The national transport network is set for a massive overhaul in the coming decade; perhaps no other sector of the Saudi economy will change so visibly. Everything from the ports and airports to the roads and rails is experiencing large-scale investment. Transport and communication was the secondfastest-growing segment of the Saudi economy in 2013, increasing at a rate of 7.2%, according to bq Magazine, a business publication focused on the GCC. Given the strong economic base and a young and growing population that provides a market of almost 30m people, transport services are likely to expand rapidly for the foreseeable future.
SOLID FOUNDATION: Saudi Arabia already has a strong environment for transport and logistics services. The Kingdom ranked 69th out of 189 countries on the World Bank’s 2014 “Doing Business” report for trading across borders. Indeed, the country is highly competitive when it comes to the movement of goods. According to the report, it takes 13 days and $1055 per container to export from the Kingdom, compared to an average of 20 days at a cost of $1127 per container for the Middle East and North Africa more broadly. Saudi Arabia is almost on a par with the OECD average, which is 11 days and a cost of $1070 per container to export. In terms of importing, the performance of the Kingdom is slightly less impressive: it takes 17 days at a cost of $1229 per container to import goods into the country. While this is better than the regional average of 24 days and $1360 per container, it is significantly worse than the OECD average of 10 days and $1090.
Overall, while the logistics environment in the Kingdom is strong, there is some room for improvement. Saudi Arabia ranked 37th globally on the World Bank’s Logistics Performance Index. Compared to the top-ranked countries, the Kingdom has particular room for progress in the areas of Customs performance and logistics competence, though it scores relatively well in terms of infrastructure and timeliness.
Given the large-scale investment in Saudi Arabia’s transport and logistics sector, the country’s ranking on such global indices is only likely to improve in the coming years. Transport and infrastructure received the third-largest allocation under the 2014 budget, behind education and manpower and health and social affairs. In total SR66.6bn ($17.76bn) was allocated for transport in the 2014 budget, an increase of 2.5% compared to the previous year. Spending in this sector has been growing steadily for a number of years. Budgeted transport expenditure rose by 16% in 2013, for example. Between 2013 and 2017, the total value of transport infrastructure projects expected to be completed amounts to some $25.5bn. For 2014, SR40.2bn ($10.72bn) of the transport allocation will be spent on new developments related to existing road projects, seaports, railways and infrastructure projects at the Ras Al Khair Minerals Industrial City. Work on a total of 3500 km of new roads will also begin, as will the design and planning phase for a further 1360 km of roads.
DEMAND: Such investments are timely given growing demand in the Kingdom. According to the Saudi Arabian General Investment Authority (SAGIA), cargo flows into the Kingdom are expected to increase from a current figure of 1m tonnes per day to 2.5m tonnes per day by 2020. The majority of this will come from basic demand (60%), while 30% of the additional needs will be stimulated by the development of the new economic cities in the country. Domestic cargo demand is expected to increase at a compound annual growth rate of 4-5% up to 2020, while international air cargo demand will rise at 5% and sea cargo will grow at 7-8% in the same period.
In the short term, cargo growth and transport services are being driven by the solid performance of the Saudi economy, the government’s expansionary fiscal policy (including the house building programme) and strong consumer sentiment. Business Monitor International estimates that annual real trade growth will average 1.7% to 2017. Air freight will likely be the best performer in this period, increasing by an average of around 8.5% per year. Rail freight is forecast to rise at 8.4%, while throughput at Jeddah Islamic Port (JIP) will average growth of 5.6%.
PORTS: The performance and development of Saudi ports will be crucial for the country’s growth in the coming years. As of 2013 the Kingdom’s ports handled 520m tonnes of cargo and 12m containers annually, according to the minister of transport, Jabara Al Suraiseri. Nonetheless, 2013 was a tough year for JIP, the country’s biggest port: total throughput at the facility declined by 3.7% to 60.4m tonnes. Container traffic was also down, slipping from 4.74m twenty-foot equivalent units (TEUs) in 2012 to 4.56m TEUs in 2013. Over in the Gulf, King Abdulaziz Port in Dammam fared better: cargo throughput increased by 6.1% to 29.03m tonnes. Jubail Commercial Port also saw strong growth, with throughput jumping by 34.2% to a total of 9.1m tonnes.
