Growing opportunities for railway operators in Oman

Introduction to Oman

A vibrant and politically stable country, located at the cross roads of the world Oman’s location, between the eastern and western corners of the globe, and at the foothills of the Middle East, naturally places the Sultanate at the center of global trade lanes. Indeed, its geo-strategic importance was already exemplified during the struggle for international maritime supremacy in the 16th century, when the Portuguese invaded Oman in order to secure their lucrative trade routes from India and South East Asia.

Oman’s geographical location is as advantageous today as at any point in its history. It currently finds itself at the heart of the fastest growing economies of the world (South East Asia, Middle East and Africa), and is placed directly on the major shipping routes between East and West. Given the recent investments in its logistics infrastructure, Oman is able to offer its neighboring countries and continents one of the fastest and most cost efficient distribution hubs for the Middle East and the Indian Ocean regions, while at the same time avoiding the requirement to navigate the politically sensitive Straits of Hormuz.

Today, Oman is in the midst of a second renaissance. It has a young, educated and highly ambitious population. Furthermore, it benefits from continued political stability, strong international relations, and a rapidly growing economy with an average GDP growth of 9% p.a. over the last 5 years.

Exhibit 1: Global trade routes

North Europe Transpacific

Mediterranean

North America

Middle East

Asia

Transpacific

Far East

South America Volume [TEU m] 1–2 2–4 4–6 6–8 8 – 14

Australia

1 2

Macro-economic overview

A flourishing economy, rich in natural resources with significant growth potential

1. Investment into economic diversification

Oman enjoys one of the fastest growing economies in the world. Over the last 5 years, GDP growth has averaged over 9% p.a., predominantly driven by an increase in oil & gas production, prudent investments in economic diversification (in particular in the tourism, agriculture and logistics sectors), and growing competitiveness of Omani exports.

As mapped out in the Sultanate’s longterm country strategy, Oman will continue to disproportionately invest in five core industries: logistics, tourism, agriculture, mining and industrial. All these sectors have been identified as focus of state investments due to their significant growth potential as well as their ability to act as cornerstones of Oman’s future economic prosperity.

Exhibit 2: Oman nominal GDP growth, 2010-2014 [USD bn] 9%

76

78

2012

2013

In 2012-2014, Oman already invested more than USD 20 billion into the expansion of its logistics infrastructure resulting in the enhancement and establishment of three major ports, five new airports, and 2,500 km of new road infrastructure. In addition, a national logistics sector strategy was developed to ensure the provision of all the “soft infrastructure” required for best-in-class logistics industry in Oman. Consequently, Oman’s logistics sector contributed USD 5 billion to the national GDP in 2014.

82

68 59

2010

2011

2014

Latest Graphs and Exhibits_20-5-15.pptx

Far from resting on its laurels, Oman is determined to maintain the economic growth momentum. Despite the recent decline in oil price, Oman has challenged itself to achieve double digit growth annually over the upcoming five years. The key building blocks of this growth include: • Continued investments into economic diversification • Further development of international trade • Sustainable development of Oman’s natural resources

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In the upcoming years, the Sultanate will continue to further invest into its logistics infrastructure focusing on the build-up of the national railway network (more than 2,100 km) and further upgrading its highway infrastructure (more than 500 km). Together with the establishment of a dedicated government agency responsible for driving the development of the logistics sector these measures are expected to double the country’s cargo throughput, adding further USD 5 billion to the Omani economy and creating 50,000 new jobs by 2020.

Macro-economic overview

2. Development of international trade become significantly more competitive on the international stage. Furthermore, these measures will serve re-exporters with a more cost efficient and faster mode to distribute goods both into to GCC countries and the wider Middle East region as well as across the Indian Ocean and beyond.

Foreign trade is a significant contributor towards Oman’s economy. In 2013, Oman exported USD 65 bn, imported USD 35 bn and re-exported USD 9 bn of goods.

Exhibit 3: Oman trade activity

To further facilitate the continued growth its international trade, Oman is increasing its offering of incentives to attract international investors to Oman. The establishment of additional freezones and free trade agreements with multiple countries including the USA, the GCC common market, the Arab countries (GAFTA) and Singapore are already having a profound effect on the increase of Oman’s trade figures.

