Reorganized railways an engine for reform

Ministry's demise sparks questions over price hikes and investment, Xu Wei reports in Beijing.

The dismantling of the Railways Ministry, which was announced in March, has been seen by many as removing the largest obstacle to long-awaited reforms of China's rail industry.

With its administrative powers absorbed by the Ministry of Transport and the new China Railway Corporation taking charge of its commercial side, many saw the move as a major step in transforming an industry that for decades has been a key feature of the planned economy.

"This lays the foundation for future reforms," said Zhang Guoqiang, a researcher for the National Development and Reform Commission's Comprehensive Transport Institute.

Yet, he warned, "there has to be more substance to this than merely breaking the Railways Ministry into two parts".

Indeed, the dismantling of the ministry has led to questions - and no little debate among experts and industry insiders - about what should come next.

Should the corporation accept private investment? Should fares be increased? And, arguably the most divisive point, should the national monopoly be broken up into regional rail operators to encourage market competition?

Zhang said he believes reform is the only choice for solving long-standing problems within the network, as well as improving efficiency and supervision against corruption.

For example, rail routes in many European countries are connected to seaports, "but efforts to do that in China since the 1980s have come to nothing," he said. "The failure has largely been due to the rigid railway system."

Although opportunities abound, one thing experts agree on is that any changes to the network need to be gradual and made with caution.

Unlike in the United States and many European countries, where the reliance on trains has fallen over the years largely due to a boom in air travel, China's railways still make a "fundamental contribution to the economy and society," said Zhao Xu at the Unirule Institute of Economics.

Stretching 98,000 kilometers, the network is the second largest in the world. Four billion metric tons of cargo are shipped on its tracks every year, including, according to a recent People's Daily report, as much as 85 percent of wood and crude oil supplies and almost 1.7 billion metric tons of coal.

A source with the NDRC said the network employs an estimated 2 million workers, and in 2012 handled 1.9 billion passenger journeys.

It is this lingering dependence on the railways that has led to the cautious tone among many industry insiders.

Late Chinese leader Deng Xiaoping, who identified rectifying the railway system as a key measure to stimulate a stagnating economy during the "cultural revolution" (1966-1976), compared China's reform to "crossing the river while feeling the stones."

But for transport researcher Zhang, there will be no stones to feel. "This reform will be one of trial and error; there is no roadmap," he said, explaining that China cannot follow the model of another country because a railway is unique to each nation's economic development. "We're in uncharted waters here."

Massive debts

In March, the State Council released a statement setting out the duties of the new corporation: Railway dispatch and command, freight and passenger business management, construction and maintenance, and taking charge of 18 railway bureaus nationwide, three transport companies and all other assets owned by the now defunct Ministry of Railways.

The commercial enterprise also inherited the ministry's massive debts.

According to authorities, China Railway Corporation was launched with a registered capital of 1.03 trillion yuan ($166.3 billion). Yet at the last count, the ministry was estimated to be 2.60 trillion yuan in the red, mostly built up since 2008 from the large-scale high-speed rail projects.

Investment previously came from bank loans and through issuing bonds; although there now appears to be a consensus among experts that there should be greater diversity in the sources of funding.

The debate over whether to allow private capital investment in rail projects was ongoing before the announcement to dismantle the ministry. In January, the topic was high on the agenda at a work conference in Beijing.

Sheng Guangzu, railways minister at the time but now general manager of China Railway Corporation, told the conference a national fund may be set up to encourage private investment in high-speed projects and to ease the financial burden. He said local governments and State-owned and private enterprises will be encouraged to participate in construction.

It is not certain whether that plan is still in progress after the ministry's separation, but experts say funding solutions need to be found, and found quickly.

For Liu Shijin, deputy director of the State Council's Development Research Center, the key test of whether the reform is a success will be if private investors have access, and are willing to get involved.

The railways "need money and the private sector has a large amount of it that is awaiting approval to enter," he said in a speech at an economic forum in Guangzhou on March 31. "The main problem the reform should solve," he added, "is allowing funding from outside (government channels) and establishing a clear business and governance structure, one that protects the interests of investors."

