July 2014

Introduction Welcome to the July edition of Train Times, our global rail newsletter which reviews the issues impacting the rail industr y. This edition provides insights on:

Pit to port infrastructure projects: long distance passenger and The first in a series of related briefings freight rail network: Provides an explores the issues surrounding the overview of Company’s location of Australia’s resources and Long Distance Passenger and Freight the export of ore, the ownership and Rail Network (LDP Project) control of the logistics chain, the Page 7 feasibility of the infrastructure and what may be required for pit to port One to watch: projects in Australia Iceland high-speed rail: Describes Page 2 Iceland’s plan to develop a high speed railway line from Keflavik China rail - Express train to Europe: International Airport to Reykjavik Highlights some of the issues Page 9 arising from the development and operation of rail infrastructure by Chinese contractors Page 6

We hope you findTrain Times an informative and useful read. Should you have feedback or suggestions for future topics, please contact [email protected]. Similarly, to hear more from our global projects & construction group, email us providing your area(s) and region(s) of interest. Pit to Port Infrastructure Projects: The Story in Australia (Part 1) By David McElveney and Carine Cruse In recent years, the economic growth and success of Australia has been inextricably linked to a boom in mining and resources sector. Minerals are Australia’s largest export. Apart from the rise of oil and gas mining and production, onshore mining in the form of iron ore, coal and other metals and minerals has grown exponentially. In particular, Australia now holds the title as the world’s largest exporter of iron ore and black coal respectively. This briefing explores the issues surrounding the location of these resources and the export of ore, the ownership and control of the logistics chain, the feasibility of the infrastructure and what infrastructure may be required. We also consider some leading pit to port projects in Australia.

Location of deposits and the export of resources In the case of both iron ore and coal, dedicated ports or Most of the country’s iron ore deposits and coal basins are berths have been developed or expanded. Most iron ore located in remote areas far from major population centres. exports currently take place through Port Hedland, Dampier and Cape Lambert, with smaller quantities According to the Bureau of Resources and Energy exported through Geraldton and Esperance. In the case Economics, 93% of the country’s identified iron ore of coal, most exports take place through Newcastle and resources (totalling some 64 billion tonnes) occur in Port Kembla in New South Wales and Hay Point, Gladstone Western Australia, with the major deposits found in the and Abbot Point in Queensland. Hamersley Province in the Pilbara (Northwest of the State), making it one of the world’s major iron ore provinces. As for black coal, over 96% of these resources occur in New South Wales (Hunter Valley and Newcastle coalfields) and Queensland (Bowen, Callide, Surat, Moreton and Galilee Basins). Most of the minerals and metals mined in Australia are destined for export. The largest importers of Australian minerals and metals are China, Japan, South Korea and India, but coal is also exported to Europe and the Americas. Given that our resource deposits are generally located many kilometres inland, extensive rail infrastructure is required to deliver those commodities to ports efficiently for bulk export. Given the distance from major cities, there are generally no existing rail networks or port facilities, which can be utilised by prospective miners. Accordingly, mining companies Pictured above: A map of Australian ports1. have had to invest in their own pit to port infrastructure to support the export of their commodities.