Exports CAGR 19%

60 50

47

40

52

37

30

28

20

18

20

10

56

35 24

29

Imports CAGR 18%

0 2009 Total exports

2010

2011

2012

2013

Total imports Latest Graphs and Exhibits_20-5-15.pptx

Exports are primarily driven by petrochemicals, minerals, plastics, metals, textiles, electrical machinery and food. Major recipients are neighboring GCC and Asian countries. Reexported products are primarily imported from Asia and Latin America, and subsequently reexported around to other GCC countries and the wider Middle East region. The introduction of the railway and the development of the overall logistics infrastructure will further enable the growth of international trade by providing Omani companies with a more efficient supply chain. By establishing the basis for a more cost efficient way of supplying raw materials and a faster and more reliable delivery of goods to customers, Omani companies will

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In conclusion, the above mentioned initiatives are expected to result in a continued double digit growth of Oman’s international trade volumes with a particular focus on the volume of re-exported goods which is estimated grow by more than 80% by 2020.

Macro-economic overview Exhibit 4 Oman’s top 10 non-oil export countries

Oman non-oil exports, 2009-2013 [USD m]

Oman top non-oil export countries [USD m] Latest Graphs and Exhibits_20-5-15.pptx 5,014

UAE

2009

4,804

2,363

KSA

1,502

China

2010

6,357

1,264

India

1,073

Pakistan

2011

2012

2013

7,876

9,334

9,887

USA

557

Tanzania

474

Kuwait

462

South Korea

456

Qatar

396

Latest Graphs and Exhibits_20-5-15.pptx

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Macro-economic overview

3. Sustainable development of Oman’s natural resources Oman is blessed with an abundance of natural resources aside from oil and gas. In particular, the Sultanate is rich in gypsum, limestone, copper, marble and chromium. While these resources are currently already form a substantial portion of Omani exports, a strong increase is expected over the next decade building on an improved transportation infrastructure. The majority of the above-mentioned natural resources are located in remote areas of Oman, which are typically served by road transport links (if at all). As a result, the mining of these resources is currently often economically unfeasible. The build-up of the railway network (designed to pass through areas with a high concentration of natural resources), will improve the economic attractiveness of a multitude of mining projects significantly. Overall, while all mining will occur in a respectful and sustainable manner, it is estimated that the railway network will enable a 6-fold growth of Oman’s mining industry.

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Oman’s logistics sector

A key enabler for economic growth The forecasted growth will be primarily driven by the expected growth in domestic cargo volumes as well as by increasingly channeling parts of neighboring countries’ cargo through Oman. Given Oman’s advantageous geographic position, it is expected that the upcoming railway network will enable Oman to capture a disproportionate volume of the GCC market cargo growth (with a current growth rate of 8% p.a.).

As mentioned above, the logistics industry is at the heart of Oman’s economic growth strategy. Today, the Sultanate’s geo-strategic advantages and world class infrastructure offer a great, but relatively untapped potential. The recent implementation of a country-wide strategy for the logistics sector (“Oman Logistics Strategy”), combined with continued investments in both logistics infrastructure and services, seek to realize this untapped potential and establish Oman as a regional logistics hub.

By achieving these targets Oman would ultimately reach a 20% market share of the cargo volumes in the GCC region (compared to 14% today – see Exhibit 5) without the need for cannibalization of any existing cargo volumes in the GCC region.

1. Size of the logistics sector opportunity Oman’s logistics industr y currently contributes USD 5 bn to the economy, employees 30,000 people and handles over 3 million TEU. However, by 2020 the logistics sector is targeted to contribute over USD 10 bn to the economy, employ 80,000 people and handle over 10m TEU.

Exhibit 5: GCC east coast container throughput, 2013 vs. 2020f [TEU m p.a.] Kuwait Dammam

Bahrain

Dubai

Abu Dhabi

Khor Fakkan Oman

2013 volumes (∑ 27 m TEU) 2020f volumes (∑ 40 m TEU)

= 5 m TEU p.a.

