Rail across borders
In our recent transport survey, respondents in the MENA region were overwhelmingly confident that investment in infrastructure would rise in the next year and this is particularly true of the rail sector. Yet despite Saudi having had a rail line linking Dammam to Riyadh since the 1950s and the much heralded development of the Dubai metro, most countries in the region do not have an existing rail network. Whilst regulatory regimes are well established for shipping and aviation in most Gulf Cooperation Council (“GCC”) states, governments are staring at a blank canvas when devising a regulatory regime for the burgeoning rail sector. In this article we examine some of the issues which governments in the GCC face when regulating rail and what lessons can be learned from the experience of the European rail industry in regulating rail across borders.
An international approach?
Governments in the region have to consider the extent to which the plans for their national networks need to be coordinated with the similar plans being developed by their neighbours. This is particularly the case for GCC member states where it is intended that national networks will be integrated within the proposed GCC rail network; a planned railway of some 2,177 kilometres linking the six GCC states and possibly Yemen.
Rail is a relatively new mode of transport for the region and as such it needs to make its own market. It will need to compete with more established forms of transport such as road and air services and prove itself to be efficient, cost effective and reliable. For the GCC rail network to be successful, integration must occur at a technical and operational level and also at a regulatory level to ensure that there is true interoperability between GCC member states. Approaches to gauge, safety and environmental issues, locomotives and rolling stock, track and signalling systems, braking systems and maintenance and repair programmes will need to be compatible within member states so as to facilitate the movement of rolling stock across borders. A common legal framework for regulating rail will need to be established with the harmonisation of training, technical and safety standards, traction currents and speed limits, operating rules and working practices and customs and immigration practices. GCC member states will need to provide for non discriminatory access to track and depots. There will need to be similar approaches to IT and ticketing systems and a fair and a functional planning and timetabling system.
The planned rail networks which are being developed within the GCC encompass a variety of different railway uses from passenger services, such as the proposed Haramain high speed railway linking Mecca and Madina via Jeddah in Saudi Arabia, to freight services, such as the proposed rail link between the Ras Laffan natural gas hub and industrial complex to the port and refinery town of Mesaieed in Qatar. There may be tensions between the desire to devise national railway networks to meet the specific needs of a particular country and the desire to achieve freedom of movement of rail within the GCC. There may also be strains caused by the differing speed of development of the constituent rail projects within the member states and the ability of member states to fund these. In order to achieve the stated aim of an operational GCC rail network by 2017, these tensions between the national interest and the overall objective of better integration at a GCC level will need to be substantially addressed and resolved.
The EU approach
The challenge of coordinating the inter-play between national and international rail networks is one currently being faced by the European Union (“EU”) in its attempts to promote a single market in the rail sector. The EU aims to remove both legal and technical barriers to the supply of equipment and the running of trains between EU member states.
The EU’s attempt to achieve its objectives rests primarily on top-down legislative direction to the member states contained in three packages of EU legislation. The first package provided for a separation of the management of infrastructure and the regulation of safety from the provision of transport services, the progressive opening of railway networks to non-national railway undertakings and the creation of track access rights. The second package provided for the liberalisation of freight services, the establishment of the European Railway Agency (“ERA”) and the accession of the EU to the Intergovernmental Organisation for International Carriage by Rail. The third package provided for the liberalisation of passenger services and the certification of drivers and crew.
Under the regulatory structure established by the EU, the regulation of safety must be conducted by a body or undertaking which is independent of those providing rail transport services. Such bodies are established on a national rather than a European level so that in the UK for example it is the Office of Rail Regulation which performs this function. The EU rail legislation has to be written into national law in order to be effective in member states and differences of implementation remain between EU jurisdictions.
The ERA is responsible for the coordination of groups of technical experts to seek common solutions on safety and interoperability but it does not police the rail sector within the EU. It is the European Commission rather than the ERA which has the responsibility for monitoring the implementation of European rail legislation. Recent suggestions that the scope of the ERA should expand to encompass the certification of railway undertakings operating cross border and the investigation of accidents have been refuted. The ERA has been criticised for both lacking teeth in its inability to enforce a common standard amongst member states and also for adding an additional layer of bureaucracy to the conduct of business in the rail sector.
A solution for the GCC?
