The groundbreaking Saudi rail-link

The railways are a 19th century invention that are finding a new lease of life in the 21st century with many countries across the world building new lines both for passengers and freight. Therefore, when the Saudi government sought to improve communications between Jeddah on the Red Sea and the capital Riyadh, rail was the obvious choice. The principal purpose of the line will be to carry freight containers and a railway is eminently suited for that purpose, both cheaper and quicker than road.

The Landbridge project, which aims to link the Gulf with the Red sea with an 1400km railway, will also cater for passengers because they are seen as an important additional market, especially at times of pilgrimage. The project, which has a preliminary cost estimate of $5bn but may well cost double that sum, is ambitious and groundbreaking, and faces numerous and varied challenges, from the sheer practicality of creating a line through difficult terrain involving 28 kilometres of tunnels and 100 bridges, to the financing and regulation of this pioneering railway. When the project is completed, it will have more than doubled the existing length of the country’s railway network to over 2000kms.

When completed, with a target date of 2010, the scheme will realise a long established dream of Saudi rulers to create a first class railway across the country to cut out lengthy sea journeys and greatly improve the country’s access with the rest of the world. Saudi Arabia was relatively late to railway technology, opening its first major line, covering the 450 kms from Damman on the Gulf to Riyadh in 1951. That line was always conceived as the first part of a railway linking the Red Sea with the Gulf but the project stalled until now and at last that long term dream is in sight of being achieved by 2010 if plans go to schedule. As minister of transport Dr Jobarah Al-Suraisry put it recently, ‘The government is strongly committed to this project, which will bring to fruition the vision of a visionary leader.’

The upgrading of the older line is an essential part of the project because it is envisaged that the Landbridge will provide an alternative route for container traffic going to the Gulf which is currently landed in Dubai. Jeddah Islamic Port is the main regional calling point for shipping services between Europe and Asia via the Suez Canal. With a transfer time of less than a day by rail across Saudi Arabia, compared with an eight day journey round the peninsula by sea, the promoters of the project, the Saudi Railways Organisation, hope to attract much of the traffic that currently ships to Dubai. A third component of the rail project is the construction of a new 115 km railway line between the industrial city of Jubail in the Eastern Province and Dammam.

It is in part the success of the Damman to Riyadh line that has stimulated the Landbridge scheme and therefore modernising that older line is an essential part of the project. Around half the containers landed at Damman are destined for Riyadh and 80 per cent are carried by rail, help by the fact that the containers retain bonded status on the railway but not on the road. The line between Damman and Riyadh currently carries 283,000 containers annually, an increase of two thirds since 2000 thanks to the rapid growth of the Saudi capital which, with a population of 5 million, is the largest city in Arabian peninsula.

In announcing the project to a conference in London earlier this year, the Dr Jobarah Al-Suraisry said: ‘ The Landbridge project will create a new dimension in land transport across the Saudi Arabian peninsula, transforming the existing rail network into a world-class freight and passenger rail system. It will be one of the largest BOT [Build, Operate, Transfer] projects ever undertaken in the Middle East.’

Preliminary work on the project is well underway and is being overseen by an inter-ministerial steering group headed by Khalid Alyahya, the head of the Saudi Railways organisation. A joint team of international and Saudi advisers has been created which includes UBS and the Saudi Arabian company NCB as the financial advisers, with Linklaters and the Law Office of Abdulaziz providing legal services. The French national rail company’s consultancy division, SNCF International is providing technical advice and Parsons Brinckerhoff has been asked to define the precise route alignment.

Under the BOT agreement, the assets of the existing Saudi railways, together with its 1600 staff, will be transferred to the concessionaire, effectively privatising the whole of the country’s network. This will create a vertically integrated railway, though passenger services are to be transferred under a separate arrangement to a franchisee.

The bidding process has started with invitations to pre qualify and it is hoped to allocate concession in the autumn of 2006. The plan is to set up a concession company, which includes the existing railways, and transfer it to the winning consortium that will acquire a major shareholding. There are still key factors still to be decided, such as the length of the concession, and how government support will be provided, which may be in terms of equity or ongoing subsidy.

The winning consortium will be charged with designing and building the rail network and subsequently maintaining the network at required levels of operational efficiency. The project will be financed by equity and debt from the Saudi Arabian and international bank markets. The land required for the projects will be obtained and provided by the Saudi Arabian government of Saudi Arabia.

Work on the technical specification of the line by SNCF International points to an operation on a quite massive scale on this diesel operated railway. It is envisaged there will be 40 double stack container trains per day with a maximum of 400 containers each, running at 120 kph, with four or five high speed trains travelling at 220kph. While the track will be single track, except in the tunnels and bridges, the civil works will be designed to allow double tracking in the future should demand increase.

The decision to have a mixed railway for both passengers and freight poses added challenges. The most economically successful railways in the world are those which have single purpose, carrying large amounts of freight. While adding in passenger traffic might will bring in extra revenue, the decision changes the technical requirements of the railway. A Saudi mining company, Ma’aden had hoped that phosphate trains with 30 tonne axle loads could be accommodated on the line but SNCF has pointed out that this would be uncomfortable for passengers on high speed trains and has suggested the line should be limited to 25 tonne axle loads. Therefore, having passengers on the line reduces its capacity for freight, not least because the fast travelling passenger services will use up several train paths that could be allocated to the container trains.

Moreover, there are doubts about the profitability of passenger services. Most passenger flows around the world, except in densely populated areas, require financial support from government. However, the Saudi government sees the passenger services as an essential part of the project, not least because the line will link the Jeddah/Makkah region (see box) with Riyadh, two regions which combined account for two thirds of the population of the country.

