Getting public infrastructure online is a key goal prior to Dubai hosting Expo 2020

Much of Dubai’s appeal is rooted in its ability to offer easy access to local, regional and international markets around the clock. Indeed, the rapid rise of the emirate owes a lot to its ability to introduce efficient transport infrastructure and trade networks. From its flagship airline carrier, Emirates, to its showpiece port, Jebel Ali – the largest container terminal between Rotterdam and Singapore – Dubai’s reputation has been built on investments in transport infrastructure and operations that make it an ideal hub for passengers and cargo to transit through.

This is unlikely to change anytime soon. Given the strong economic and demographic growth being experienced both locally and regionally, as well as the responsibilities of hosting Expo 2020, the emirate’s transport systems will need upgrading and expanding to meet demand over the coming decade. This should provide a raft of opportunities for private sector investors and operators.

Strongest Performer

The transport, communications and storage sector is a significant force in the local economy, accounting for 14.8% of Dubai’s GDP in 2013, with a value of Dh48.4bn ($13.2bn). The sector is growing at a healthy 5.6%, and its track record is largely attributable to government efforts to position the emirate as a multi-modal transport hub. Dubai has played a crucial role in establishing the UAE as one of the most efficient trading nations in the world. According to the World Bank’s “Doing Business Report 2015”, the UAE ranked 22nd out of 189 economies for its overall business environment and eighth globally for trading across borders.

Indeed, the country is significantly more competitive than the Organisation for Economic Cooperation and Development (OECD) average for developed nations. In the UAE, it takes an average of seven days to import and export goods, compared to an OECD average of 9.6 days and 10.5 days, respectively. The cost of importing and exporting containerised goods also gives a saving of more than $400 per container, compared to the average across the OECD. Coupled with the significant investments being made for improved transport infrastructure, it is hardly surprising that Dubai is emerging as a leading global logistics and transport centre.

According to the International Air Transport Association (IATA), the UAE is expected to become the world’s third-largest market for international air freight by 2018, replacing Germany. With a projected volume of 4.97m tonnes, the UAE will follow only China (5.6m tonnes) and the US (10.1m tonnes). Freight volumes handled by Dubai’s two international airports increased by 18.1% in 2014. Total cargo volumes at Dubai International Airport and Al Maktoum International rose to 3.13m tonnes that year from 2.65m tonnes in 2013.

Driving Demand

Dubai and the UAE’s rise to prominence are being fuelled by a favourable demand environment. The Middle East region’s international freight volumes are projected to grow at 4.7% in the five years to 2018, according to the IATA. This marks the region out as the fastest-growing globally, ahead of Africa, which is another important export and re-export market for Dubai.

The strongest performing trade routes moving forward are also likely to generate substantial business for the emirate. According to IATA, in the next five years the Middle East-Asia trade route will grow fastest at a compound annual rate of 6.2%, followed by inter-Middle East trade at 4.6%. The global rate of growth for international freight in the same period is forecast to be 4.1%. Indeed, Dubai has been posting increasingly impressive foreign trade figures: in 2013 the total value of foreign trade in the emirate increased by 7.6% to Dh1.3trn ($354bn).

Logistical Center

The favourable shift in global trade routes will not only benefit Dubai’s aviation industry. The emirate’s maritime and logistics sectors are also expected to prosper as a result of the demand environment. Indeed, the market has already gone a long way to becoming an integrated logistics and transportation hub. “Dubai is a well-established assortment area,” Issa Baluch, former president of the International Federation of Freight Forwarders Association (FIATA), told OBG. “You have a pattern of large ships coming into Jebel Ali and feeder ships going out.” In the coming years, Dubai’s hub model and re-export strategy should only grow.

A significant step was taken in this direction in 2010 with the inauguration of the Dubai Logistics Corridor, a 200-sq-km custom-bonded free zone area that connects Jebel Ali port, Jebel Ali Freezone and the new Al Maktoum International Airport.

At the launch, Salma Hareb, the CEO of Economic Zones World and the chairman of the Dubai Logistics Corridor, told the gathered local press, “One of the important outcomes of the launch of the corridor is the improvement in the flow of sea-to-air cargo by eliminating the processes of exit and entry from one zone to another. Additionally, there will be a potential elimination of double Customs inspection. This is just one step forward, and our plan remains to further integrate, ultimately resulting in the greatest possible efficiency.”

