April 01, 2013

China takes the first step towards railway reform

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THE new Chinese government has finally done what many regarded as inevitable: dissolving of the Ministry of Railways (MOR). Its administrative functions are being transferred to the Ministry of Transport while the commercial activity of operating the national railway is moving to the newly-formed China Railway Corporation (CRC). The MOR suffered a series of what now can be seen as fatal blows, first with the dismissal of the penultimate minister of railways Mr Liu Zhijun in February 2011 following allegations of corruption. Liu's leadership was then singled out as one of the causes of the fatal Wenzhou high-speed train crash in July 2011 which killed 40 people and injured 192.

Liu had adopted a cavalier attitude to safety in his quest to propel China's high-speed network into first position in the world by operating trains at their maximum design speed with scant regard for operating and maintenance costs let alone safety. This resulted in a humiliating climb-down when the MOR was ordered to reduce the maximum speed of trains to bring them within normal safety margins. Separation of government control from the day-to-day business of running the railway should make it easier to avoid such excesses in the future.

China's People's Daily newspaper says "the dismantling of the Ministry of Railways is also a farewell to the planned economy." This may well be true as China continues its quest to become a modern economy. In any event, government departments have no business running commercial activities, while transport policy in China can now be coordinated and planned more effectively by having all modes under one umbrella.

The decision to appoint the last minister of railways, Mr Sheng Guangzu, as the first head of CRC is also an astute move because it will provide CRC with strong leadership from the outset by someone who is well-connected politically.

It is not clear yet how the huge debt of Yuan 2.53 trillion ($US 405.8bn) built up by the MOR, leaving it with a debt ratio of 61%, will be managed and who will become responsible for it. However, the government has already made it clear that a railway subsidy mechanism will be put in place to ensure adequate compensation for the carriage of students, disabled veterans, and agriculture-related materials, the operation of the Qinghai - Tibet line, and research.

CRC will need to be organised as a proper business, but it may take some time to establish whether CRC can be run at a profit, and if not what steps need to be taken to get costs under control and maximise revenue.

CRC will be responsible for new line construction, and the government has already said that it wants the high-speed programme to continue. Some observers believe the creation of CRC might make it easier to attract private investment into the railway, but it is early days, and the first priority must be to establish the right structure, goals and funding mechanisms for CRC.

Russia made a similar transition in 2003 when the Ministry of Railways was transformed into a regulator and licensing authority, with policy transferring to the Ministry of Transport, and the formation of Russian Railways (RZD). This was the first step in a reform process which is still continuing, with some RZD subsidiaries now privatised. RZD's phased and well-planned approach to reform has enabled the railway to keep its finances under control, something which China would do well to emulate.

It is also unclear how the demise of the MOR will affect China's huge railway equipment supply industry which hitherto has been tightly controlled by the MOR. The managers of China's two rolling stock giants, CNR and CSR, will be watching closely to see what changes might be afoot.

China's decision to scrap the MOR now leaves India as the only major country in the world where the national railway remains part of the Ministry of Railways. India should now follow China's lead if it is serious about developing its railway in a timely and cost-effective manner. Up to now, Indian railway ministers have always tread cautiously, claiming that the social functions of Indian Railways (IR) - the ability for the poor to travel at affordable fares and IR's cradle-to-grave structure - are so vital to the Indian economy that IR must remain under direct government control.

But the current set up is leading to mounting losses at IR which is demoralising for both managers and staff alike, and makes it very difficult for IR to push ahead with capital investment projects such as the Dedicated Freight Corridors, which are well behind schedule, let alone the nascent high-speed programme.

The Indian government needs to give IR its freedom before the railway becomes crippled by debt. It is perfectly possible to institute subsidies and safeguards so that the poor can continue to travel at low fares. An independent and commercial IR will be of far more benefit to India's drive to become an economic powerhouse. Failure to reform such an important lever of the Indian economy could derail India's economic progress.

David Briginshaw

David Briginshaw joined IRJ in 1982 as associate editor, and was appointed editor-in-chief in 2001. He has travelled the world extensively interviewing many of the CEOs and senior managers of the world's railways and transit systems which has given him an in-depth knowledge of the global railway industry.

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