Regionally, there are many opportunities for port expansion. In 2012 the UAE processed half of the containers in the Middle East region, while Saudi Arabia, in second place, was responsible for approximately 16% of regional container throughput, according to Drewry Shipping Consultants. With large shipping lines adding more regional ports to their routes, there is room for further growth. For example, in June 2013, Maersk Line included Jubail and Dammam to its Middle East-Europe route, through the ME2 service linking the Kingdom’s Eastern Province with the Mediterranean.
TRANS-SHIPMENT: One significant driver of growth in Saudi ports has been the area of trans-shipment. Michael J Power, managing director of Gulf Stevedoring Contracting Company, told OBG, “Trans-shipment has become increasingly important, reaching 50% in overall volume in 2013.” This segment has considerable potential for expansion for JIP as well. As JIP’s director-general, Sahir Tahlawi, told OBG, “JIP is located on one of the world’s busiest shipping routes and has a tremendous growth potential, especially in the area of trans-shipment.”
RED SEA COAST: Much of the growth in port traffic is likely to be along the Red Sea coast. Fahd Al Rasheed, CEO of Emaar Economic City, told Reuters in January 2014, “Twenty-five percent of global trade goes through the Red Sea but we’ve never leveraged it in the region.” Indeed, many of the port operators on the Kingdom’s west coast are confident that they can capture a greater share of traffic.
In 2013 the world’s three largest container shipping lines – Maersk Line of Denmark, Mediterranean Shipping Company of Switzerland and CMA CGM of France – agreed to consolidate and pool vessels on the Asia-Europe, trans-Pacific and trans-Atlantic routes. For Saudi Red Sea ports with the capacity to handle the largest vessels in operation, this is potentially good news. “The ‘Big 3’ alliance coming in will present a big change,” said Hamdi Nadrah, director of strategic projects at Red Sea Gateway Terminal at JIP. “With the consolidation of services, and the use of mega-vessels, Jeddah is well placed to take advantage because of its facilities and prime position on the main Europe-Asia route.”
Seaport infrastructure on Saudi Arabia’s Red Sea coast is currently seeing significant expansion. Nadrah told OBG, “Jeddah still has the capacity to handle all of these ships. There will be no congestion.” But the port handled 65% of cargo traffic entering the Kingdom by sea in 2012, suggesting that the country may be over-reliant on this site.
With the additional traffic predicted for Saudi Arabia in the coming years, several other ports are being expanded or built. The most ambitious is Emaar, The Economic City, the country’s first privately owned port. The project, which will serve King Abdullah Economic City (KAEC) and associated special economic and industrial zones north of Jeddah, has seen investments of $666.5m so far. This figure is expected to rise to $2.4bn by 2018. The port began operations in January 2014 with an annual capacity of 1.3m TEUs. This will increase to 4m TEUs by 2016 and 7m TEUs by 2018, with a final projected capacity of 20m TEUs. By way of comparison, this last figure would be four times JIP’s current handling capacity.
The first quarter of 2014 also witnessed the launch of other plans to add capacity on the Red Sea. In February a ground-breaking ceremony took place for two port projects in Yanbu: $559.8m worth of construction will take place at King Fahad Industrial Port and Yanbu Commercial Port to boost operational capacity and support services. The project at the commercial port, which handled 3.2m tonnes of cargo in 2013, includes the dredging of the harbour channel and the construction of new piers. However, infrastructure is not the only area of focus for investment. With Saudi ports expected to pick up traffic, the operation and management of this infrastructure is an increasingly sought-after prize. In June 2013 for example, Gulftainer Company of the UAE acquired a 51% stake in Saudi Arabia’s Gulf Stevedoring Contracting Company. With this move, the UAE’s second-largest port operator added the management of three terminals in Saudi Arabia to its portfolio: the Northern Container Terminal at JIP on the Red Sea, and Jubail Industrial Port and Jubail Commercial Port on the Gulf. The purchase, the financial details of which have not been made publicly available, makes Gulftainer the largest port operator in the Middle East by number of terminals. The company now operates 40% of container terminal facilities that handle ships of 12,000 TEUs or larger.
