Mexico scraps US$3.75 billion China rail deal ahead of state visit

MEXICO CITY (REUTERS) - Mexico has revoked a US$3.75 billion (S$4.8 billion) high-speed rail contract from a Chinese-led consortium after its uncontested bid prompted an outcry from lawmakers, souring a state visit to China next week by President Enrique Pena Nieto.

After the contract to build the link was awarded on Monday, opposition politicians accused the government of favoring the group led by China Railway Construction, the sole bidder.

Mexico's communications and transport ministry, which has defended the bid process, said on Friday it expects to re-run the tender in late November under the same terms, and would keep it open for six months to enable all interested parties to participate.

"The President wants this project which is so important for Mexico to not be questioned, to have absolute clarity," Transportation Minister Gerardo Ruiz Esparza said.

"We expect more participation from train makers in the new tender," he added.

China Railway Construction can take part in the new tender and could be eligible for compensation because Mexico's government withdrew the contract, he said.

Since Pena Nieto took office in late 2012, he has tried to forge closer ties with China after years of manufacturing rivalry between two nations seeking to supply the US market.

Announcing the contract on Monday, Mexico's government said the 210km line to connect Mexico City and the central city of Queretaro would cost 50.82 billion pesos (US$3.74 billion), including the build cost and five years of operation.

The proposal came with a 20-year, Chinese government-backed credit to cover most of the project's value, at interest rates below those available even to Mexico's government.

News of the cancellation helped to drag down Chinese stocks on Friday and is an embarrassment for Pena Nieto ahead of his trip to China. He is due to unveil a joint investment fund with China, which has so far invested a tiny fraction in Mexico of the billions of dollars it has spent in Latin America.

The fund could be worth up to US$5 billion, officials say.

China's CSR Corp and China Railway Construction, both involved in the bid, could not immediately be reached for comment by Reuters.

Chinese financial news magazine Caixin, however, reported that both companies said they were unaware and surprised when contacted for confirmation.

Shares in China Railway Construction shed nearly 5 percent in their biggest drop since June 2013 after the news.

Opposition lawmakers on Thursday questioned Ruiz Esparza over the deal, accusing the government of providing information to help the Chinese-led consortium and its Mexican partners.

Senators asked how 16 companies had pulled out of the bidding on such a prestigious project. Javier Corral of the center-right National Action Party (PAN) accused the government of sharing information with the winning team ahead of time.

Ruiz Esparza denied the accusations.

Francisco Burquez, a PAN senator who had attacked the deal, said he believed the about-turn was due to domestic political pressure and media reports that noted Mexican winners of the bid were friends of Pena Nieto, but not outside intervention. "I don't see anything beyond this," he told Reuters, calling the cancellation a major victory for transparency in Mexico.

Germany's Siemens and Canada's Bombardier were among the companies to express an interest in the project, which is meant to move 27,000 passengers daily from Queretaro at speeds of up to 300km per hour.

Siemens' Mexico rail chief told Reuters last month that the company, along with Bombardier and France's Alstom PA, had asked for more time to prepare a bid, a request he said was denied by the transport ministry.

An Alstom spokeswoman said the group would consider a tender relaunch, but would need six to eight months to draw up an offer. Bombardier spokesman Marc Laforge declined to comment on whether the company would bid. Siemens also declined comment.

Pena Nieto's Institutional Revolutionary Party (PRI) was frequently accused of fostering crony capitalism when it ruled Mexico for most of the 20th century. Much economic power is still concentrated in the hands of a few families in Mexico.

The government earlier said Pena Nieto would cut short his trip to Asia amid rising protests over the disappearance of 43 students in southwestern Mexico who are feared to have been massacred by a drug cartel working with corrupt police.

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