1 www.portsaustralia.com.au/aus-ports-industry/map-of-australian-ports/

2 Ownership and control of the logistics chain If access cannot be negotiated with an existing rail owner, The large capital investment required for such an the only alternative for prospective market entrants is to undertaking means that a company will only undertake the build their own rail infrastructure. However, with tightly construction of pit to port infrastructure if there is no other held tonnage allocations or berths at major ports, new or feasible alternative or there are overwhelming benefits expanded port facilities may also be required. associated with the ownership and control of its own The feasibility of pit to port infrastructure logistics chain. The feasibility of such an undertaking is a major concern. Quite apart from the mining and mineral processing An assessment of the commercial viability of mining infrastructure, the logistics chain may involve the a deposit must take into account the value and market construction of access roads, air strips, mining camps, potential of the mined ore, the full costs of developing the a power plant, water treatment plants, railway or rail mine including geology, mine planning, and processing and spurs with train loaders and unloaders, and a port or port the cost of associated plant and infrastructure, together expansion in the form of new berths or terminals, all to with the cost of finance to undertake the project. Where support one or more mines. a new railway and port is required, or even just a rail spur Many a court challenge has been mounted by new entrants to an existing railhead or a new berth within an existing to the market seeking to gain third party access to the port, the costs are likely to be measured in the hundreds of closely guarded rail and port infrastructure of established millions, if not billions, of dollars. players. This course of action has not proved successful in The supply of equipment and the transport of ore make Western Australia to date. up some of the biggest outlays for a mining company. Major miners want the certainty of control of the logistics As deposits are being exploited hundreds of kilometres chain, with only their rolling stock and freight being carried inland, the percentage of development costs associated on their privately owned railways in what are 24 hour/day with transport, power and water infrastructure is likely operations. This ensures that there are no impediments to to far exceed the costs of mining plant, equipment and their ore reaching the market, no demurrage payable and machinery, which have traditionally made up the bulk of that maximum returns are achieved. mine development costs. Where distance is involved, rail haulage will be a cheaper option than road haulage in the Where miners are operating under State Agreements, are long-term. subject to the Railways (Access) Code in Western Australia or the laws governing access to infrastructure in other The economics of the construction and operation of pit to states, there may be a requirement for those parties to port infrastructure are central to the viability of many large facilitate third party access to their rail infrastructure. resource projects. Rail owners can be required to accommodate proponents on existing infrastructure, but only insofar as capacity What infrastructure will be required? constraints allow. In the case of the Code, proponents may The construction project will be a complex one involving request a rail owner to undertake an extension or expansion multiple sites and interfaces between the mining of an existing railway if it can be done in a technically and operations, rail, port facilities and shipping vessels. economically feasible way and the expansion is consistent Early construction work will generally involve the with the carrying on of safe and reliable rail operations on construction of access roads and an airstrip at the principal the route. mine site. These will be extended to haul roads and site What has tended to happen is that capacity constraints on roads at both the mine and port and along the rail corridor. the railways of the largest miners have denied third parties As part of its mining infrastructure, a company will the opportunity of access. In limited instances, those typically employ large haulage trucks and/or conveyors to companies will freight ore on behalf of smaller miners (for haul ore or minerals to crushing, scrubbing, screening or example, FMG for BC Iron), but the process is controlled treatment plants. The ore will then be transported by rail to by the rail owners and is managed to fit around their own port. In some instances the ore is further crushed, screened operational requirements. or blended at the port.

Train Times July 2014

3 The railway will have to be planned and constructed to Leading examples of pit to port operations support heavy haulage trains of particular lengths and to in Australia accommodate particular scheduling. The ore freight trains The largest iron ore producers in Western Australia, BHP used in Australia comprise some of the largest consists and Billiton, Rio Tinto and Fortescue Metals Group, own and tonnage loads in the world. The rail works will typically operate private pit to port infrastructure. include marshalling, service and maintenance yards, train loaders, rail loops and sidings, culverts, bridges, signalling BHP Billiton operates the Newman Line (426km) and and communications and train unloaders, conveyors and Goldsworthy line (208km) from its mines near Mount stackers at the port. Newman and Mount Goldsworthy and along the route of those railways. Ore is transported by rail to Port Hedland. A port will have to be designed complete with shipping channel(s), marine structures such as wharves, jetties, Rio Tinto and its wholly owned subsidiary, Hamersley Iron, load-out facilities, berthing dolphins, navigational aids and operate the Hamersley and Robe River lines, which total harbour walls. The onshore port or terminal facilities would more than 1,100km. Rio Tinto transports ore from its mines include offices, water, power, lighting, communications near Tom Price, Paraburdoo, Yandicoogina and Hope Downs and storage or stockpiles. Once again, the design will to Dampier for export and from its Robe River and West be influenced by many factors, including the proposed Angelas mines to Cape Lambert for export. export volumes, size and frequency of export vessels to be Roy Hill Holdings (in which Hancock Prospecting owns a accommodated and other logistics. 70% share) is currently undertaking the construction of Heavy haul rolling stock will have to be designed and the new AUD 10 billion Roy Hill pit to port project, which constructed, often overseas for shipment to Australia. will include a 344km railway and two new berths at Port Hedland.

