How China's railways are financed keeps market-reform wheels turning

　　By LAN XINZHEN

　　On December 7, four days after it listed on the Shanghai Stock Exchange, China Railway Group Ltd. (China Railway) was listed in Hong Kong. Besides being the largest railway company in China, it is the fourth listed joint stock railway company. It may not sound significant to the casual observer, but the listing of China Railway indicates a speeding up of reform in the Chinese railway market.

　　On December 3, when China Railway was listed in Shanghai, its stock price surged more than 68 percent. The company's opening price was 17 percent higher than its issue price on its Hong Kong stock exchange debut on December 7.

　　According to statistics released by the Ministry of Railways (MOR), from January to August, fixed asset investments in railways amounted to 112.7 billion yuan ($15.23 billion), only 44 percent of the total planned investment of 256 billion yuan ($34.59 billion) for 2007. With a severe shortage of funds for railway construction, the MOR will have to make use of the capital market, financing present listed companies and establishing new joint stock companies for listing.

　　Railway management derailed

　　China has the busiest railways in the world, comprising 24 percent of the world's railway transport with only 6 percent of the total railway tracks. By the end of 2006, the per-capita railway track length on the Chinese mainland was less than 6 cm, about as long as a cigarette.

　　Yu Hui, a researcher at the Institute of Industrial Economics of the Chinese Academy of Social Sciences, thinks that the major problems with China's railway industry are that transport capacity lags behind the demands of the national economy and that seasonal shortages in transport capacity are getting worse. The reasons behind these difficulties are weak competition, lack of efficiency, and mixed management of government and enterprises, said Yu.

　　According to Yu, currently the MOR not only heads the railway authority, acting as the maker and monitor of market rules and industrial policies, but is also the direct investor in railway enterprises. It holds the corporate functions of railway production dispatching, makes market strategies for passenger and cargo transport, and shoulders the responsibilities of preserving and increasing the value of state assets. Because of this there are no clear boundaries between the functions of the government entities and those of enterprises.

　　Moreover, railway transport enterprises are not really independent participants in market competition. In China, railway transport enterprises include various railway bureaus and their branch bureaus. However, these railway bureaus have no independent corporate property rights so they cannot make independent decisions, run the enterprises on their own, or be responsible for the profits and losses. Most business decisions are made by the MOR, making it the sole market participant. As a result, there is no competition within the industry.

　　Without internal competition, railway transport enterprises have no initiative to raise efficiency and reduce costs. Except for those listed companies, most of other railway enterprises have not established modern enterprise mechanisms or complete restraint and incentive mechanisms.

　　"Reform must be carried out in the railway system, separating the government functions from enterprise management and clearly defining the relationship between the government and enterprises so that enterprises can be independent market participants," Yu said. "The administrative monopoly must be eliminated in order to set up a reasonable mechanism for competition and impel enterprises to improve efficiency."

　　Greasing the wheels

　　The Chinese Government has long supported the reform of the railway system, though little has actually been done until the past few years. According to the 11th Five-Year Plan of Chinese Railways launched on October 26, 2006, the major objectives for Chinese railways in the next five years are: Total mileage of railways will surpass 90,000 km by 2010; marked effects will be achieved for railway reform, allowing various types of investors and initially establishing a new railway management mechanism adaptable to the market economy.

　　The aims of the reform previously were the separation of government functions from those of enterprises management and separation of railway network construction from railway transportation.

　　In 2000, then Minister of Railways Fu Zhihuan submitted to the State Council a proposal for the separation of the railway network construction from railway transportation. The planned structure after reform included a railway network company, five to seven passenger transport companies, three to five cargo transport companies as well as two to three specialty companies.

　　However, this proposal was denied by the State Council in 2002.

　　After Liu Zhijun served as Minister of Railways in 2003, the MOR submitted another proposal to the State Council with the idea of connecting railway network construction and railway transportation as well as regional competition. This proposal was not approved by the State Council either, shelving reform for a later date.

　　Since the National Development and Reform Commission (NDRC) was set up in 2003, the responsibility of drafting railway reform proposals has shifted from the MOR to the NDRC. The theme of reform was changed to carry out basic reforms: separating the main business from supplementary businesses, shareholding reform and reform of the investment and financing system.

　　In the second half of 2003, the MOR began to separate the main business of railway transport from supplementary businesses. In 2004, the MOR began shareholding reform of its railway networks and transport enterprises. In 2005, the MOR dismantled 41 railway branch bureaus but set up 18 railway bureau groups.

　　However, the most influential event came in 2005 when the MOR announced that railway construction, transportation, equipment manufacturing and diversified management would be opened to foreign capital and domestic non-public capital. In most recent railway projects, the MOR has adopted diversified financing.

　　A full head of steam

　　On September 28, Quchang Railway in Zhejiang Province opened to traffic. Under construction since November 30, 2005, it was new China's first railway financed with shares of private capital. Of the total investment of 675.1 million yuan ($91.23 million), privately owned Zhejiang Changshan Cement Co. Ltd. holds 18.88 percent of the shares, Shanghai Railway Bureau holds 42.56 percent, Changshan County State Assets Management Co. holds 31 percent and Zhejiang Railway Investment Group Co. Ltd. holds 7.56 percent.

　　Only 41 km long, Quchang Railway makes up a tiny segment of the country's total 80,000 km railways. "But it (Quchang Railway) is a significant step forward in China's railway investment and financing mechanism," said Wang Feng, Deputy Director of Shanghai Railway Bureau. "It marks a turning point in the opening of railway investment and the financing market, which has long been monopolized by the state, to private capital for the first time."

　　According to Wang, reform of the railway investment and financing mechanisms has been the focus and breakthrough of the on-going railway reform.

　　Although the problem of mixed functions of the government and enterprises that lays at the heart of the matter is not yet solved, the reform of the investment and financing mechanisms can broaden channels for funding railway development. Corporate operation will be adopted in newly built railway projects and then many joint stock companies and joint ventures will be established. This will lay a foundation for a market-oriented railway development pattern to eventually take shape.