August 02, 2013

China implements radical railway reform

Written by  Qi Zhongxi and Yang Jianxiang
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On March 17 the Ministry of Railways nameplate on its main office in Beijing was torn down to be replaced by that of China Railways Corporation, marking the MOR's demise. Qi Zhongxi and Yang Jianxiang of China Features explain the new setup and the outlook for the new railway.

DUBBED "the last fortress of the planned economic system," China's Ministry of Railways (MOR) has been split into three. According to the reform plan announced in March, MOR's railway planning and policy making functions are entrusted to the Ministry of Communications (MOC), its other administrative functions rest with a new organisation, the State Railways Administration (SRA), while MOR's commercial activities pass to the new China Railways Corporation (CRC).

Under the reforms approved by the State Council, the Chinese government's cabinet, CRC will be a state-owned company reporting directly to the central government. It will be financed by the Ministry of Finance and regulated by MOC and SRA.

CRC will transport passengers and freight, and will be responsible for operating and managing the country's rail network. CRC will draft investment plans for railway construction, and put forward to the government proposals to fund and build the lines. CRC is also responsible for implementing railway projects and is accountable, as the main responsible body, for safety.

The 18 regional railway bureaux, employing about 2 million people, will form the backbone of CRC. Earlier this year, Mr Sheng Guangzu, China's last railway minister who is now CRC's general manager, confirmed that there will be no lay-offs.

Most institutions formerly under MOR, such as the railway research institute and railway publishing house, will merge into CRC. However, CRC has not taken on MOR's security, court of law, and procurator functions.

Nearly four fifths of MOR's 900 civil servants will transfer to CRC. Many of them are likely to give up their job status, because they will have better benefits and development opportunities as company employees.

SRA will be responsible for formulating railway technical standards, overseeing railway safety and service quality, and ensuring that railway projects are implemented according to the required standards.

SRA will have a staff of 130 civil servants, drawn largely from MOR. SRA's director general is Mr Lu Dongfu, a former MOR vice-minister. Four deputy directors general have also been named.

China-2009-095SRA will take over responsibility for some of MOR's overseas activities such as its seat on the Organisation for Railway Cooperation (OSJD), where Mr Wang Yongping, the controversial former MOR spokesman, is working as Chinese commissioner.

SRA was expected to begin operations in June, but preparations are behind schedule, and the new organisation has yet to be officially launched. The embryonic SRA remains in the former MOR building, together with CRC, and may stay there for a couple of years before moving to another site.

SRA will report to MOC, but sources within MOC say they do not know much about the organisation yet, as it has not been inaugurated, and MOC has little railway experience. So far it is not clear which office will deal with railway affairs. MOC sources say the ministry has no idea at this stage about how to perform the duties entrusted to it. Indeed, its future relationship with SRA and CRC are enveloped in a mist.

CRC reports directly to the State Council, and its general manager is de facto a minister-level official, and of the same seniority as the MOC chief, but superior to the SRA director general. This makes it questionable as to how effective MOC and SRA will be in supervising and regulating CRC.

Incorporation of the railway sector into MOC is part of the reform scheme aimed at building up a comprehensive national transport system. With simultaneous handing down of power by the central government, overall planning is expected to make railway construction more economic, with better use of human and material resources. The government expects railway operations to become more efficient, with stricter work standards set and policed by SRA, and improved services.

However, Professor Wang Mengshu from Beijing Jiaotong University, who is also chief engineer of China Railway Tunnel Group, and a rare, outspoken voice in China, said centralised management proved the greatest driving force in China's bullish railway development. The breakup of MOR may lead to a host of problems such as rocketing ticket prices, putting them on a par with air fares, as well as operational safety concerns and a slowdown in investment.

"Reform is justified if it is beneficial to the people and helpful to boosting national strength. Otherwise, there should be no reform," says Wang Mengshu.

By the end of 2012, China had 98,000km of conventional railways and 9356km of high-speed lines in operation. Compared with its population of some 1.3bn people, the rail networks' per capita share roughly equates to the length of a cigarette.