Pictured above: BHP’s operations in Pilbara region of Western Australia2. Pictured above: A view of the Roy Hill site with railway loop3.

2 http://www.theaustralian.com.au/business/mining-energy/rail-freight-operator-qr-on-track-for-a-pilbara-expansion/story-e6frg9df-1226313945300# 3 The West Australian Newspaper, 20 June 2014

4 Fortescue Metals Group operates a 310km long railway from Next briefing its Chichester Hub (Cloud Break, Christmas Creek mines) Part 2 of this briefing will feature in the next edition to a private berths at Anderson Point in Port Hedland. of Train Times and will discuss issues in pit to port More recently a 129km rail spur has been constructed to developments, which are of particular importance in the connect FMG’s Solomon Hub (Firetail, Kings Valley mines) Australian context. A failure to plan for or around these to its main railway line to Port Hedland. These large scale issues could lead to large project delays and cost blow- expansions have cost many billions of dollars. outs. We will also consider pit to port projects in other Other iron ore pit to port logistics chains involve Geraldton parts of the world in which Clyde & Co has been involved. (including Oakajee) and Esperance Ports. The development of new rail and iron ore export facilities at Anketell Point David McElveney some 30km east of Karratha and the existing port of Partner, Sydney Dampier is currently being planned. T: +61 2 9210 4438 E: [email protected] According to the April 2014 “Resource and Energy Major Projects” report published by the Australian Government’s Bureau of Resources and Energy Economics, iron ore Carine Cruse projects with a combined value of over AUD 20 billion and Senior Associate, Perth coal projects with a combined value of over AUD 15 billion T: +61 8 6145 1721 are in the Publicly Announced Stage. In addition, iron ore E: [email protected] projects with a combined value of over AUD 29 billion and coal projects with a combined value of over AUD 50 billion are at the Feasibility Stage in Australia. This will lead to further pit to port developments or expansions over the coming years.

Train Times July 2014

5 China Rail – express train to Europe By David Moore The development and operation of rail infrastructure by Chinese contractors was at the forefront of discussions at the ‘4th International Infrastructure Investment and Construction Forum’ hosted by the Chinese International Contractors Association (CHINCA) in Macau recently. Although both sides are eager to make this arrangement work, they should also be aware of the potential pitfalls this partnership could bring.