While the passenger element is seen as critical to the success of the project and the six hour Jeddah – Riyadh trip would halve the time which it currently takes to drive, the government recognises that subsidy might be necessary. SRO chief Khalid Alyahya explained that this was why separate concessions for freight and passengers had been envisaged. ‘The profitability of the main project will stand on the freight revenues; the passenger franchise will be finalised on its own merits. We recognise that they will probably be different players, and we accept that the passenger service may need government support.’

Attracting the private sector is the first aim of the government. However, at the conference, Dr Al-Suraisry emphasised that there was a fallback position should private investors not be prepared to come forward at the right price: ‘The government is dedicated to seeing the project through. We see investors seeking options and are keen to allow the private sector to do the project, but if this first route does not succeed, of course the government will pursue other options.’

Both the Saudi government and potential concessionaires must learn the lessons of similar major projects around the world which have often been beset by massive overruns and delays. In his book, Megaprojects and Risk, Bent Flyvbjerg of Aalborg University Denmark, points out that there is a tendency for promoters of major projects to overestimate potential income and usage, while understating the risks and downside. From a study of a wide range of projects, Flyvberg found that ‘cost overruns of 50 to 100 per cent in real terms are common with megaprojects; overruns of over 100 per cent are not uncommon.’ Transport projects are particularly susceptible with nine out of ten of those analysed suffering from cost overruns. (One of the worst was the Suez canal which came out at 20 times more than the original cost!)

He cites several examples from recent history. The Channel Tunnel, an entirely private sector project apart from some government guaranteed revenue from the railways, opened in 1994 having cost £4.7bn, 80 per cent more than planned and financing costs that are 140 per cent higher than forecast while revenues were less than half the expected level. Both Denver’s $5bn airport opened in 1995 and Boston’s infamous Big Dig tunnelling project in the centre of the city have cost three times more than originally envisaged..

There are counter examples of successful projects that have been delivered on time and budget, such as the £2bn first section of the Channel Tunnel Rail Link completed in 2003 and the two TGV lines in France, Sud Est and Atlantique, but, in general, overruns and delays have been the norm. The task of the promoters of any large scale project is therefore to attempt to operate within the limits of time and cost set at the beginning.

In this regard, one fascinating new approach to the way such huge projects are undertaken has been adopted by BAA, which owns and operates three out of five of London’s airports, for its construction of the massive Terminal 5. This is a £4.2bn scheme, due to be completed in March 2008, involving not only the construction of the main terminal building at a cost of £1.2bn but also a new station for both main line and Underground trains, as well as 14 kms of tunnel, a new link road, a control tower, and many other ancillary items.

The usual relationship between the commissioning organisation and the contractor is to attempt to pass on as much risk to the contractor as possible. However, according to BAA, this approach is flawed because, as Mike Riley, the company’s commercial director for Terminal 5, ‘at the end of the day it is our reputation that is at stake and the risk is likely to end up back with us in any case’. Therefore, BAA decided to take on the risk itself, while ensuring that its 41 key suppliers all signed the same agreement which specified that work had to be carried out to the highest standard possible. Moreover, contractors from different companies are expected to work together in teams to the goals set by BAA.

So far this cooperative approach has seen over half the project being built on time and on budget, with none of the expensive legal claims and counterclaims that usual litter such complex schemes. The Terminal 5 team are convinced that this new way of working will become a model for similar major large projects.

BAA which is a private company but subject to a regulator who determines the price of landing charges at its airports, has, by deliberately seeking to retain risk, bucked the trend of recent public sector contracts which, particularly in Britain, have resulted in the creation of complicated public private partnerships to carry out both the construction of schemes and the long term maintenance.

While some of these have been successful in terms of both providing the new infrastructure on time and keeping costs stable for the public sector, others have proved failed to deliver the clear hoped for benefits to the organisations commissioning them. Indeed this is the case with largest PPP in the UK the £30bn PPP to upgrade the London Underground over the next 30 years which resulted in the letting of three contracts to infrastructure companies in 2003/4. This deal, was controversial from the outset not least because it cost a staggering £450m to negotiate and establish. The arrangement has been beset with difficulties because of the poor performance of the infrastructure companies and is now recognised to have been too complex and unwieldy with insufficient risk transfer, resulting in continuous complaints both from London Underground and its passengers.

The key issue for such projects is the real transfer of risk at a reasonable price. The private sector will only taken on risk if it is sufficiently remunerated and negotiations to achieve a fair price are the essential for successful contracts. While the BOT concept has been widely used across the region, the detail of precisely what risks are transferred and at what cost is essential if the project is to be delivered economically and efficiently. That, like almost everything to do with this enormous and visionary project is quite a challenge.

BACKGROUND

Meeting the transport needs of the fast rising number of Muslim pilgrims who come annually to Saudi Arabia’s holy cities is an increasingly difficult task for the Saudi authorities. That is why another part of the SRO expansion programme is a linked but separate project aimed principally at passengers that will create a railway between Makkah and Madinah, with Jeddah as a main hub in the middle.

New lines linking Jeddah with both the holy cities will be built, together with a spur to Yanbu. The project is intended to provide a ‘fast, reliable and comfortable mode of transport with the particular task of helping to transport the 2.5 million visitors at the time of the annual Hajj, as well as three times that number of annual Umrah visitors (who come out of the prescribed time for the Hajj), 2m of whom come during Ramadan.

It is intended to let the concession – or concessions, since the two main lines may be let separately – for the construction and operation of the railway under a BOT contract but no decision has yet been taken on whether freight will be carried on the line.

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