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Private Capital Largely Limited in Railway Industry

05-08 13:59 Caijing
The current railway management system tends to scare off private investment. Behind this is a power and interest structure which has long been severely damaged.

By staff reporters Zhang Lu, Weng Shiyou, Chen Yan and intern reporter Song Wei 

China’s railway system is currently facing a huge dislocation of capital: central government investment has dropped, while railway infrastructure projects are in urgent need of a capital injection.

According to the main indicators released by the Ministry of Railways (MOR) in Feb. 2012, capital investment in China's railway industry totaled 20.796 billion yuan in 2011, a decrease of 67.5 percent over the same period last year.

Behind this is a shortage of construction funds. MOR data show that as of Sept. 30, 2011, the railways ministry had 3.74 trillion yuan in total assets, 2.23 trillion yuan in liabilities, and a debt ratio as high as 59.6 percent.

The capital shortage was caused in part by the central government’s move to scale back funds for construction. Construction funds for the MOR dropped from 700 billion yuan in 2010 to 469 billion yuan in 2011; while the funds set aside this year will be further reduced to 406 billion yuan. Still, a major underlying cause of the railway ministry’s financial strain is its inability to repay its debts, which has caused a number of commercial banks to put the brakes on railway investment and financing. Meanwhile, the MOR's recent attempt to raise funds by issuing short-term financing bills received a lukewarm response from the market.

Consequently, the railway ministry's investment financing mode of leveraging a small amount of government funding against a large amount of debt financing has become increasingly difficult to sustain.

At the same time, social capital investment in railway construction has gradually increased. At the end of March this year, construction began on a 624 km coal transport line financed by Xinjiang Guanghui Industry Investment (Group) Co., Ltd. In Oct. 2011, the MOR approved construction of the Ordos-Huanghua railway line, which will extend from the city of Ordos in Inner Mongolia Province to Huanghua Port in Tianjin Municipality. It is estimated the entire project investment of 110 billion yuan came from private enterprises.

Besides financing needs, top leaders have ordered relevant departments of the State Council to study and draft the implementing rules for the "new 36 clauses" and ensure that they are introduced in the first half of this year. The railway industry is one of the four monopoly sectors that the "new 36" focuses on. The clauses, which were promulgated by the State Council in May 2010 with the aim of supporting the private sector, have so far proved difficult to implement. Relevant departments will study and draft a railway system reform program which introduces market competition and promotes investor diversification.

The MOR has previously used the mode of provincial joint ventures to finance railway construction, and many of such projects have involved private capital. However, the current railway management system tends to scare off private investment due to a number of factors such as government transportation cost controls, the lack of independent management rights, and unequal treatment in transportation scheduling. This has greatly hindered participation of private capital and other non-MOR sources of investment and dampened overall investor enthusiasm towards the railway industry.

Behind this is a power and interest structure which has long been severely damaged. With the close integration of government administration and enterprise, the MOR not only serves as the external management agency that regulates the industry, it is also charged with managing rail transport operations through various railway bureaus and companies.

Opinions vary widely as to specific reforms that could be adopted. One expert who previously participated in railway reform said three key principles should be followed: First, the division of powers between national and local railways needs to be clearly defined. Once this happens, a basic, mutually supportive pattern which features a clear division of duties and responsibilities between national, regional and municipal railways will emerge, upon which explicit requirements on the rational division of powers between governments can be put forward. Second, a separation of the functions of the government from those of enterprises should be realized, after which an industry organization structure formed by enterprises can be built up. Lastly, operating rules which meet the needs of the market should be implemented throughout the entire rail network, said the expert.

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Full article in Chinese: http://magazine.caijing.com.cn/2012-05-05/111838192.html

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