The EU model for rail regulation is one which has been suggested as a precedent for adoption by the GCC. However whilst there are obvious parallels, the challenges faced by the EU and by the GCC in terms of promoting cross border rail are different. The challenge within the EU has been to harmonise and eradicate differences between existing and well developed national networks. The challenge for the GCC will be to minimise those differences from the outset. It will not be possible to import European templates and impose them on the region. The region needs to develop its own model.
The framework of regulating rail at a GCC level is at an early stage of development. The GCC, as a looser economic and political alliance, lacks the same kind of legislative infrastructure as is in place in the EU. A study will be launched in 2011 on the formation of a GCC rail authority and to examine how it will implement the GCC rail project. The remit of the GCC rail authority is expected to cover the standardisation and coordination of the network. It will be interesting to see whether this authority has more of a regulatory and policing function than its European equivalent, the ERA, or whether powers of regulation and enforcement will remain devolved to member states. The EU has often been criticised by some in the rail sector for being too prescriptive and for creating unnecessary levels of regulation. The GCC member states have a unique chance to create a competitive, integrated and efficient railways system which will benefit their people and their economies. It is likely that the GCC will want to learn from the lessons of the EU rail experience. Mistakes made today may prove costly in future as some of the problems arising in the EU demonstrate.
Technical issues - first mover advantage?
Development of a regulatory structure at a GCC level for technical and operational regulation is however in danger of being outpaced by the development of rail projects by member states. In fact within the GCC it may not be legislative direction or agencies which really determine the focus and shape of the GCC railway but the standards set by the first projects to come to fruition within the GCC member states and how they are regulated. These projects will provide a template for the GCC railway at a technical and operational level as later projects will need to be compatible with the systems used in these first projects. In addition when devising regulation, it can be expected that draftsmen will look at the available precedents in the region.
Of all the GCC member states, Saudi Arabia is the only one with an established rail network and is probably one of the most advanced in its development of new rail projects. Saudi’s existing rail network is run by the Saudi Railways Organisation, a state owned public utility. However, new projects such as the North South Railway connecting Haditha in the north of Saudi to Riyadh, have been transferred to the new Saudi Railway Company, a subsidiary of the country’s Public Investment Fund. Movements of phosphates and bauxite over the North South Railway to Ra’z az Zawr are expected to commence in 2011. Saudi Arabia plans to emulate the European model of separating the responsibility for operating the railway from regulatory responsibility. The responsibility for regulating Saudi rail is to be transferred to the newly established Saudi Railways Regulatory Commission. Saudi Arabia has also followed the European model of permitting private operators to run rail services and in March 2010, RITES, which is part of Indian Railways, was awarded the contract to operate the Jelamaid to Ra’z az Zawr service.
The UAE ’s planned federal railway project is also at an advanced stage of development, with tenders for the construction of phase I, a railway for the transportation of granulated sulphur between the southern Shah gas field, to the Habshan field and on to Ruwais, having been issued in 2010. The UAE presents an interesting model for the development of rail regulation at a GCC level as it has a federal structure. The UAE was quick to recognise the need to coordinate the regulation of its rail network at both at an emirate and a federal level. It established the Union Railway Company, a wholly state owned company, to manage the development of the federal rail project. It has also moved to separate the operation of services and management of infrastructure from regulation so that the regulatory function will be performed by the federal National Transport Authority.
There has been general agreement on some of the main technical parameters for the GCC railway; that it will be single track, dual use and have diesel traction. GCC member states were to submit comprehensive design and engineering briefs to the GCC Secretariat by the end of 2010. In the absence of a GCC regulatory framework for rail, communication between member states will of course be paramount as projects develop.
In addition to technical and operational regulation, there will be a need to harmonise customs, immigration and competition laws to facilitate the free movement of goods and people between GCC member states.
The political and economic measures required to enable the successful operation of a railway can be seen as part of a continuing development of further economic integration by the GCC. A common market within the GCC was established in 2008 and is in the process of implementation by member states. Commentators have stressed that the announcement of the common market was really only the starting point and that the true economic union within the GCC will take years to develop. The GCC also signed an agreement to create a customs union from 1 January 2003, establishing, amongst other things, a single point of entry to the GCC and a uniformed customs tariff for imported goods. Unfortunately, disagreements between member states regarding the distribution of revenue have meant that implementation of the customs union has been delayed and is not expected to be in place until at least the end of 2012. Perhaps the development of the railway will provide a further impetus for member states to resolve the hurdles to GCC economic union.
