There was a need for an efficient public transport system throughout the entire country for freight as well as passengers
High oil prices catalysing rail development
While the Middle East has been upgrading its rail network over the past decade, it wasn’t always a priority for the region. “It’s all because of the oil,” says Hassan. Cheap fuel prices made it simple for locals, tourists and businesses to use the road to get around and transfer goods.
However, the country’s reliance on fuel became weaker after the oil prices witnessed a hike in 2014. The escalating oil prices since then have sabotaged the UAE economy, Hassan says. “The oil supply is not very good anymore so the UAE is relying more on tourism and other sources for its economic growth.
“After fuel prices surged by 70%, it wasn’t viable for the public and there was a need for an efficient public transport system throughout the entire country for freight as well as passengers. That would reduce the burden on the economy, on people's pockets and even businesses.”
With an aim to boost trade and improve the economy, the government launched the Etihad Rail project in 2009; the network would connect the entire region from Ghuweifat on the border with Saudi Arabia, to Fujairah on the east coast.
The network was planned to be delivered in stages. Stage One, a 254km line from the gas fields in the Al Dhafra region to the Gulf port of Ruwais, received an investment of AED1.28bn and was completed in 2015. Now fully operational, Stage One has the capacity to transport 22,000t of granulated sulphur on a daily basis and has carried more than 20 million tonnes - the equivalent of around one million truck trips - from Habshan and Shah to Ruwais to date.
Upon the success of Stage One, the UAE‘s Ministry of Finance and the Abu Dhabi Department of Finance signed a deal in November 2018 to finance the second stage of the UAE’s national rail project. Stage Two will span 605km and integrate the national system with the GCC network, transporting up to 50 million tonnes of freight a year.
The final expansion will come under Stage Three and serve the northern Emirates, adding a further 250km to the network.
Economic and environmental benefits
Etihad Rail is a key economic project as part of the Abu Dhabi Economic Vision 2030 and UAE Vision 2021 – an initiative which outlines a roadmap for Abu Dhabi with an aim to improve the region’s overall development and increase GDP from non-oil sectors to over 60% by 2030.
Furthermore, it prioritises having a sustainable approach in its operation. A single freight train’s journey can carry the same load as up to 300 trucks, thus reducing traffic congestion, accidents and road maintenance costs.
One fully loaded train reduces CO2 emissions by 70%-80% compared to the equivalent number of trucks. The estimated total benefits of emissions savings would total AED21.2bn over the next 40 years, claims the company.
“The primary mode of freight transport is currently by vehicle, which can be slow, inefficient and expensive, as well as environmentally damaging,” says Hassan. “Use of rail will enable greater quantities to be transported within a shorter period of time and at less cost, facilitating more efficient trade.”
Other than contributing to safeguarding the environment, the rail aims to connect urban hubs with remote rural areas – such as Fujairah - which will boost business in all areas of UAE.
The primary mode of freight transport is currently by vehicle, which can be slow, inefficient and expensive.
While the overall economic benefits to the population are clear, governments face the immediate challenge of having to finance the upfront cost of an expensive asset
An increasing burden for the UAE Government?
It was far from easy to develop a national rail network. As Hassan explains, given the capex for railway projects is high, the development of the rail has been “a drain on the economy”.
The oil prices had a direct effect on the government’s infrastructure spending, resulting in a budget deficit and delays in the delivery and growth of rail projects. “With the need to be more fiscally accountable it's not surprising that plans have been economised and otherwise spread out for delivery over a longer period of time,” says Yvonne Cross, partner and railway analyst at law firm Ashurst.
“While the overall economic benefits to the population are clear, governments face the immediate challenge of having to finance the upfront cost of an expensive asset [the prime focus of which] is to benefit the people rather than delivering significant profit,” Cross adds.
Cross notes in order to appeal to lenders and sponsors, the government must ensure the projects “are properly structured with sensible risk allocations and sufficient payment guarantees.” She adds the main challenge would be that there will come a point where there is not enough market capacity to deliver all the planned projects at the same time due to financial constraints.
Other challenges facing the rail industry in the region include getting labourers to work on the project in remote areas. “It is quite difficult for the contractors and the operators to bring in the right amount of labour as this goes through the desert where the conditions are very extreme,” Hassan says.
Cross says the growth is slow but it’s the right way forward as projects are prioritised in order of need and also delivered to the right capacity so it doesn’t “pose a substantial drain on fiscal resources, but rather this approach allows the asset to grow and expand over time.”
Despite the slow growth and economic speed breaks, Cross is bullish about the rail sector in UAE. “The rail sector in the UAE will continue to develop and grow so long as there is a regional appetite, however, it’s more likely to be at a slow but steady pace,” she concludes.