Dubai Ties Economic Hopes to New Metro

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    By Stefania Bianchi  www.online.wsj.com THE WALL STREET JOURNAL

    DUBAI — The opening of Dubai Metro Wednesday could mark a turning point in the emirate’s fortunes as it tries to spend its way out of the worst economic downturn in a generation.

    The Gulf emirate's new metro network operated during a trial session on August 9, 2009.
    The Gulf emirate's new metro network operated during a trial session on August 9, 2009.

    After four years of planning and construction, Dubai’s ruler Sheik Mohammed bin Rashid Al Maktoum will open the 52-kilometer-long rail system, the first urban metro network in the Gulf’s Arab states. Across the Persian Gulf, Iran already operates a metro in Tehran.

    Dubai’s planners hope the metro will not only make the daily commute for thousands of the city’s residents easier but also help lift a struggling economy, desperately in need of a boost.

    But the vast project has come at a high price for debt-laden Dubai. Construction costs on the project have soared to 28 billion U.A.E. dirhams ($7.6 billion) from the 15.5 billion dirhams originally estimated, according to the emirate’s Road & Transport Authority, or RTA.

    The sheikdom can hardly afford the increased cost. Dubai’s government and its many related companies are estimated to have debts of almost $85 billion, more than double the city state’s gross domestic product, according to investment bank EFG-Hermes. That figure doesn’t include the cost of the metro.

    “It’s very difficult for any railway system to recoup initial capital costs,” said Joss Dare, partner and head of Middle East transport at law firm Ashurst.

    The RTA has said it expects the metro will generate $4.6 billion over the next 10 years. To raise cash, it has offered naming rights for 23 of the planned 47 metro stations, as well as the metro lines. So far, approximately $490 million has been raised from the sales.

    With little oil, Dubai has historically invested in the best infrastructure in the Gulf to attract international companies and investment. The emirate is home to the region’s largest airport and biggest container terminal, which both help make it a bustling trading hub.

    Like many of its neighbors, Dubai wants to spend its way out of the global economic crisis despite heavy debts. The emirate has budgeted this year for its first-ever deficit of $1.14 billion, with government spending up 42%.

    “The metro is a long-term investment,” said Simon Williams, chief economist for the Middle East at HSBC Holdings PLC. “Its value will show itself when Dubai eventually returns to growth.”

    A crucial challenge will be weaning the emirate’s drivers off their cars. Motorists in the sheikdom benefit from cheap fuel subsidized by the government and no tax on vehicles. A liter of gasoline in Dubai costs 41 cents, compared with 77 cents in the U.S. at current market prices.

    Ticket prices for the metro will range between 49 cents and $1.80 depending on the distance traveled.

    The RTA forecasts 200 million passenger journeys on the metro each year, reducing congestion by up to 17% on the roads. But some residents are hesitant. Extreme summer temperatures that can exceed 50 degrees Celsius makes commuters reluctant to venture out of their air-conditioned cars, or walk to the nearest station.

    “My nearest metro stop is at least a 15-minute walk from my apartment so I’d have to take a taxi, which would probably end up being more expensive,” said Gemma Fish, a British expatriate living in Dubai’s Marina district, who commutes 30 kilometers a day to work by car. “The traffic is a lot better than it used to be so it doesn’t take me long to get to work anymore.”

    Originally intended to help unblock the flow of traffic along Dubai’s main 12-lane Sheikh Zayed highway, the first phase of the metro will launch just as the emirate’s road congestion woes ease. A wave of redundancies in Dubai’s core financial and construction industries may have caused thousands of expatriate workers to leave, making the city’s once gridlocked roads noticeably quieter.

    The metro follows the introduction in mid-2007 of an unpopular road toll system called Salik, which in Arabic means clear or open. Many residents fear the system, which costs just over a $1 at each toll gate, will be extended to help encourage use of the metro.

    The driverless system will have women-only carriages, as well as VIP sections, giving passengers leather seats, a panoramic view from the front of the train and more leg room for just a few extra dirhams.

    A second track, the 22-kilometer Green Line looping the Dubai Creek, was originally scheduled to open next March, but will open three months later, according to the RTA. Plans for a third line, linking Dubai’s existing airport and the Al Maktoum International Airport under construction near the border with Abu Dhabi, have been postponed.

    If successful, Dubai Metro could trigger a wave of rail projects across its oil-rich Arab Gulf neighbors. The U.A.E. recently set up a $360 million company to manage the development of a countrywide rail network. Abu Dhabi, Saudi Arabia and Kuwait all have projects at various stages of planning.

    But with Dubai’s first metro train about to leave the station with passengers for the first time, all eyes will once again be on the tiny emirate.

    Write to Stefania Bianchi at stefania.bianchi@dowjones.com