High-Speed Rail Keeps Outlook On Track
BMI View : Russia's high-speed rail network plans underpin our forecast for consistent growth in the Russian rail sector. Transport upgrades for major sporting events and stronger integrat ion of Russia's Far East with the Asian economies have provided a boon in investment in the rail sector and the announcement of the three planned high-speed lines look set to continue this. Whilst looking to the private sector for financing presents some downside risk to the high-speed project, we forecast that the Russian rail sector will grow in real terms by 6.5% year-on-year in 2013, rising to 8% by 2017.
Russia's planned high-speed rail network moved a step closer being fully realised after a series of announcements by Russian Railways (RZD) made at a conference attended by President Vladimir Putin. The announcements confirmed that there are three high-speed corridors under consideration:
Moscow - Nizhny Novgorod - Kazan - Yekateringburg
Moscow - Rostov-na-Donu - Alder (near Sochi)
Moscow - St Petersburg
The Moscow-Kazan line is expected to be the preferred first route. At 803km and costing RUB928bn (US$29.3bn), RZD hopes to have the line operational by 2018 to help transport tourists to Kazan, which is one of the host cities for the 2018 Fifa World Cup. Whilst still at very early stages, plans for Moscow's high-speed train stations have also been submitted to the Directorate of the Moscow Transport Hub. The Moscow - Kazan journey times will come down from more than 13 hours to 3½ hours.
Russia's Rail On The Right Track
We have previously highlighted that Russia's rail infrastructure sector will be one of the best performing within the Russian construction industry. For example, a US$8bn finance package announced in April as part of a US$29.5bn project to upgrade Russia's Far Eastern rail network to facilitate better integration with the Asian economies and access the region's vast resource wealth. In addition, RZD's existing capital expenditure plans include RUB67bn (US$2.1bn) which has been allocated to rail projects to cater for the Sochi games. This will result in the Russian rail sector's outperformance in the coming years (see ' Pension Funds For Eastern Rail Growth', 5 April) .
We forecast that in 2013 the rail sector will achieve 6.5% growth in real terms on the previous year, in comparison to an average of 6.1% growth across the whole transport sector. Over our forecast period up to 2022, the rail sector will average 4.9% year-on-year (y-o-y) real growth with a peak of 8% in 2017 (before the 2018 Fifa World Cup). In comparison, the transport sector as a whole will average 4.2% y-o-y real growth up to 2022 and reach a peak of 6.7% growth in 2017.
|High-Speed Rail Growth|
|Russian Transport and Railways Infrastructure Industry Value (US$bn) and Real Growth (% y-o-y)|
Financing Remains Pertinent Risk
The President of RZD, Vladimir Yakunin, has stated that the best means of financing and taking forward the high-speed rail lines will be through the public-private partnership (PPP) model, with the state taking a 70% stake in the venture and the private partner 30%. As we noted on the Far Eastern rail upgrade project, potential sources of finance include pension funds, the state Russian Direct Investment Fund, the Ministry of Finance's pension investor Russian National Wealth Fund and infrastructure bonds.
Whilst we believe the private sector will need to be involved to finance Russia's expansive rail programme we highlight a number of important downside risks. Specific to the high-speed network is the question of long-term profitability; few high-speed lines are money makers for their operators, and demand for high-speed rail is often driven by subsidised ticket prices.
More generally, on the notion of the high-speed project being PPP led, Russia's privatisation wave within the domestic infrastructure sector that was announced in late 2010 has largely stalled. Political risk tied to entrenched vested interests in state-owned enterprises is the biggest stumbling block in regards to ventures such as the high-speed rail project. Thus, with history as a pre-cursor, we are cautious on the progress of the high-speed lines. Government dominance weighs heavily, and despite several private invites, there remains a mistrust in letting go of any controlling interests in key infrastructure sectors - in particular in the rail sector.