Since this announcement, the emirate has been building on the concept of a logistics and transport hub in the southern part of the city. In September 2014, for example, Dubai Airports announced plans to spend $32bn to expand Al Maktoum International Airport to handle more than 200m passengers in the next decade. Built in two phases, the development – spread over 56 sq km – is projected to be the biggest airport in the world upon completion. Al Maktoum, which opened in October 2013, has a current annual capacity of 5m passengers.

The specifics of this mega project are still being worked out. The master plan for Dubai World Central (DWC), the broader aviation and logistics development of which Al Maktoum is a component, is currently being finalised and is approximately 90% complete. In addition, one potential development under consideration is a stand-alone dedicated terminal for flydubai. The facility would have a capacity for 20m passengers and, while acting as a hub for the low-cost carrier, could be opened up for other airlines depending on demand.

Building The Hub

The main driver of Al Maktoum International and the DWC development, in terms of the airline and aviation support industry, on the one hand, and the logistics industry on the other, is Emirates. Indeed, coordinating with the airline will be key to implementing a plan for the growth of the aviation and logistics hub. Planning around Emirates has been a moving target, but the company’s projections for the past 20 years have been fairly accurate and bode well for future expansion.

The Al Maktoum project should not only support Emirates in its role as a facilitator of air travel and tourism growth: as part of the broader DWC development, Al Maktoum is also expected to drive an airport city project that will support the logistics industry in the emirate. Indeed, spread on more than 140 sq km, DWC offers shared warehouses and dedicated plots for freight forwarders, as well as freezone status to companies operating there.

The growth of the development is expected to improve the integration of sea and aviation freight services within the emirate and cement Dubai’s position as an efficient hub for export to the region and beyond. “The new DWC industrial area is designed to work on a complimentary basis with Jebel Ali [ free-zone and port]. Companies are looking for new synergies for investment in DWC with a view to maintaining their foothold in Jebel Ali,” Lars Ergstrom, group vice-president for the Middle East at Gulf Agency Company, told OBG.

Attractive Corridor

There is already a gravitation towards this new logistics corridor in the city’s southern suburbs. In May 2014, for example, Emirates moved its air freight division, Emirates SkyCargo, to a new cargo terminal at Al Maktoum International Airport. The company has engaged the locally-based firm, Allied Transport, to truck cargo between Al Maktoum and the existing Dubai International airport in the north of the city.

This commitment to the DWC project will support the growth of associated and ancillary businesses. The Dubai Aviation City Authority is already building two agent buildings in the zone and expects to build more over the coming years. Furthermore, several high profile companies have already committed their logistics operations to DWC for the emirate and, in many cases, the country and the region. Logistics is likely to be the second fastest growing segment of DWC next to aviation. A number of logistics operators are already established in DWC, with many already asking for additional land. Recently DWC managed to secure commitments from IKEA, Apple and Nestlé, all of which are basing their regional logistics operations out of DWC.

Port Upgrades

With additional room for growth, it is the southern reaches of the emirate that are emerging as the engine of trade for Dubai. The port at Jebel Ali has long been at the centre of the emirate’s expansion strategy. Home to the largest manmade harbour in the world, Jebel Ali is currently being expanded by 6 berths to increase capacity to 19m twenty-foot equivalent units (TEUs) by 2015. Less than 200 km to the southwest at Taweelah, Abu Dhabi is also busy bolstering its port capacity.

Port Khalifa currently has a capacity of approximately 2.5m TEUs and 12m tonnes of general cargo, and this is expected to reach volumes of about 15m TEUs and 35m tonnes of general cargo upon the full completion of the development in 2030.

Although this expansion raises some questions about eventual competition and overcapacity, there is also a sense that the projects can support each other and cement the UAE’s ranking as a leading international player in global trade and logistics.

“Port Khalifa could provide a strong platform for Abu Dhabi to attract more energy-intensive industry, complementing Dubai’s industrial activity in Jebel Ali, which is more centred around trade, logistics and value addition,” Mohammed Sharaf, group CEO of DP World, the operator of Jebel Ali, told OBG.

Furthermore, planners in Dubai are confident that the new DWC development will support, rather than compete with, the Jebel Ali Free Zone Area (JAFZA) located nearby. Indeed, the development of the logistics corridor in the southern reaches of the emirate is seen as a significant means of building on an historically important economic segment for Dubai, namely the re-export, trade and logistics business.