Chinese Prime Minister, Li Keqiang, recently said, “For Rail regulations China, Romania is a bridge, as well as Eastern Europe. Cooperation Over the last decade, the European Union has issued between China and Central and Eastern Europe is an important various rail “packages” designed to make the provision part of the cooperation between China and the European Union and operation of rail systems more uniform and open. The 4 and Romania plays a major role in it” . There is evidence regulations are broad in their reach and cover issues such as that Eastern Europe is looking to take advantage of this safety and interoperability. Significantly from an investor’s Chinese interest. For example, the Romanian and Chinese point of view, they also cover the right of a third party to authorities have announced the launch of talks to develop access the infrastructure and the levying of charges for the EUR 11 billion Vienna-Bucharest-Constanta high-speed access to the infrastructure. railway. Romania is not the only potential beneficiary of Chinese investment in the rail sector. Serbia and Hungary The operator of the infrastructure will not have a free are also in dialogue with the Chinese to build a railway hand in setting the charges and this could be a significant linking Belgrade and Budapest. consideration if the infrastructure is to be financed using a project financed PPP structure. Also, a train operator cannot This may be novel territory for Chinese contractors for a necessarily expect exclusive use of the infrastructure number of reasons: as the regulations give third parties rights to use the PPP structures infrastructure too. Romania has said that it intends to develop its infrastructure Rolling stock using Public Private Partnership structures. PPP structures Chinese investors may view Europe as an ideal market are probably not the most familiar structure to a Chinese for their rolling stock (or other systems) and may want to contractor and possibly not its first choice as a means of develop infrastructure to create a market for that rolling developing infrastructure. Nevertheless, the approach is stock. Again, the procurement rules may muddy the waters, flexible and this should not be a particular impediment. as a public authority procuring additional rolling stock Procurement rules should run an open and transparent competition for that rolling stock (as it should for the infrastructure). Of greater significance will be the fact that many of the countries that would like to benefit from China’s investment Despite these issues, it has been reported that Chinese should comply with procurement rules intended to open up investment in Central and Eastern European has risen public procurement to open and transparent competition. If from very little at the turn of the century to approximately a country wishes to procure works or services then, in order EUR 600 million in 2012 so it will be interesting to see how to comply with the rules, it should advertise the opportunity events unfold. and allow suitably qualified bidders to compete for the right to develop the new infrastructure in accordance with established David Moore evaluation criteria. This would not preclude Chinese Partner, London contractors from bidding but it might be at odds with a private T: +44 (0)20 7876 4955 deal between a host government and a Chinese contractor. E: [email protected] Of course, if Chinese contractors are able to provide the most competitive offers then this should not be an issue.

4 China might build the high-speed railway in Romania - RailwayPro, December 2013

6 Current status of the Qatar long distance passenger and freight rail network By Laura Warren and Chris Campbell In a previous update, we looked at Qatar Rail Company’s (QRC) plans to develop a rail network across Qatar and focused on the progress of the Metro project, which has seen QRC award approximately USD 10 billion worth of contracts for the Doha Metro project since early 2013, with further contracts to be awarded during the remainder of 2014. In this article, we provide a brief overview of QRC’s Long Distance Passenger and Freight Rail Network (the LDP Project).

QRC’s development of rail infrastructure in Qatar comprises LDP Project Routes three main networks: the LDP Project, the Doha Metro The LDP Project involves the construction of approximately (which involves the construction of four rail lines and 500 km of railway together with six freight facilities, a approximately 90 stations across Doha) and the Light depot, and seven passenger stations at a projected cost Rail project (which involves the construction of a light rail of USD 38 billion. Work will take place over a number of system to serve Lusail City). Whilst the Doha Metro and phases in order to construct the routes planned across Lusail Light Rail schemes are both significant projects in Qatar, which are scheduled to be completed in 2030. their own rights, the LDP Project is perhaps the biggest project being undertaken by QRC in terms of its scale and, The LDP Project comprises the following phases: as a result of it being part of a broader rail network planned –– A mixed rail line for passengers and freight from Port across the six Gulf Cooperation Council countries, its Mesaieed to Saudi Arabia; importance to the wider Middle East region. –– A high speed passenger rail line from Doha to Bahrain; –– A freight rail line from Port Mesaieed to Ras Laffan; –– A mixed rail line for passengers and freight from Doha to Dukhan; and –– A mixed rail line for passengers and freight from Doha to Al Shamal. Phase one of the LDP Project is scheduled to be completed by 2018 and involves the construction of 146km of track from Port Mesaieed to the border with Saudi Arabia along with a station to the west of Doha, known as Doha West International, that will connect to the Doha Metro. Phase one has been sub-divided into three areas: –– Area one will connect the Saudi Arabian border with a junction south west of Doha and require the construction of 71km of track –– Area two involves the construction of a 32km line from the junction to the southwest of Doha to a freight yard –– Area three requires the construction of rail track to the Doha West International station and involves the construction of three rail bridges