Those devising the regulatory framework for the GCC rail project will no doubt be studying the EU model in detail but will not feel bound by it and will want to learn from the successes and the weaknesses of the EU system. In the meantime, the extent to which the successful completion of the project will rely on diplomacy and political goodwill should not be underestimated but as at the end of 2010 it would seem that the ambitious objectives of the GCC member states towards the development of an integrated rail network remain on track.
Emma Giddings is a partner specialising in asset finance and leasing in Abu Dhabi
Tom Johnson is a partner specialising in rail in London.
Michael Jurgen-Werner is a partner specialising in EU and Competition law in Brussels.
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Iranian sanctions and the Gulf
A short sail across the Persian Gulf, the UAE has historically been a haven for Iranian traders. Dubai in particular has attracted hundreds of thousands of economic migrants and is currently home to an estimated 8,000 Iranian businesses. The once healthy mercantile relationship between the Emirate and nationals of the Islamic Republic has suffered in recent times as Dubai becomes one of the territorial focal points for the application of more exacting international sanctions against Iran. As Iranian businesses look for new opportunities elsewhere, those operating in the Gulf must be mindful of their obligations under international law before committing to any potentially prohibited activities.
2010 saw a marked increase in the scope of sanctions against Iran. On 9 June, the United Nations (“UN”) Security Council passed Resolution 1929 (2010) (“Resolution 1929”), which built on existing trade and financial restrictions. This was shortly followed in July by the United States Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010 (“CISADA”), unilateral legislation intended to impose far stricter, US -led prohibitions. Though subject to international criticism, CISADA has (among other things) the potential to exclude from the US financial system those guilty of breaching its terms. The EU Council Decision 2010/413/CFSP (the “Council Decision”) of July and Regulation (EU) No. 961/2010 of 25 October (the “Iran Regulation”) followed, imposing similarly demanding obligations as those set out in CISADA, albeit limited to a European context.
The introduction of these sanctions builds on what is an already complex body of law and provides further uncertainty to individuals, businesses and government entities in the Gulf over who is affected and what is prohibited. The line between applicable and unenforceable legislation is far from clear. Those in danger of breaching any applicable rules are encouraged to seek clarification and advice before making a costly (if innocent) mistake.
The UN Sanctions
Resolution 1929 expands on existing UN resolutions against Iran, namely 1696 (2006), 1737 (2006), 1747 (2007), 1803 (2008), 1835 (2008) and 1887 (2009) (together with Resolution 1929, the “UN Sanctions”). The UN Sanctions seek to exert political and economic pressure on Iran in order to, among other things, force the country into providing greater transparency in respect of its nuclear development programme. The UN Sanctions are the most directly pertinent rules to GCC members.
Resolution 1929 places a number of obligations on Iran as a UN member state. These are focussed on the country’s cooperation with the International Atomic Energy Agency and suspension of its uranium enrichment efforts. The resolution also extends the existing restrictions on trade with, and investment in, Iran or Iranian entities by other UN member states.
The new measures include prohibitions on the supply (direct or indirect) of arms to Iran and the provision of bunkering services to Iranian owned or contracted vessels (provided there are reasonable grounds to believe the vessels are carrying prohibited items). Member states are also required to inspect cargo travelling to or from Iran provided there are reasonable grounds to believe the cargo contains prohibited items. Resolution 1929 also prohibits the provision of financial services (including insurance) that could contribute to Iran’s nuclear proliferation or weapons delivery systems.
As UN member states, each GCC member is obliged to comply with the UN Sanctions. For example, the UAE has reportedly stepped-up its scrutiny of vessel cargoes travelling to/from Iran through its ports and airports, particularly in Dubai. Trade has suffered as a result: Iranian imports from the UAE were estimated at US$13 billion in 2008 by the IMF and it is estimated by some commentators that this figure could fall as low as US$6 billion for 2010.