Many companies with pre-existing investments in JAFZA, for example, are making commitments to DWC but also keeping their presence in JAFZA. As a result, there is likely to be little competition between the two. DWC is being built on the same IT platform as Jebel Ali Port and JAFZA so that there will be seamless integration for companies operating in both areas, and moving goods back and forth.

Rail Transport

Dubai’s new logistics and trade corridor will also be supported by the development of Etihad Rail, a new nationwide rail network. In September 2014 Etihad Rail announced that it was close to securing government funding and awarding contracts for the second phase of the $11bn network. The 628-km second phase will connect Mussafah port in Abu Dhabi with major ports in Abu Dhabi and Dubai and build on the first phase, which connected the Shah and Habshan hydrocarbon fields with the port of Ruwais in Abu Dhabi.

“With tenders for Etihad Rail’s phase two – connecting Abu Dhabi, Jebel Ali, and Fujairah – having been issued, the details outlining the rail’s connection points to the surrounding countries are now the major point of discussion,” Sharaf told OBG.

This new rail network could have a profound impact on the transportation environment in both Dubai and the wider region, building on the maritime and aviation network already centred on the emirate. “The success of Etihad Rail will depend on how quickly they can build connectivity,” Kapil Mehta, head of trade and marketing for the UAE, Oman, Qatar and Iran at Maersk, told OBG. “The rail heads should be around consumption points to make an impact since landed cost for the customer will play an important role in choice of mode of carriage.” Indeed, in the medium term, the introduction of rail freight services is expected to support further growth of both logistics and warehousing in the southern corridor of the emirate. “With Jebel Ali earmarked as the major hub for phase two of Etihad Rail, there will be a great deal of investment activity in the surrounding area leading up to its completion in 2017,” Sharaf told OBG.

The success of the move to increasingly rely on land freight will depend on a number of factors, not least being the ongoing development of inter-GCC integration. Dubai and the UAE will be dependent, to some extent, on their regional neighbours for the growth of an integrated land freight industry in the emirate. This is not only the case in terms of the rapid roll-out of the rail network throughout the region, but also in terms of harmonising regulations to allow for the efficient transfer of goods.

“One of the main challenges for logistics service providers in the UAE remains the carriers to land trade. Regional alignment in terms of Customs and clearance procedures would greatly enhance trade cost and effectiveness," Ergstrom told OBG.

Domestic Demand

The growth of the rail network in the UAE will not only be dependent on international trade but will also be supported by domestic demand. Indeed, across the transportation industry, local demand factors are likely to support a growth in services in the coming decade. For example, the emirate’s population growth is likely to stimulate demand for a number of transport services. Between 2007 and 2013, the population of Dubai grew by some 44%, reaching 2.21m, despite the negative affects of the global financial downturn. Moving forward, the emirate is expected to add as many as 1.2m people to its population by 2020, an increase of more than 50% from the current level.

The transport expansion is partly a consequence of Dubai’s winning bid to host Expo 2020. Indeed, the six-month event will have a significant impact on the emirate’s transportation network prior to and during the exhibition. The event is expected to draw 25m visitors to Dubai, and planning for the fair and expanding the city’s infrastructure will create 277,000 jobs. The preparation for the event will provide a substantial stimulus to the Dubai economy, generating $23bn, or 24.4% of current GDP, between 2012 and 2015. Indeed, the local economic growth rate is expected to increase from 4.2% to 6.4% between 2014 and 2016 and could reach 10.5% by 2020, according to the consultancy Jones Day.

Public Transit

The population and visitor growth trends will perhaps be of greatest consequence for Dubai’s public transport network. The Roads and Transport Authority (RTA) of Dubai is planning to launch up to 35 mega projects to meet the demands of Expo 2020 and the emirate’s organic growth. Infrastructure development up to 2020 is set to be allocated as much as $4bn, with the RTA overseeing the expansion of the metro network.

Beginning in 2015, the metro expansion project is expected to incorporate the extension of both the red and green lines. The red line would see a new spur built along Sheikh Zayed Road between the current red line and the expo site near Al Maktoum International Airport, while the green line would nearly double in length after being extended by 20.6 km. A third extension of 15 km would provide a route to the airport and the expo site via key locations such as Mirdif City Centre, the Shurooq and Ghuboor developments, Dubai Festival City, Ras Al Khor and International City. The national drive to increase public transport infrastructure includes plans to expand the Dubai metro by 50% over the next few years.