Part 2 graphs_50-5-15.pptx

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Oman’s logistics sector

sector to the growth of the overall economy, the Omani government developed the “Oman Logistics Strategy” in 2014 under the patronage and chairmanship of the Minister of Transport and Communication. As part of this strategy a dedicated government agency (“Oman Logistics Centre”) has been established which focuses on addressing four priority topics to enable growing Oman into a regional logistics hub. These four topics are:

2. Value proposition of Oman’s logistics sector For achieving these ambitious targets, Oman can build on a variety of competitive advantages: Firstly, Oman enjoys a premier geographical position to distribute goods into and out of the GCC, as well as around the Indian Ocean. The benefits of this g e o - st r a teg i c a d va n t a g es i n clu d e: • Faster access into and out of the GCC markets (land based transport with rail could by up to 36 hours faster than shipping with feeders) • More reliable access into and out of the GCC markets (avoiding the politically sensitive Straits of Hormuz and the congested ports of the other GCC countries) • Cheaper access into and out of the GCC markets (up to USD 250,000 savings on fuel charges per vessel only)

• Trade facilitation – As part of this initiative, the Oman Logistics Centre aims at facilitating lean, transparent and consistently applied government approval processes with respect to the import, export, re-working and physical movement of cargo in Oman; in addition, the time required to establish a business in Oman should be significantly accelerated. • Markets – The Oman Logistics Centre also encourages and incentivizes the development of a superior logistics product offering and promotes the creation of a globally recognized brand, such that Oman is considered as a key logistics hub by potential customers • Human capital – In this area, the Oman Logistics Centre aims at enabling an adequate supply of labour and the development of the local workforce capabilities • Technology – Finally, the Oman Logistics Centre aims at developing a state-of-theart work environment in order to increase the attractiveness and productivity of Oman’s logistics infrastructure

Secondly, in order to leverage on its geostrategic advantages, Oman has developed a world-class infrastructure, including: Thirdly, given the criticality of the logistics • Three deep-water ports, capable of handling all sizes of vessels (some of which are currently unable to call at regionally competing ports), including the corresponding freezones (offering enticing incentives for key industries) • A new international airport under construction (Muscat) and four newly developed regional airports • An extensive expansion of the road infrastructure and other infrastructure such as a newly developed logistics park

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Oman Rail

The backbone of Oman’s logistics strategy

1. T h e r a i l n e t w o r k i n O m a n a n d its technical specifications

The development of the railway network in Oman project is partially driven by the development of the GCC Railway Mainline (see Exhibit 6). Designed to generate economic, social and environmental benefits for each of the member countries, the GCC Railway Mainline will link all six GCC member countries along their eastern sea border, from Kuwait in the north, through Saudi Arabia, Qatar, Bahrain, the United Arab Emirates to Oman in the south.

The full rail network in Oman will ultimately span 2,135 km and connect Oman’s major ports, industrial areas, mineral deposits and population centers both with each other and with the wider GCC region (see Exhibit 7). The railway will benefit from the following technical specifications: • Double track designed for future electrification • Safety by design (no crossings at grade, protected by fencing) • Mixed freight and passenger operations • Locomotive and wagons axle load of 32.4 tons • International design standards (AREMA AAR/UIC) • St a t e - o f- t h e - a r t s i g n a l i n g a n d communication systems (ETCS Level 2, GSM-R)

In order to effectively facilitate cross-border trade and thus maximize the impact created, the entire rail network in the GCC region is designed to allow full interoperability. Furthermore, the network will accommodate both passenger and freight services.

Exhibit 6: Overview of GCC Railway Mainline and domestic rail networks Jordan

Kuwait City

Kuwait

Qatar Damman

Doha

UAE

Sohar

Abu Dhabi

Jeddah

Muscat

Al-Buraimi

Riyadh

Oman

KSA

Al Duqm Mazyounah Salalah

Planned GCC Railway Mainline

Planned Omani railway lines

Existing Saudi railway lines

Planned Saudi railway lines

Main ports in Oman

Part 2 graphs_50-5-15.pptx

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4

Oman Rail

Exhibit 7: Oman Rail network

Al-Buraimi Hafeet

UAE

• Containers: It is expected that the railway will attract an incremental 2 million TEU to Oman’s ports within the first five years of being operational, to be distributed into the wider GCC region by rail (this equates to less than 8% of the total addressable rail market) • Automotive: By 2020, over 3 million new cars are forecasted to be sold every year in the GCC. Currently, new cars are distributed by the car manufacturers to each individual country of the GCC. Based on preliminary discussions with several car manufacturers, there is a clear potential to consolidate the distribution in one country, with Oman being able to offer an attractive value proposition once the railway is developed • Bulk: For example, one bulk shipping company currently imports 8 million tonnes of iron ore pellets into Sohar port, which are subsequently distributed into the GCC slide region; preliminary discussions Part 2 graphs_50-5-15 6 20150621T1201+03.pptx 1 indicate that this volume could ultimately be distributed fully by rail. Furthermore, the railway could attract numerous other bulk shippers to import/export through Oman

