A proposed expansion of Saudi Arabia’s rail system is set to be one of the biggest construction projects in the Middle East and should revolutionize freight distribution in the region.
UBS had only allocated a medium-size conference hall at its London offices for the launch of plans to build the first railway linking Saudi Arabia’s major cities.
But there was standing room only by the time more than 200 bankers and contractors had piled into the bank, which, together with the Jeddah-based National Commercial Bank, is acting as adviser to the project, which conservative estimates suggest will cost $5 billion plus.
At present Saudi Arabia, though comparable in size to western Europe and among the world’s 25 largest economies, has a modest 1,000km of railways, built between 25 and 50 years ago to link Riyadh and the east coast port of Dammam.
The first part of the 2,900km expansion would link the west coast port of Jeddah to Riyadh and there are plans for additional connections between Hazm Al-Jalamid, near the border with Jordan, and Riyadh, as well as between Makkah, Jeddah and Madinah. The old railway would be modernized.
“The route between Jeddah and Riyadh will be primarily a domestic container/freight line though we hope there will container transhipment to other Gulf countries – and there will also be a passenger service between Jeddah and Dammam,” says Khalid Alyahya, the president of the Saudi Railways Organization.
Invitations to companies to prequalify for the BOT (build-operate-transfer) project will be sent out in the next three months, bids will be evaluated in the first quarter of 2006 and the concession awarded by the end of that year.
Saving time
The main selling point for the project, whose advisers include French railway company SNCF International and the international lawyers Linklaters, will be the saving in time. The freight service will take 18 hours to travel between Jeddah and Dammam compared with eight to nine days by sea. “It will reduce transit times, enable shipping lines to save costs and minimize shipping delays,” says Jean-Pierre Loubinous, SNCFI chairman.
There are still issues to be resolved, including the precise role of any rail regulator. According to Linklaters, the project will be contract based, but there is as yet no final decision on whether the regulator will be responsible for determining if the contract has been complied with.
There is plenty of private sector liquidity both in the country and the region to invest in major projects such as this land bridge. Last year Etihad Etisalat, a joint venture between the UAE telecommunications company and Saudi investors, raised $2.35 billion in Islamic finance to finance the second mobile phone licence in the kingdom.
Bankers say privately that financing of a similar scale will be needed for the railway line and that some at least of the money will probably be raised using Islamic finance – though at this early stage nothing official is being said about the total bill for the project.
However, Alyahya says that the construction costs alone would be “$1 million a kilometre at current cost.”
With more than 1,000km of new line and reconstruction of the existing railway, as well as finance, legal and consultancy costs, the final price will be significantly over $5 billion, bankers estimate privately.
