High-Speed Line Succumbs To Highlighted Risks

News that the development of Kazakhstan's first high-speed rail line has been postponed does not come as a surprise given the difficulties in overcoming the recurring problems of cost and demand dynamics with such projects, even in more developed markets. The cost of the project, which would see a 1,101km high-speed line between the capital Astana and country's second city Almaty was never made public, but it has been given as the deciding factor for the delaying of construction by President Nursultan Nazarbayev.

Despite having hired French railways specialist Systra to design the line and oversee its implementation and having the backing of China, the project has now been shelved due to the likelihood of it being financially unviable to run. Passenger demand dynamics were cited and are often a key argument against high-speed lines, such as during the development of Spain's high-speed network, or indeed the ongoing debate over HS2 in the UK. Similarly, California's high-speed plans have been revised and altered several times due to demand risks and spiralling costs.

We had previously highlighted the risks to the realisation of the high-speed line, many of which have played out. Amongst them we highlighted that ultimately the huge capital outlay needed to see the project realised would be left to the Kazakh government to raise, which would be difficult with a slowdown in commodity demand in China, which has been a key source of growth for the Kazakh economy and investor confidence ( see 'High Speed Line Highlights Rail Sector Priority', March 19). Also, the tight time-scale in which the project was to be realised - due operational by 2017 for the World Expo. It was ultimately a combination of the need to see the project realised in this short timescale without truly knowing whether passenger numbers would make the project financially viable, making raising capital even harder for the government, which saw plans shelved.

High-Speed Would Have Been Welcome Boost
Construction Industry Value (US$bn) and Real Growth (% change year-on-year)

News that the development of Kazakhstan's first high-speed rail line has been postponed does not come as a surprise given the difficulties in overcoming the recurring problems of cost and demand dynamics with such projects, even in more developed markets. The cost of the project, which would see a 1,101km high-speed line between the capital Astana and country's second city Almaty was never made public, but it has been given as the deciding factor for the delaying of construction by President Nursultan Nazarbayev.

Despite having hired French railways specialist Systra to design the line and oversee its implementation and having the backing of China, the project has now been shelved due to the likelihood of it being financially unviable to run. Passenger demand dynamics were cited and are often a key argument against high-speed lines, such as during the development of Spain's high-speed network, or indeed the ongoing debate over HS2 in the UK. Similarly, California's high-speed plans have been revised and altered several times due to demand risks and spiralling costs.

High-Speed Would Have Been Welcome Boost
Construction Industry Value (US$bn) and Real Growth (% change year-on-year)

We had previously highlighted the risks to the realisation of the high-speed line, many of which have played out. Amongst them we highlighted that ultimately the huge capital outlay needed to see the project realised would be left to the Kazakh government to raise, which would be difficult with a slowdown in commodity demand in China, which has been a key source of growth for the Kazakh economy and investor confidence ( see 'High Speed Line Highlights Rail Sector Priority', March 19). Also, the tight time-scale in which the project was to be realised - due operational by 2017 for the World Expo. It was ultimately a combination of the need to see the project realised in this short timescale without truly knowing whether passenger numbers would make the project financially viable, making raising capital even harder for the government, which saw plans shelved.

Whilst this announcement is a blow for the construction sector in Kazakhstan, rail development will continue to provide opportunities. Almaty is well positioned as a freight hub, as the major city near the growing freight corridor between China and Europe. As such, we remain positive on the development of freight rail lines in Kazakhstan, of which there are numerous ongoing projects totalling over US$1bn in our Key Project's Database. Indeed, BMI's Freight Transport analysts forecast rail freight will increase from an estimated 288.79mn tonnes in 2012 to 365.07mn tonnes by 2017. This 4.7% average year-on-year growth is likely to grow even more when the rail lines are fully operational.

Kazakhstan's logistic credentials have been further bolstered with global port operator DP World announcing its interest in the port of Aktau and logistics hub, the Khorgos-Eastern Gate. We note that interest from such a global player is a massive coup for Kazakhstan which wishes to develop as a Eurasian logistics hub.

Freight Demand To Boost Rail Sector
Rail Freight Tonnes (000s) and Change (% year-on-year)

DP World's interest in Kazakhstan's premier logistics facility and its major port (located on the Capsian Sea) indicates that the UAE-based firm plans to develop Kazakhstan's transit credentials. The Khorgos-Eastern Gate is a logistics hub being developed on the country's border with China and is set to play a major role in the development of land-based freight options between China and Europe. The port of Aktau could potentially be used as an extension of this connection between East and West, with the port located on the Caspian Sea offering connections to other Central Asian states, Iran and potentially links into the Black Sea via land routes through Azerbaijan and Georgia.

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Sector: Infrastructure
Geography: Kazakhstan
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