The government's target for 2020 is to increase the network to 120,000km. This year Yuan 650bn ($US 105.9bn) has been raised for railway fixed-asset investment, which includes Yuan 520bn to build 5200km of new lines.

Earlier this year, when he was still minister of railways, Sheng Guangzu said all railway investment and construction would go on as planned, but in future the government will fund railways built for social reasons, while the private sector will be encouraged to invest in commercial railways.

Nevertheless, construction work has halted and no new projects have been launched in the last three months. Work is expected to resume soon and priority will be given to ongoing projects scheduled for completion this year, sources say.

MOR had no difficulty in obtaining bank loans because of its governmental status, whereas now banks will think twice before lending to CRC.

Diversified financing might be a solution. Local governments are expected to take the lead in railway construction in the future. While the main lines are reserved for state players, private and foreign capital will be encouraged for investment in feeder lines. Although this policy was introduced several years ago, so far no successful cases of non-government investment in railway construction have been reported.

Noticing that the United States has a rail network of 272,000km for a population of around 314 million people, the Chinese government has announced a long-term goal of expanding the network to 280,000km by the end of 2050.

According to MOR's annual report, total debts amounted to Yuan 2.66 trillion by the end of 2012. The debt breaks down to Yuan 759.1bn of bonds, Yuan 14bn of foreign loans, and about Yuan 1.4 trillion of loans from domestic financial institutions.

With the exception of the Qinghai - Tibet railway, which cost Yuan 40bn and was financed by the government, all other railways built since 1949 were funded by MOR through loans. MOR was said to pay Yuan 100bn in interest a year. As CRC inherits MOR's assets and debts, the debt will be a great burden on the new business.

A variety of proposals have been put forward to help CRC reduce its huge debt pile. Wang Mengshu says the state government should write off part of CRC's debt as non-performing bank loans, because a considerable portion of MOR's services in the past were provided free in the national interest.

There seems to be a consensus that a dividing line should be drawn between the old and new debts, and the government should come up with a reasonable method to relieve CRC of the debts inherited from MOR. In future, CRC should only be responsible for the new debts it incurs.

The government has promised to find an appropriate way to settle the debt issue, but no decision has been announced yet. For the time being, it is clear that the government will continue to support CRC, as it did with MOR.

Over time, the state will give CRC "great support," says Mr Wang Feng, deputy director of the State Commission Office for Public Sector Reform, the government department that formulated the reform plan.

As if responding to Wang Mengshu's concerns, Sheng Guangzu says in future only the government or social investors will invest in socially-necessary railways. CRC is an enterprise now and will follow the market and seek economic benefits.

The government is studying the introduction of a subsidy for socially-necessary rail services. Losses incurred from the carriage of students, disabled military personnel and agricultural products at very low rates, and operations on the Qinghai - Tibet and Southern Xinjiang lines are likely to be compensated for by the state.

The government has promised not to put a levy on CRC's earnings from state assets before the historic debts are cleared, while CRC will be allowed to enjoy the tax breaks formerly applied to MOR, and other government-favourable railway policies. The government has reiterated that it backs the issuance of a railway construction bond.

These developments augur well for the new railway corporation. Indeed, it should not be difficult for CRC to pay off its debts and make a profit if it is given a free hand, one industry observer says.

Freedom has arrived

Last year the State Development and Reform Commission (SDRC) finally allowed railfreight rates to rise by an average 1.5 cents/tonne, ending a 30-year moratorium on rates. CRC does not always have to listen to SDRC, and in early April it began to push for reform of the freight transport system. Flexible passenger fares have also been offered on a trial basis. Such measures are likely to markedly increase railway revenue.

In China there is usually a return on railway investment within 15 years. The country's longest high-speed line linking Beijing with Shanghai, which opened in June 2011 and cost more than Yuan 220bn, is no exception. An MOR audit in 2012 showed it registered post-tax revenue of Yuan 196m, up 532% on the first six months of operation in 2011. Its total assets were Yuan 4.49 trillion and total debts amounted to Yuan 2.79 trillion to produce a debt-to-asset ratio of 62.2%.

The debt ratio is not much of a worry says Wang Mengshu. If the debts could be cleared in two or three years, CRC would surely pass into a period of profitable operations, he said.

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