Paving the Silk Road

In centuries past, dusty caravans ferrying everything from spices to porcelain made their way along the Silk Road in the Middle East, a route prized for its connections to both Europe and Asia. As it turns out, that historic roadway presaged the vast transportation and logistics network that is now emerging in the region, and that could be a significant source of economic growth for many years to come.

A number of factors put the Middle East in a prime position to play the role of trade hub — both on a global scale and for regional and local markets. There is, of course, its geographical position, equidistant from Northern and Middle Africa; Pakistan; and nations of the Commonwealth of Independent States, such as Kazakhstan, Turkmenistan, and Uzbekistan, with good road and sea links to these areas. As trade increases between Europe and these countries and between Europe and Asia, the Middle East stands to benefit.

More important, however, is the changing nature of global shipping. For decades, shippers have had to make one fundamental choice: Should they send goods quickly but expensively via air freight, or slowly but more cheaply via sea freight? In the past, most shippers opted for the latter choice, accepting that the market’s preference for larger inventories meant a slower speed to market. But product cycles have sped up, greater competition has made demand less predictable, and companies are managing their stock more closely — making sea freight transportation far less appealing. At the same time, air freight transport is still much too costly to be viable for most goods.

But there’s a hybrid solution: hubs that offer an easy conversion from sea transport to air transport. This lets shippers start with cost-effective sea freight transport and, if the need arises owing to unexpectedly brisk sales or unforeseen additional demand, switch the goods to air freight while en route. Given the distance and travel time between Europe and Asia, the Middle East is a natural location for sea-to-air conversion. Governments in the region should consider which of the following kinds of hubs to develop, while logistics and transportation companies — and their clients — should watch carefully.

Global Multimodal Transport and Logistics Hub. This represents the most demanding option, re­quiring access to the sea, as well as huge investments in infrastructure. It also demands the availability of a large free zone around the port–airport infrastructure that adheres to global quality standards, where companies can receive and hold goods without paying duty; evidence that the port and airport operator can smoothly manage complex processes; competitive handling charges; and living standards that can meet the demands of a large expatriate community.

Currently, the only global hub of this kind in the Middle East is in Dubai, which has invested heavily in enhancing its logistics facilities. It already has Jebel Ali, the Middle East’s largest seaport, and the government is in the process of constructing the Dubai World Central complex. This includes an international six-runway airport, slated for completion in 2008, as well as a logistics city that will extend the Jebel Ali Free Zone to about 130 square kilometers. Even without these new features, however, Dubai already converts more than 100,000 tons of freight from one mode to the other annually. To compete with Dubai, another Middle Eastern contender would have to be blessed with a more preferable geographic location — for instance, Oman, on the Indian Ocean, or, to a lesser extent, the greater Jeddah area on the Red Sea, both of which offer a more direct route from the Asia/Pacific region to Europe. However, hubs tend to engender a virtuous circle — i.e., the greater the number of connections provided by the hub, the more attractive the hub becomes, and the more carriers want to be connected to it. Therefore, considering the volume in the area, it is unlikely that there will be more than two global multimodal hubs in the Middle East.

Regional Logistics and Distribution Hub. Ideally, this could act as a distribution point for goods throughout the area immediately surrounding the Middle East. Such hubs need not be as large as a global hub nor accommodate as great a range of vessels, but the quality of services and processes must adhere to the same high standards. The infrastructure must simultaneously provide good connections to global hubs and exporting countries as well as excellent links to neighboring regional markets. This requires appropriate overland connections within the region, as well as a port infrastructure for smaller ships. A regional hub does not have to be multimodal but instead could simply be an airport or seaport in a strong trade lane. A few traditional gateways to the Middle East, such as the Nile Delta, the Red Sea ports, Kuwait’s coastal area, and the northern shores of the Persian Gulf, could develop into regional hubs.

Domestic Transport and Logistics Services. Finally, if a country cannot meet the needs of a global or regional hub, its government could focus on the development of do­mestic transport services. The infrastructure to provide such ser­vices is not easy to design. For in­stance, roads must mimic the actual flow of trade and goods within the country. Ports require a balance between efficient handling of short sea transportation and allowing for dedicated connections to long sea passages. Middle Eastern countries with smaller domestic markets, such as Bahrain and Qatar, may lack the scale and volume to support a global or regional hub but could potentially execute this approach.

In addition to strengthening infrastructure, governments in the Middle East must implement the standard regulatory policies that lend themselves to growth, such as permitting full foreign ownership of local entities, which allows multinational companies to control their assets in the region without relying on local partners. Simultaneously, governments must offer services crucial to the logistics industry, such as efficient customs declaration.

The countries that succeed at establishing robust transportation and logistics networks can expect to see a number of benefits: increased economic activity, improved industry competitiveness as foreign challengers come into the market, and growth in job opportunities. Those that fail, however, may find themselves falling by the wayside on the well-traveled Silk Road.

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