Saudi Railway is targeting freight shipments on the country’s Northern Line EPA/Mike NELSON
Saudi Railway is targeting freight shipments on the country’s Northern Line EPA/Mike NELSON

Business

Saudi courts Red Sea railway bidders as it presses forward with diversifying economy

The kingdom plans to link the Red Sea with the Arabian Gulf through a 1,000 mile railway

Bloomberg

September 18, 2017

Saudi Arabia plans to seek bidders for the construction of a 1,000-mile (1,600-kilometer) railroad linking the Red Sea with the Arabian Gulf as early as the end of this year, signaling the go ahead for a long-delayed project seen as vital to reducing the economy’s dependence on oil.

The so-called Land Bridge line will shave around three days off the current five-day journey time for shipping seaborne freight around the Saudi coast, while improving links to Riyadh, and Jeddah, the nation’s two biggest cities.

Contract tenders will be issued at the end of 2017 or early in 2018 following an encouraging response to an invitation for expressions of interest, Saudi Railway Co. Chief Executive Officer Bashar Al Malik said in an interview.

Saudi Arabia first awarded contracts for a privately funded coast-to-coast line in 2008 in an effort to accelerate the transit of goods around a country a fifth the size of the U.S., but put the project on hold after financial terms couldn’t be agreed. It’s now “moving ahead to implement the project” after an encouraging response from the private sector, Al Malik said.

The cost of the Land Bridge line will depend on the exact route chosen and the location of the Red Sea terminus, with bidding for contracts likely to include local and international engineering companies and financial institutions, according to Al Malik, who has been CEO of Saudi Railway since March.

Saudi Arabia allocated 52 billion riyals ($14 billion) to infrastructure and transportation this year, up from 38 billion riyals in 2016, according to the Ministry of Finance’s 2017 budget report. The investment is aimed at advancing moves to wean the Arab world’s biggest economy off oil as part of the Vision 2030 plan led by the heir to the Saudi throne, Mohammed bin Salman.

Saudi Railway is separately targeting increased freight shipments on the country’s Northern Line, including minerals transported for Saudi Arabian Mining Co., also known as Maaden.

Phosphate volumes should rise to 5 million tons this year from 4.4 million in 2016, while bauxite carriage may improve to 4 million tons from 3.3 million, Al Malik said.

The railway company is evaluating its ability to boost capacity as Maaden and its partners Mosaic Co. and Saudi Basic Industries Corp. expand production at Waad al-Shamal in the far north of the country, he said.

Saudi Railway is also looking at expanding rail links to better serve energy giant Saudi Arabian Oil Co., or Aramco. which has bulk plants in Tabuk, Turaif and the Al Jouf region close to the Jordanian border for the distribution of gasoline, diesel fuel and other liquid products.

Other opportunities for increased freight haulage center on agricultural production in the Busaita area of Al Jouf which hasn’t yet utilized rail infrastructure, Al Malik said. The zone has some of Saudi Arabia’s largest farms, including Al Jouf Agricultural Development Co.’s 60,000 hectares of wheat, barley, maize and other crops.

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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”