RAIL: Much of the activity in the Red Sea ports is being driven by the government’s ambitious plans to roll out an integrated transport network across the country. This is perhaps best illustrated by the plans for the Kingdom’s rail network, and in particular the Saudi Landbridge project. The rationale for the Landbridge line, running from JIP to King Abdulaziz Port in Dammam (with an extension to Jubail) is to expedite the transport of goods along the main Europe-Asia shipping route. “The idea is for the freight ship coming from Europe to stop at the Red Sea and for the goods to continue by rail to the Gulf and then back onto ships. It takes one to two or two and a half days to cross by land and eight to 10 days to round the peninsula by sea. In this way our ports can become a hub for transit traffic,” said Rumaih bin Muhammad Al Rumaih, CEO of Saudi Railway Company (SAR). Making this happen will require increasing efficiency in terms of handling and costs, a situation that will be helped by the additional capacity being brought to the Red Sea coast.
LANDBRIDGE: The Landbridge project could be a decisive factor in the Kingdom’s ambitions to become a leading logistics and trade centre for the whole region. The $7bn project includes the construction of 950 km of track between Jeddah and Riyadh, the upgrade of the existing line between Riyadh and Dammam, and a new 115-km track between Dammam and Jubail on the Gulf. Originally the government conceived of the project as a public-private partnership based on a 50-year build-operate-transfer (BOT) concession. In 2008 a consortium of seven Saudi companies and Australia’s Asciano was selected as the preferred bidder for the concession. However, negotiations over the deal’s financial terms eventually led to its collapse. “The timing was not right for a BOT agreement on the Landbridge,” said Rumaih. “There was the global economic crisis, so there wasn’t the appetite, and typically infrastructure globally is built by governments anyway.”
Since this failed attempt to bring private capital on board, the government has committed to state-funded projects, both for Landbridge and for other rail infrastructure. In October 2011 the government announced that it would move forward with the Landbridge project using financing from the Public Investment Fund (PIF). In January 2013 a seven-year, $72m project management contract was awarded to the Fluor Corporation of the US, while Italferr was selected in July 2013 for the project design. At present, four consortia are bidding for the development of the project: Agility PWC Logistics Consortium, Mada Consortium, Saudi Binladin Consortium and the Tarabot Consortium. Contractors expect to be notified of the government’s decision in mid-2014.
In the broader scheme of Saudi Arabia’s ambitions to establish a comprehensive rail network, the Landbridge project is in its relative infancy. The most progress, thus far, has been made with the Haramain high-speed rail project, a line connecting Makkah and Medina through Jeddah and the KAEC in Rabigh. As of January 2014 the project was approximately 55% complete and is expected to be finished and open by the end of 2015.
NORTH-SOUTH LINE: The other major axis of the national rail network is the North-South line, currently the world’s largest railway construction project. Construction on the 2400-km rail line, which runs from Al Haditha in the north to Riyadh and the industrial line from Al Jalamid to Ras Al Zour via Al Azbirah, began in 2006 and is approaching completion. The industrial mineral line is open and had by February 2014 transported 4m tonnes of phosphate. In terms of the passenger and general freight network, the line has reached just north of the Riyadh airport.
SAR, owned by PIF and responsible for the North-South line, expects full completion of the track and stations by the end of 2014. Commissioning will begin in mid-2015 and take six months to one year to complete. The company will also take delivery of the rolling stock in the first quarter of 2015. For passenger services, SAR will take ownership of six train sets, each made up of two locomotives and eight coaches. Each train will be able to accommodate more than 400 passengers.
SAR has also tendered contracts for the construction of an internal rail network in Jubail, which will connect the manufacturing base there to the wider network and a northern branch line of 120 km that will link the industrial city with the main network by mid-2016. In Jubail the internal rail system will connect the manufacturing facilities with the main port and the wider rail network. The work is expected to be complete by 2017 at the latest.
NETWORK OPERATION & MAINTENANCE: The rail company is discussing the operation and maintenance of the wider North-South network with a number of Class 1 operators from around the world, including SNCF (France), Deutsche Bahn (Germany), Renfe (Spain) and Network Rail (UK), among others. Offers for the tendered package were expected to be submitted by the end of March 2014 with a final decision to be announced in 2014.
