which makes up 65 per cent of SRO's turnover. "We
continue to experience strong demand for container and freight services
and we have seen an increase in revenues by 65 per cent in the past five
years," says Al-Yahya. "We are now handling 240,000 TEUs between Dammam
and Riyadh per year."
The projects will serve as a much-needed stimulus for the local economy. "We
employ about 2,000 people now but this figure will significantly increase
with the network expansion, as the emergence of a robust railway sector
will create downstream opportunities," says Al-Yahya. "Ports will witness
higher volumes of work and increase employment opportunities. The western
railway passenger service will also contribute to job creation in services."
The economic benefits of the railway programme are evident. So too is
the positive environmental impact if more traffic can be shifted to the
railways. But have lessons been learned from privatisation schemes in
countries such as the UK, where the results have been less than satisfying?
"We can learn from everywhere in the world," says Al-Yahya. "The verdict on the
UK experience is not out yet. After a difficult period it might still emerge
a a successful experiment in the privatisation field. They [the UK] have opted
for full privatisation through break-up of all the functions. The situation is
different in Saudi Arabia in as far as what we have to privatise and what we
have to offer as greenfield concessions. Privatisation is limited to SRO, a comparatively
small organisation. The bigger part consists of greenfield projects that are
several times bigger than the existing railway network. This fresh start will
allow concessionaires to avoid mistakes that were made in other countries."
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