Train Times July 2014

7 Procurement of phase one of the project is under way – a The final phase of the project involves the construction joint venture between Parsons and Systra has been engaged of a link from Doha West International to Dukhan in the by QRC to provide design consultancy services (with an west of Qatar. outline design for phase one being due to be completed in Following on from the awards of contracts on the August 2014) and QRC has invited contractors to submit Doha Metro project, focus is expected to shift onto the bids for pre-qualification for phase one. These were due to procurement of the LDP Project, commencing with phase be returned on 1 June 2014 and award of the design and one in 2015. build packages for the three phase one areas are anticipated to be made in mid-2015. Given its strategic importance to the wider Middle Eastern region and its part in Qatar’s 2030 vision, the delivery of Phase two of the LDP Project requires the construction of a the LDP Project is a major aspect of QRC’s remit and a 171km railway line to connect Hamad International Airport significant opportunity for all parts of the supply chain to with Bahrain via the Doha West International station and the rail sector. is scheduled for completion in 2021. This part of the LDP Project will see the construction of high speed passenger rail infrastructure with trains expected to travel at up to Laura Warren 350 km/h. Partner, Doha T: +974 4496 7416 Phase three builds on the development of phase two and E: [email protected] involves the construction of 80km of railway line to dual the line from the Doha West International station to Bahrain. Additional links to and Ras Laffan will Chris Campbell Senior Associate, Doha also be constructed as part of this phase, which is due to be T: +974 4496 7439 completed in 2027. E: [email protected] Phase four of the LDP Project is due to be completed by 2030 and involves dualling of the line constructed to the Saudi Arabian border in phase one, together with a Doha industrial freight link.

8 One to watch...

Iceland’s high-speed rail between the international airport and Reykjavik The authorities in Iceland have plans to develop a high speed railway line from Keflavik International Airport to Reykjavik. The anticipated cost of the scheme is almost USD 900 and optimists would maintain that the project will be approved next year with tendering in 2016.

The new 40km railway is being promoted as a Traffic forecast suggest that there will be between 3 consequence of increased tourist traffic which, the million and 4 million users per annum. If there are 4 promoters believe, makes the scheme financeable as a million users of the train per annum this would generate public private partnership on the basis of the revenue it 10% if the initial cost. will generate. Currently, the journey from the airport to It is anticipated that the final investment decision the city can be taken by bus – it takes 40 minutes and will be made next January. costs approximately EUR 13. The new train would cut this journey time to 15-20 minutes so should, it is hoped, attract most of this custom at a charge of Euro 16.25.

Train Times July 2014

9 Rail at Clyde & Co Clyde & Co is an international law firm with over 300 partners and 2,500 staff in 37 offices around the world. We have built our reputation by providing high quality, expert and sector-specific advice.

Our rail team comprises lawyers who have undertaken –– Privatisations, mergers and acquisitions, alliances and extended secondments within the rail industry and joint ventures, corporate restructuring and fund raising therefore have detailed knowledge of how the industry –– Economic and safety regulation works. With the benefit of a worldwide network of offices we –– Station development and redevelopment are able to deploy this experience anywhere in the world. –– Rolling stock issues such as rolling stock acquisition and We have advised participants from across the rail sector refurbishment including train operators, infrastructure managers, –– Rail disputes, including disputes arising out of major construction companies, infrastructure maintenance derailments, civil cases and criminal investigations and companies, lenders, insurers and reinsurers, regulatory prosecutions bodies and central and local governments. In summary, we are able to offer a one stop shop advising Our experience is international and includes advising on: on all issues arising in the rail industry wherever they may –– Infrastructure projects, including PPP projects, project arise. This includes complimentary issues such as property finance and construction issues and planning, competition, employment and pensions and –– Train operation, including concessions and rail health and safety. franchising (bidding, mobilisation and transfer schemes For further information on our rail expertise please contact as well as general advice) and access arrangements [email protected].

“With great industry knowledge, “Clyde & Co offers a comprehensive the [rail] team at Clyde & Co is service to its transportation clients.” very responsive and reassuring Legal 500, 2009 when faced with limited information and tight deadlines.” Legal 500, 2012

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