The exact nature of the contract has not yet been decided. However, according to Rumaih, “This is all greenfield. Operators would like to see historical patterns as they would like to know the risk involved, but that is not possible. So for SAR, and indeed other projects in Saudi Arabia, it is really difficult to have projects based on demand or a revenue model. So we will focus on operations to start with and will have key performance indicators on operations themselves. We will have some revenue sharing to incentivise the operator to get people and freight on board, but it will not be completely revenue-based as this will be too risky for investors.”
For both SAR and the chosen operator, the commercial incentive is likely to be driven by the freight services. Both the mineral segment and passenger services will have prices set by the government (with the involvement of the Saudi Railways Regulatory Commission). Freight services will be priced by SAR in conjunction with the operator.
SAR has already begun an aggressive campaign to build business in this segment and take share from road transport. The company has signed memoranda of understanding with major local companies, such as the Saudi Arabian Oil Company for the transportation of fuel products and Saudi Basic Industries Corporation. “We’re focusing on the huge-volume customers going from point A to point B,” said Rumaih. “The railway has problems competing with the trucking industry when it comes to door-to-door. If we have to start double handling, the chances of competing with road transport decrease.”
PASSENGER SERVICE: In terms of passenger services, SAR’s strategy seems to be to focus on the lower-income segment of the market. “We developed a ridership model when the feasibility of the network was studied several years ago. We concluded that we have the biggest chance of taking share from bus passengers and then it would be from car travel and finally, and least likely, from the airlines. Saudi Arabia is a big country and this is somewhat of a disadvantage when it comes to rail travel. As a rule of thumb, for a journey beyond 600 km, rail becomes less competitive against airlines,” said Rumaih.
Given that the main Riyadh-Jeddah route is 950 km, targeting the right passenger demographic will be key. “There are people who cannot afford to travel by plane, so in terms of pricing, we need to make sure that the segment we’re targeting is addressed carefully,” said Rumaih. In reality, this is likely to mean ticket prices will be subsidised (especially given that there are subsidises for domestic air travel as well).
Rumaih remains bullish, pointing to the passenger figures on the existing Riyadh-Dammam line. These increased by 1.6% to 1.12m in 2010, the latest year for which statistics are available. However, this was less than the peak of 1.23m passengers in 2005. Rumaih concedes, “The Saudi and GCC network will be like a freight network with passenger services as an add-on. It’s the opposite of Europe and similar to the US and Canadian network.”
One advantage of rail over road, particularly in the passenger segment, could be speed. The NorthSouth line is designed to accommodate speeds of 250 km per hour, but the maximum operating speed of passenger services has been set at 200 km per hour initially. As the government looks to make greater efforts to enforce speed limits on the roads (120 km per hour), rail services could begin to take market share from the roads.
ROAD: The government is keen to lessen the burden on the Kingdom’s road network. Saudi Arabia has 59,000 km of asphalted roads, a network that grew by 11.22% per year in the two decades to 2011, according to the Kuwait Financial Centre (Markaz). Furthermore, the government continues to invest in the network to ensure maintenance and reduce congestion. Total expenditure on roads in 2013 reached $2.1bn. While much of the investment is focused on the capital region, the government is also seeking to improve connectivity elsewhere. The long-running Saudi-Omani highway is an example of this. The road, which is expected to be completed by end-2014, will cost $432.7m. It will, however, reduce the land travel distance between the countries from 2000 km to 800 km, cutting out the need to drive via the UAE. As with the plans for the 2177-km GCC rail network, this will help the Kingdom improve its connectivity and access to markets in the region.
OUTLOOK: Such plans illustrate the depth of ambition of Saudi Arabia when it comes to transport. Infrastructure upgrades across all elements of the transport network will help the country position itself as a viable base for logistics operations in the region and for the critical Europe-Asia cargo route in particular. While most of the capital investment in infrastructure is coming from the government, the development of an extensive transport network will present a number of opportunities for international transport operators to gain a foothold in the market. With such developments at an early stage, the terms of engagement are not yet clear, making it hard to assess the risks and rewards of investment for now. However, with so many opportunities presenting themselves in what remains a rapidly growing market, the government is unlikely to be short of suitors to run the various components of its ambitious transport network over the coming years.
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