Rail Boom On The Horizon
BMI View : Newly elected Mexican President Enrique Peña Nieto has pledged to oversee the restoration of passenger rail service to Mexico through a multi-billion investment plann . Railways have long been the neglected transport mode in Mexico, with net output as a percentage of total transport in long term decline, however, these projects present significant upside potential to our currently muted outlook for rail infrastructure industry value growth over the medium term.
The flagship project in Nieto's railway plans is a high speed rail linking Mexico City with the manufacturing hub of Queretaro. The train would travel at speeds of up to 180km per hour (kmph), slightly below the European standard of at least 200kmph , making the 200km trip in around 90 minutes. Eventually there are plans to extend the line to Guadalajara.
The project is only in the very early stages, however, there are strong signs it will move forward. It was included in Nieto's budget proposal which allocated MXN2bn for rail projects in FY2013 . Currently , pre-investment studies are underway, assessing the environmental, financial, technical and legal feasibility of the project. There is an ambitious timeframe for the project, with work hoped to start within the year and be completed in 2016. Whilst we believe this is too ambitious considering the current status and the lack of any details on financing, we are positive that the project will progress.
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The project's ability to meet the ambitious timeframe depends on which of a number of options are pursued in developing the railway. The first, and quickest option, would be using the existing railway, which is currently dedicated to freight transport. The second is to modernise the existing railway to include an additional right of way. The final option, and the most expensive, would be to build an entirely new railway.
Using the current rail line would be difficult given that they are privately operated and already congested. Using the same railway for passenger and freight use is possible; however, it puts limitations on the times when freight trains can run. Given the growing level of US-Mexico trade, freight rail lines are currently congested and therefore rail companies are unlikely to approve any limitations of their use of the lines. Consequently, a brand new railway seems to be the most likely outcome.
The biggest risk, as always, will be financing. It is also not clear how these projects will be funded. Nieto's previous success with infrastructure projects has been through inviting the private sector to invest, and this is certainly possible in this case. Indeed, there is a dearth of new high speed rail projects globally, and companies active in this sector are keen for new opportunities.
In addition to the high speed railway, other projects included in the budget are the Yuncatan Trans-Peninsula Rail and Mexico City-Toluca Rail. Nieto has also floated plans for a third subway line in Monterrey. The potential for a boom in rail construction presents upside to our forecasts, although we will refrain from incorporating this into our outlook until greater clarity on projects is provided. Currently, we are forecasting real growth of just 2.3% in railways infrastructure industry value on average between 2013 and 2017.