Dubai’s metro system, launched in 2009, has had a significant impact on mass transit in the city. Indeed, between 2012 and 2014, public transport usage increased from 368m rider to 531m riders, respectively. The average daily ridership across the network increased to 1.48m riders in 2014, compared to about 1m in 2012. Much of this is on the metro network where the ridership figure reached 164m in 2013, up from 109m in 2012. Public transportation’s share of passenger trips increased from 6% in 2006 to 14% by the end of 2014. The RTA has set the target of a 20% share in total use by 2020.

This goal will be supported by the recent launch of Dubai’s tramway. The 10.6-km first phase of the project, which includes 11 stations and runs from Dubai Marina to Al Sufouh, was opened in November 2014. The second phase of the project will extend the line to a total length of 25.2 km, with 17 stations served by 25 trams. By the end of 2014, the tram line is expected to carry 27,000 riders per day, increasing to 66,000 riders daily by 2020. The extension of Deira Creek is another major project in the pipeline. The initiative, which is still some way from completion, will see the creek extended so that it runs from Business Bay to Jumeirah, while encircling Bur Dubai. The number of water taxis serving the creek will be boosted in preparation for heightened activity in the area. Officials estimate that the extension will eventually create approximately 8000 sq metres of development space capable of housing up to 450 restaurants and four new hotels by 2016. Dubai has also moved to shore up its marine transport services elsewhere in the emirate. Additional water taxi routes have opened in Dubai Creek and Dubai Marina, with others scheduled to follow.

Public Transit Financing

The expansion of Dubai’s public transport infrastructure is expected to create significant opportunities for private sector participation. Indeed, the RTA is looking at the opportunities for public-private partnerships (PPPs) across the urban transport network, in order to maintain its focus as the industry regulator.

Dubai is currently in the process of preparing a PPP law. However, given the rapid pace of infrastructure development and the complexity of PPP arrangements, it may be that obstacles become so exacerbated by the rush prior to 2020 that opportunities would ultimately be limited. Brownfield road PPPs, for example, would entail significant challenges, including issues over the preventative and corrective maintenance that is already performed on roads. Meanwhile, greenfield road development within the cities on a PPP basis is something of a rarity in Dubai. The RTA would most likely look for private investment in things like bridge construction. The financial arrangements for such investment would likely be on an availability payment basis, rather than a revenue-sharing agreement. Given that the demand profile for these infrastructure projects could be affected by tolls on feeder roads, an arrangement in which the private operator would be compensated for maintaining the infrastructure in full operation is seen as the most viable option for achieving an agreement.

The RTA has also not ruled out the possible use of PPP agreements for the extension of the metro network. This is currently operated on a contract management agreement with a British company, Serco, and any future private sector financing would likely focus on rolling stock, rather than the infrastructure, especially given the risk and capital requirements for infrastructure investment. However, while the government would still play a vital role in the funding and implementation of public transport development, the RTA also plays an important role as regulator, which will be just as vital a task going forward.

Public transport PPPs would also likely create challenges around revenue arrangements, given that Dubai is trying to bolster ridership through low fares. Indeed, Dubai has among the lowest public transportation fares in the world, with the 7% of GDP spent on public transport the third-lowest globally, behind Cairo and Bangkok. As such, the nature of the fare structure is likely to be a challenging point of negotiation between the RTA and future operators of public transport networks.

Nevertheless, this would be the case whether the framework is a PPP or a straightforward operator contract, and the authority has had no issues bringing in international firms to operate its infrastructure in the past. In October 2013, for example, Serco signed a $536m, five-year extension of its contract for the operation and maintenance of the Dubai metro. The company, which began Dubai metro operations in 2009, agreed to operate its existing network until 2019 with the possibility of a further two-year extension being considered as well.

Outlook

There are many attractive opportunities for entry into Dubai’s transportation sector, across a broad range of segments, from freight forwarders to public transport, and the fundamental conditions are in place in the emirate that would ensure substantial and sustained demand for services and infrastructure. The forecast for strong economic and demographic growth should ensure increasing opportunities across the logistics and transportation spectrum. Also, with a burgeoning track record of cost and time efficiency, and a raft of coming projects in the run-up to Expo 2020, Dubai looks set to build on its reputation as a regional and global trading hub.

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The Report: Dubai 2015

Transport chapter from The Report: Dubai 2015

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