Why rail restructuring has been shunted into a siding

PUBLISHED : Monday, 04 August, 2003, 12:00am
UPDATED : Monday, 04 August, 2003, 12:00am

Sometimes, a successful small reform can make big reforms that much harder. That is what has happened at China's Ministry of Railways. The rail system is one of the few remaining state-owned enterprises that is run in the old-fashioned way, directly by a ministry, rather than through a corporate entity. It is also one of the biggest state-owned enterprises, with annual revenue of more than 130 billion yuan (HK$122 billion) and more than 1.5 million employees.

The inefficiencies of China's rail freight network are a persistent headache for companies that rely on it for moving their goods. A better rail system, with faster and more reliable delivery times, and market pricing on the most heavily used routes, could deliver huge economic benefits.

But plans to reform the rail system are stuck in a bureaucratic quagmire from which they are unlikely to emerge for many years. One reason is that China lacks the financial impetus that has driven reforms of rail systems in many other countries, notably in Latin America and Europe. There, governments decided they had to do something because they could no longer afford the massive subsidies necessary to keep the clunky, state-run rail systems going.

The Chinese government, however, does not provide a large, explicit subsidy to the railway, despite the fact that the system's annual operating costs exceed its operating revenues by a hefty 12-15 billion yuan per year. How can this be? Thank a little-noticed, but nicely successful reform measure taken by the railways a few years back. In the late 1990s, the ministry was, like all state-owned enterprises, under intense pressure from the government to cut its workforce, which then stood at 2.3 million. So the ministry told the 14 regional railway administrations to carve off whatever non-core activities they could, and stick them - along with a bunch of workers - into independent companies.

Over the past several years, local railway administrations have set up 40,000 independent service companies, which handle everything from loading cargo and running hotels to selling tea and snacks on platforms.

The shareholding, and profits, of these companies are split three ways, between the companies' private owners, the local railway administration and the ministry.

This measure accomplished two things. First, it enabled the ministry to get rid of 800,000 employees, with a corresponding reduction in costs. Second, the ministry's share of the profits covers its annual deficit, and even enables it to declare a 'profit' of around 500 million yuan per year.

The reform was an effective and sensible way of reducing the state payroll while avoiding the pain of mass layoffs.

Of course, the 'profits' of these companies are an accounting fiction, since they do not own the assets that they operate and so need not account for them on their balance sheets. The local rail administrations own the assets and use their cut of the profits to maintain them.

But the result is that the ministry has cut its workforce by a third and turned a heavily subsidised government operation into a 'profitable' enterprise. This success has enabled it to deflect efforts to iron out the gigantic inefficiencies in the rail system.

Research by the China Economic Quarterly