Sohar

Muscat

Ibri Nizwa

Ibra

Saudi Arabia

Haima Al Duqm

Mazyounah

Yemen

Marmul

Amal

Thumrait Salalah

Main ports

Value proposition of the Omani rail network and forecasted demand The Omani government is driving the development of the national railway network based on the following rationale: Firstly, the establishment of the rail network will drive the growth of international trade. The advent of the railway will enable Oman to take full advantage of its geographically advantageous location. Once operational, the railway will provide the most cost effective and reliable distribution channel into and out of the GCC region, while also having the added advantage of allowing

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Oman Rail

shipping lines to avoid the politically sensitive Secondly, the upcoming railway network will drive the growth of international inward investment. As more customers distribute their GCC region destined cargo through Oman, the opportunity for Oman (and in particular Omani freezones) grows to offer value added services such as , e.g., warehousing, packaging, assembly. In addition, as the establishment of the rail network enables a more efficient and reliable supply chain, Oman will become a more attractive location for international companies to locate their business (especially when conducted in conjunction with concerted efforts to improve the ease of doing business).

F i n a l l y, t h e r a i l w a y w i l l l e a d to a significant reduction of road congestion and improved road safety as well as a decrease of environmental pollution. Consequently, preliminary discussions with major potential customers demonstrate great enthusiasm and demand for the new railway.

Thirdly, this new mode of transportation will improve the competitiveness of the domestic industry significantly. The railway network will provide Omani companies with a more efficient supply chain solution, thus enabling Omani companies to become more cost competitive on both the domestic and international stage. In addition, the railway will enable a strong growth in the exploitation of natural resources (particularly gypsum, limestone and marble) due to improved economics. It is estimated that the railway could be used to transport up to 20 million tonnes of gypsum from Thumrait to the ports of Salalah and Duqm already within two years after the start of operations. In addition, the railway could be used to transport 10 tonnes of marble, gypsum and limestone from northern Oman to the port of Sohar within the same time period.

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Operating partnership with Oman Rail A unique opportunity to develop a railway business with limitless potential

the first two years from a concentrated base of large domestic mining companies.

As witnessed above, the railway lies at the lifeblood of Oman’s economic development. Given its importance, Oman Rail is seeking an internationally experienced partner to ensure the successful build-up of its freight railway operations. It is envisioned that the partner will have proven expertise in developing, operating and maintaining a safe, efficient and effective railway business, and as such will be best placed to successfully aid Oman Rail in maximizing the economic value creation potential of the railway.

Thirdly, the partnership offers large demand upsides from international opportunities. In addition to the domestic base demand, there is a large potential upside from international opportunities, including the potential to transport up to 5 million TEU from Oman’s ports to the GCC region within the first 5 years, as well as the potential to consolidate car manufactures’ and bulk traders’ distributions into and out of the GCC.

The envisioned par tnership will be highly attractive to entrepreneurial and collaborative railway operators seeking lucrative growth opportunities. Particular benefits for the operating partner include:

Fourthly, the partnership will be built on lucrative contractual terms rewarding business success. Oman Rail recognizes that to attract the best partner, is must provide a lucrative opportunity. Therefore, Oman Rail has designed the contractual terms to reward its chosen operating partner upon achievement of the business development and operational targets.

Firstly, the partnership offers the opportunity to develop operations in a greenfield set up. To maximize the probability of success, the operating partner has the opportunity to shape the development of the railway (e.g. terminal design, rolling stock procurement, operational guidelines) right from its beginning without legacy issues or having to overcome preconceived ideas.

Finally, the partner will have the opportunity to contribute towards the development of a country. Hence, given the importance of the railway for Oman, the operating partner will benefit from full governmental support in its pursuit of developing the railway. In addition, the partner will be able to benefit from strong international PR, given the highly prestigious nature of the project.

1. Key benefits for the operating partner

Secondly, the project offers a unique business opportunity with very limited risk, given the large existing domestic base demand from a concentrated customer base. Over 20 million tonnes of existing cargo flows from three potential customers are already in advanced discussions for conversion to rail. A further potential of up to 70 million tonnes of domestic volume capture within

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Operating partnership with Oman Rail 1. 2. Contact details for interested parties Interested parties are encouraged to contact Oman Rail for more details using e-mail: [email protected] or phone: +968 22 308 900. A link to the tender details can also be found on the website of Oman Rail using the following link: http://www.omanrail.om/supplychain

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