Again, there are those who urge caution, such as Zhang at the Comprehensive Transport Institute. "We do need to shift funding away from bank loans and State subsidies," he said, but authorities must "carefully consider the national interests involved."

Open for debate

Another key reason for dismantling the ministry was to break the monopolies that have existed within the network for more than half a century and introduce competition.

To achieve this, observers say the corporation needs to be further separated. How far that goes is open for debate.

Zhao Jian, a professor at Beijing Jiaotong University who specializes in the railway industry, suggested making the corporation into a parent company and establishing three regional operators, covering North, Central and South China.

"There should be no department above these three companies in terms of managing train services," to create a market-driven environment, he said.

Liu Bin, another researcher at the NDRC's Comprehensive Transport Institute, voiced a similar opinion in an interview with China Securities Journal. However, he added, "It doesn't matter how many companies make up the railway corporation. The key is to ensure there is competition along the major railway lines."

Others say they would go even further and separate the transport network for the business operation.

"Breaking up the China Railway Corporation by geographical location would only mean the monopoly switches from a national one to regional ones," Zhao Xu at the Unirule Institute of Economics told China Daily. He said allowing different companies to operate different routes, allowing them to cross over into each other's markets, would spur competition and create a market driven by the demands of passengers.

By contrast, Zhang said he would be hesitant about breaking the monopoly, citing the contribution the railways make to China's economy.

The consensus among researchers is that railway investment accounts for an estimated 2 to 3 percent of China's GDP growth.

"Putting all the emphasis on smashing the monopoly will harm the development of the railway economy in the long run," Zhang warned.

Public speculation

Among the public, changes to the way the railways are run has led to speculation over the future of ticket prices and freight costs.

As China Railway Corporation is a purely profit-driven entity, and combined with the fact it has been saddled with the defunct ministry's huge debts, a price hike would be an understandable course of action. According to Sheng, the head of the corporation, rail tickets are generally priced at lower than market value.

However, any suggestion of an increase in the costs for passengers was dismissed by the NDRC last month. In a statement, the country's economic planner vowed that train stations nationwide will continue to charge according to government-set prices.

Still, some experts argue that a more effective pricing system will help the railways to better cater to the market and improve efficiency.

In a commentary published by Caijing magazine on April 1, Li Lin, who before the recent shakeup was a researcher at the ministry's Economic Planning Institute, agreed with the belief that an administrative body should be responsible for setting ticket prices, rather than the corporation or any other commercial operation, due to the impact it would have on the cost of commodities. Yet, he said, that does not mean prices should be fixed regardless of market demand.

"There should be a revision to the regulations that make sure prices cover the operating costs of the company and also stay within reach of the spending power of the average passenger," he wrote.

Li conceded that railway operators should get some say in determining the costs of passenger tickets and freight costs.

Despite the NDRC statement, a price hike at some point in the future is inevitable. "The cost of resources is rising, and will keep doing so, and there is no exception for railway transport," Zhang said.

The only way to constrain costs and avoid hitting passengers in the pocket, he added, is "if other modes of transport, such as air travel or highways, start to play a larger role".

China's 12th Five-Year Plan (2011-15) states that authorities will expand the national highway network by 25,000 km, bringing the total to about 83,000 km, as well as build 82 airports and expand 101 more by 2015.

The plan also sets out to solve the lack of cohesion between different modes of transport and promote hubs. (This month the State Council approved a pilot zone aimed at boosting the airfreight sector in Zhengzhou, capital of Henan province.)

However, the concern over ticket prices that erupted after the dismantling of the ministry shows, according to experts, that the reform will need to carefully balance public interest with the desire to make a profit.

"Under the old system, losses from public transport were offset by revenues from freight. As a commercial enterprise, the China Railways Corporation will be unwilling to continue to take the losses," said professor Zhao Jian at Beijing Jiaotong University.

"The problem can only be solved through subsidies from the State," he added. "The problem is, how much should those subsidies be?"

Xin Dingding contributed to this story.