Obtaining finance to fund trade with Iran has also become increasingly difficult (and where available, expensive) as US influence has dissuaded banks from lending. Rather than spend time and money on due diligence to comply with the UN Sanctions (and CISADA), banks are dropping some Iranian clients and/or calling in existing loans. For example, a number of creditors of the Islamic Republic of Iran Shipping Lines (“IRISL”) called in debts owed by IRISL after it was made the subject of certain sanctions under Resolution 1929. These developments may have a significant impact on the enforcement of security: for example, three of IRISL’s vessels were seized by a syndicate of banks in Singapore last year; the vessels were only released in January 2011 by Singapore’s Supreme Court following the repayment by IRISL of at least EUR155m to Société Générale as agent for the banks.
As the UAE becomes increasingly unattractive as an operational hub, Iranian businesses are reportedly looking for opportunities elsewhere in the region. Though the climate for dealing with Iranian counterparties may currently be easier in other jurisdictions, nationals and residents (whether natural or corporate persons) of all GCC member states must remain mindful of their obligations under the UN Sanctions. Comprehensive due diligence is to be encouraged to ensure that the directly enforceable provisions of the UN Sanctions are not breached.
CISADA goes further than the UN Sanctions. It targets globally all companies involved in the Iranian energy and financial services sectors. This legislation is intended to restrict Iran’s access to oil refinement technology and equipment and its import of diesel and petroleum products, both of which are vital to the country’s economic development.
CISADA is a controversial and divisive example of unilateral law making. It is intended to extend US influence and policy in dealings with Iran, but is unpopular in a region with longstanding ties to the Islamic Republic. Officials in the UAE have, for example indicated a willingness to follow the rules provided in the UN Sanctions but are reluctant to enforce the tougher CISADA provisions and have questioned their legality, despite the recent diplomatic efforts of US Treasury officials visiting the region.
The CISADA sanctions are broad and the penalties severe; both are intended to reach far beyond US borders. For example, under the act the US President is able to prohibit any transfers of credit or payments by, through or to any financial institution where those transfers or payments are subject to US jurisdiction and involve a sanctioned person. Practically, the US President could therefore freeze any dealings in US Dollars which involve an individual or company that had breached the terms of CISADA. Although questions remain over the enforceability of the act globally, the potential repercussions of non-compliance for a region reliant on US currency are clear.
Members of the transport, energy, finance and insurance industries in the Gulf wanting to make use of the US financial system and markets are strongly encouraged to exercise considerable caution when dealing with Iran or Iranian entities. Careful scrutiny of customers, cargoes, financing and end users is essential and in case of doubt, business may need to be refused or further assurances provided; indemnities will not provide sufficient protection in the face of potential criminal liabilities for breach of the CISADA provisions.
The Council Decision and Iran Regulation
Like CISADA, the Council Decision contains significantly broader sanctions than those imposed by the UN under Resolution 1929. The Iran Regulation develops the Council Decision in setting out new and detailed rules on the operation of European Union (“EU”) sanctions against Iran and is legally binding on EU member states, EU citizens and EU entities. Importantly, the Iran Regulation applies on board any aircraft or vessel under the jurisdiction of an EU member State, to any EU national (natural or corporate) and to any legal entity doing business in whole or in part with the EU.
The Iran Regulation follows to a large extent, but not entirely, the CISADA provisions. The EU has prohibited its member states from applying unilateral US sanctions against Iran as a matter of policy and therefore introduced the Iran Regulation to complement CISADA from a European perspective. Unlike CISADA, the Iran Regulation does not purport to be extra-jurisdictional, but its provisions are relevant to EU nationals and to those companies operating with the EU or within European territory.
The Iran Regulation contains restrictions on imports from and exports to Iran and technical or financial assistance in the nuclear field. The regulation prohibits the supply of certain equipment and technology to, and investment in, the Iranian oil and gas industries. It also imposes additional inspection requirements on EU member states on goods imported from or exported to Iran, regulates relationships between EU and Iranian financial institutions and prohibits the provision of insurance or reinsurance to Iran or persons acting on behalf of Iran.
Companies and individuals in the transport, energy, finance and insurance sectors with European interests or operations are recommended to tread carefully when dealing with Iran or Iranian entities. Locally, the Iran Regulation may not share the relevance of the UN Sanctions or the threatening nature of CISADA, but those affected should seek advice before engaging in any potentially prohibited activity.
