Train of thought: Firm's talk Etihad Rail

We ask experts to voice their views on the US$10.89 billion project.
Logistics, ANALYSIS

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Seeing is believing - is how the old, but powerful idiom goes. And so, when Etihad Rail released the livery design of its new trains last month, companies in the UAE took notice. The circulated image of a locomotive, in a trim light grey paint scheme, neatly- streaked with a broad red band, cleared up any haziness surrounding the project and turned the focus of the country’s big business players to a future that includes a railway network.

But, what will a rail network mean to logistics in the UAE? After all, this country and region finds itself in a position contrary to many other places in the world, in that it first developed a modern road system before moving into rail transport.

So, for the huge expatriate population in the country, trains are not a new concept. Many countries around the world are steeped in rail transport history stretching back more than 500 years or even earlier, if the primitive tracks built in 600 BC around the Isthmus of Corinth in Greece are considered.

One such experienced expat in the region is Masood Hassan, PWC Partner, Middle East advisory service, who has been in the industry for the past 13 years. He states that while the benefits of a rail network are immense, the hype surrounding this new industry should not overshadow the critical challenges that need to be addressed.

“The populations of many countries within the region are young and rapidly-expanding and the strain on the existing road infrastructure is increasingly apparent. The drivers behind the rush towards rail solutions are clear: improved economic performance, enhanced quality of life and the desire to develop rail networks in countries that are currently in an incredibly dynamic phase of their evolution,” he says.

“Railway transportation has several advantages over other means of transport. Railways provide the ability to move large volumes of materials and passengers, according to a regular schedule and over long distances. It eases congestion and increases the appeal of public transport.

“However, if the Middle East is to realise the full potential of its logistics industry and compete with the logistics leaders around the world, it needs to address issues such as weak customs procedures and infrastructure, its dependence on a large expat demographic for business and the lack of widespread free economic zones.”

But the most important question to be considered, according to Hassan, is regarding the cost of maintaining such an infrastructure for the long-term.

“Other challenges are also apparent. for example the effects of the credit crunch on public and private finances. It remains to be seen how many of the transport projects in the region will be structured as PPP [public private partnerships] projects in one form or another,” he says. “One thing is clear, in the short term this looks an attractive proposition, but the true cost of managing the rail infrastructure through life is a question that still has not been answered by many of the countries implementing
these projects.

“Sowhile new state-of-the-art rail systems are being installed around the Middle East, economic prosperity takes on a different shape for those countries that already have mature rail infrastructures: for example, how to ensure that the best use is made of the existing infrastructure assets. So it is no surprise that with the ever-growing pressure for cost reductions, there is now a real focus on lowest cost through life-risk-based assets management.

“Something that the Middle East must take into account when building big rail infrastructure projects is an understanding of the true cost of running a rail infrastructure versus the economic value that will be returned,” he adds.

The outlook of other companies for the new project is bright, though. Just days after the release of the locomotive images, Etihad Rail announced that it had signed a Memorandum of Understanding (MoU) with DP World for the development of an intermodal rail terminal at the Jebel Ali Port.

The shift from truck to rail transportation is expected to be more cost effective for businesses over long-haul moves. One Etihad Rail train will carry up to 260 TEUs (twenty-foot equivalent container units), which, if transported by road, would require at least 130 trucks. By 2030 it is expected that the Jebel Ali intermodal rail terminal will have a capacity to handle the transfer of five million TEUs per annum.

Commenting on the implications of the agreement, Srinath Manda, programme manager, transportation and logistics practice, Middle East, North Africa and South Asia for Frost & Sullivan says: “Etihad Rail’s signing of a MoU with DP World, indicates a significantly positive development for the logistics sector in the United Arab Emirates. Jebel Ali Port and the JAFZA zone, which is already the preferred logistics base of majority industries operating in UAE, is likely to become even more popular among both logistics service providers and the users.

“The UAE has a reasonably good integration of road network and ports, which helped to make it a dependable logistics hub in the GCC. With the inclusion of a rail service in this already-integrated transportation network, the country is likely to gain a significant first-move competitive advantage even in the multimodal logistics market within the GCC.

“Additionally, the proposed high capacity trains that can carry up to 260 TEUs would contribute to a safer, more economical and environmentally-friendly transportation. Global studies have proved that rail mode is nine times safer and 30 per cent more economical and 80 per cent less polluting than road transport.

“On the whole, Frost & Sullivan believes that this initiative is likely to pave the way for realising the full potential of the national rail network being built in UAE, especially in terms of its utilisation for cargo transportation across the country, and, in fact, the entire GCC in the long term,” he adds.

But what about the companies themselves? How do they feel about the rail network?

DP World for one is pleased: “We are delighted to formally sign this MOU with Etihad Rail,” says chairman HE Sultan Ahmed Bin Sulayem. “The rail terminal and the Etihad Rail network as a whole will add significantly to the efficiency we can offer customers at our flagship Jebel Ali port.

“With state-of-the art facilities at Jebel Ali able to serve the largest vessels in the world, supported by the latest e-trade technology, and the Dubai Logistics Corridor linked to the Dubai World Central airport, Jebel Ali will be fully multi-modal, connecting sea-road-rail and air. This will add enormously to the efficiency of the supply chain.”

The signing of the MOU with DP World further expanded Etihad Rail’s list of partners and customers. In October 2011 Etihad Rail signed a formal agreement with ADNOC to help it transfer sulphur from its sources in Shah and Habshan to its point of export at Ruwais. The company has also signed MoUs with other UAE firms such as Emirates Steel, Arkan, Al Dahra Agricultural Company, Etisalat and du.

HE Khadim Al Darei, vice chairman and managing director of Al Dahra Agriculture Company says: “Our partnership with Etihad Rail gives us access to a modern and integrated transportation system that ultimately can give us a competitive advantage and help us enhance our business. Plans are already underway for us to use rail as our preferred transport method as soon as the second stage of Etihad Rail’s network is operational.”

Arkan vice-president in strategy and business development Saad Qureshi, adds: “As a building materials manufacturer, raw material procurement and product distribution are critical to our overall competitiveness, using the rail network to transport our raw materials and distribute our finished goods reduces our transport costs and provides us with immediate availability of freight space.

“Globally, rail lines are the preferred mode of transport for building materials, given the heavy nature of raw materials and products. Road transport also limits the volume of goods that can be transported at once. The railway will significantly reduce our lead time and give us added flexibility in terms of volume and costs.”

Construction on phase one of the US$10.89 billion project, a 266km route that will link Shah, Habshan and Ruwais in the emirate’s western region, is scheduled to be operational in 2013. The second phase will connect Abu Dhabi with Dubai. It will also provide links to the Jebel Ali port, Mussaffah and Khalifa port. The third phase will be the extension to link the northern emirates. The second phase is expected to be completed by 2016 and the third phase by 2017.

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