Foreign capital to fund railway construction
By Lu Haoting (China Business Weekly)
Updated: 2004-08-06 11:08

The Ministry of Railways' plan to allow private capital, including foreign investments, to fund railway construction projects will be made public by year's end, confirm sources close to the ministry.

"The draft will be finished either this month or in September, and will be made public by year's end," Wu Wenhua, a researcher with the National Development and Reform Commission's Institute of Comprehensive Transportation, said last week.

The institute is helping the Ministry of Railways (MOR) draft the blueprint to reform the system of financing and investing in railway construction.

"The highlight of the plan is private capital will be allowed to fund railway construction," Wu told China Business Weekly.

"Operators of railways will be transformed into independent economic entities with diverse shareholders.

"Such financing methods can be adopted on branch lines and hot routes with large passenger flows, such as the Beijing-Shanghai route."

MOR is also expected to allow three railway companies, affiliated with the ministry, to list, either domestically or overseas, sources said.

The companies are China Railway Parcel Express Co Ltd (CRPE), China Railway Container Transport Co Ltd (CRCT) and China Railway Special Cargo Co Ltd (CRSC).

The companies were established at the end of last year.

"CRCT will probably be the first to list, given the handsome profits it earns," said a CRSC official, on condition of anonymity.

"Presently, it is hard for CRSC to list as a whole because the current price of special cargo transport cannot cover our costs, and we can hardly make a profit.

"But it is possible we will first list our profitable subsidiaries, such as Large Cargo Transportation Co Ltd and International Cargo Agency."

CRCT's officials were not immediately available for comment.

Analysts said the ministry's plan, if adopted, will be a historical step towards diversifying the ministry's investment channels.

Officials and analysts expect the scheme will ensure sufficient capital for railway construction.

Presently, governments at all levels in China fund - through various sources, including the railway construction fund and loans from the State Development Bank - railway construction.

China spends less than 60 billion yuan (US$7.3 billion) annually on railway construction, statistics indicate.

That figure is far less than the 300 billion yuan (US$36.3 billion) spent annually on road construction, China Youth Daily recently reported.

That wide gap is "a result of the backward financing system in the sector," Dong Yan, the institute's director, was quoted as saying by China Youth Daily.

The lack of construction of new railway lines, mainly the result of inadequate financing, has enhanced the deterioration of rail transportation, experts suggest.

"Strained railway transportation has created a bottleneck for the sound development of Chinas economy since the end of last year," said Huang Min, director of MOR's Department of Development and Planning.

MOR's statistics indicate the daily demand for rail cars, during the year's first quarter, surged to 280,000, up from last year's daily average of 160,000.

However, China's rail network is incapable of handling 100,000 cars a day.

Most of the trunk lines have been operating at full capacity.

Introduction of multiple investment entities will help solve some of the existing problems in railway transportation, said Wang Derong, deputy director of the China Transport Association.

"The fact there is no clear line between the functions of the government and enterprises is the root cause of MOR's slow reform," Wu said.

"MOR should use its well-performing assets to attract private capital. Railways that have larger passenger and cargo flows in the relatively developed East China should be opened to private capital."

The State opened the nation's road-construction and maintenance sector, and introduced multiple-ownership investors, in the 1980s. Investors from various backgrounds were permitted to enter the sector to earn profits.

China's rail sector, however, remains primarily State owned.

The overall investment in China's rail sector, from 1997 to 2002, was 300 billion yuan (US$36.14 billion). Meanwhile, input in road transport during the same period reached 1.4 trillion yuan (US$168 billion), China Youth Daily reported.

Wu also called for reforms to the railway sector's accounting and pricing systems to ensure investors earn profits.

He didn't elaborate.

China currently has 73,000 kilometres of railways. About 20,000 kilometres of those railways were built prior to the founding of the People's Republic of China in 1949.

Also, 20,000 kilometres were constructed during the 1950s and 1960s.

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