This is an extremely complex area of the law. It is not entirely clear how the various sanctions inter-operate or who is bound by what. In the Gulf region, the one constant we can apply is that compliance with the UN Sanctions is mandatory for all. Beyond that, those operating within the transport, energy, financial and insurance industries in the region must be mindful of the stricter CISADA and Iran Regulation provisions in order to determine whether they are of relevance in any given situation. Persons wishing to avail themselves of the US financial system, currency and markets must take particular care to avoid breaching CISADA.
Although local governments have voiced their opposition to CISADA and the Iran Regulation, US and EU nationals based in the Gulf should be extremely careful before ignoring these laws. Non-compliance could result in significant civil and criminal penalties, especially given the extra-jurisdictional nature of the US legislation. Individuals should also seek to ensure that any conflicts between their personal interests (in relation to the sanctions) and the best interests of the entity to which they owe a fiduciary duty (where relevant) are minimised.
Persons potentially impacted by any of the laws summarised above are encouraged to undertake comprehensive due diligence and seek legal counsel where necessary to ensure that the risks of breach and associated penalties are reduced.
If you would like to read more on this topic, please follow the links below:
Effect of international and US sanctions against Iran on the global shipping industry
EU publishes Regulation implementing Iranian sanctions
James Collins is an associate specialising in asset finance and leasing based in Abu Dhabi.
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Minimum insurance requirements for over-flying the UAE
On 21 January 2010 the UAE ’s General Civil Aviation Authority (the “GCAA”) issued Information Bulletin 06/2010 (“IB 06/2010”). This entered into force on 1 February 2010 and implements minimum insurance requirements for air carriers, with such implementation to be effected in 3 phases. The first two phases only affected those carriers operating to and/or from the UAE. The third phase however, effective as of 1 January 2011, has wide reaching effect, since it will apply the requirements of IB 06/2010 to any carriers over-flying the UAE.
Phase 1, effective since 1 March 2010 (for carriers already operating to/from the UAE) and 1 April 2010 (for new carriers due to commence operations to/from the UAE after that date), required the GCAA to be provided with evidence of valid insurance complying with the minimum requirements (detailed below).
Phase 2, effective since 1 July 2010, provided that any carrier who had not complied with phase 1 would have to suspend operations to and/or from the UAE until they provided evidence to the GCAA of compliance with the minimum insurance requirements.
Phase 3, which came into effect on 1 January 2011, states that only carriers which comply with certain minimum insurance requirements will be allowed to over-fly the UAE.
The minimum insurance requirements for carriers operating to/from the UAE apply in respect of both third party liability, as well as the carrier’s liability in respect of passengers, baggage and cargo. Carriers only over-flying the UAE must comply with minimum insurance requirements relating to third party liability.
The minimum insurance requirements, which are stated in special drawing rights (“SDRs”) are as follows:
- Third Party Liability
The minimum insurance cover for each and every aircraft, per accident is calculated by reference to the maximum take off mass (“MTOM”) of such aircraft as follows:
|MTOM (in Kilograms)||Minimum insurance cover (in SDRs)|
|500 - 1,000||1,500,000|
|1,000 - 2,700||3,000,000|
|2,700 - 6,000||7,000,000|
|6,000 - 12,000||18,000,000|
|12,000 - 25,000||80,000,000|
|25,000 - 50,000||150,000,000|
|50,000 - 200,000||300,000,000|
|200,000 - 500,000||500,000,000|
Passengers, Baggage and Cargo
|Passengers||250,000 SDRs per passenger|
|Cargo*||17 SDRs per kilogram|
*These requirements apply only in respect of commercial operations. For non commercial operations, there is still a requirement to have minimum cover in respect of passengers but for smaller aircraft with MTOM of <2,700kg this requirement is reduced to 100,000 SDR per passenger.
It is somewhat surprising that IB 06/2010 reflects baggage and cargo liability limits contained in the original text of the Montreal Convention 1999, but does not take into account the increases to such limits which became effective as of 1 January 2010 (prior to the date of IB 06/2010).
Carriers over-flying the UAE must provide the GCAA with evidence of valid and compliant third party aviation liability insurance before 1 January 2011, failing which, at the very least, they will be prohibited from over-flying the UAE until they have provided satisfactory evidence of compliance. The GCAA may also impose a variety of other sanctions.
Anna Anatolitou is a senior associate in dispute resolution, Norton Rose (Middle East) LLP, Abu Dhabi and Dubai.
This article was published previously in Legal Flyer.
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