Government Debt

Being big brings big trouble

PUBLISHED : Sunday, 07 August, 2011, 12:00am
UPDATED : Sunday, 07 August, 2011, 12:00am

With more than 2 million full-time employees, the behemoth monopoly that is the Ministry of Railways is easily one of the largest business entities in the world.

To put that in perspective, the world's biggest company, Wal-Mart Stores, has about 2.1 million workers.

But that's only the tip of the iceberg. The ministry is responsible for about 80,000 kilometres of railways - or about twice the circumference of the Earth at its equator. It operates 17,000 train engines, transporting 1.4 billion passengers and 3.3 billion tonnes of goods a year.

And with 16 railway bureaus operating as its arms across the country, the ministry even has its own legal system that operates independently from any regional jurisdiction in China. It's the only such state-run agency that can boast its own court, police and prosecutors' office.

But the growing consensus on the mainland is that the ministry has lost its way.

Plagued by scandals, corruption, mounting debt and, most recently, the devastating crash involving two high-speed trains that left at least 40 people dead, the ministry has faced increasingly louder calls by the public in recent years that it undergo long overdue reform on massive scale - perhaps that it even be broken up into smaller, competing companies.

The crash in Wenzhou, Zhejiang province, two weeks ago has served to again bring these concerns to the forefront of people's minds, and they're clamouring to see big changes to the rail ministry, a stubborn holdout of the planned-economy era of the mid-20th century.

Long driven by officials' vested interests, the system has grown into something beyond anyone's ability to supervise - not by the highest of party officials or the entirety of society, and not by market forces or the rule of law, according to Hu Xingdou, a professor of economics with the Beijing Institute of Technology.

In that size lies the problem. The ministry owns a whole system of research-and-development bodies to satisfy its need for special machinery and equipment. And its powerful civil-engineering force, used to build all those rail lines, is divided between two large corporations, both publicly listed in Hong Kong and on the mainland.

Both corporations were originally incorporated by the ministry, though nowadays it is up to the State-owned Assets Supervision and Administration Commission to represent the government on those firm's boards.

One of them is China Railway Group (known as CRECG), consisting of 10 infrastructure-building companies, plus more than two dozen parallel companies focused on design, special projects, manufacturing, real estate development, and on financial and investment services.

The other is the China Railway Construction Corporation (CRCC), reformed from the downsized former People's Liberation Army railway troops in the 1980s. It consists of 15 infrastructure-building companies, plus more than a dozen parallel companies. Thanks to the financial stimulus from the central government, much of which was spent on the building of new railways, especially high-speed railways, both corporations saw their annual revenue more than double from 2008 to 2010.

During the financial crisis in 2008, a line thrown around was 'too big to fail'. The Chinese have their own expression for such companies, and it translates to 'being big can be big trouble'.

For the Ministry of Railways, that 'trouble' includes life-threatening operational hazards, a lack of co-ordination and managerial rigour, ugly corruption among top-level and regional-level officials, and a very large business model that uses massive amounts of state investment but will take years to generate desirable returns, if that is even possible.

There have admittedly been some changes to the railways industry over the last 30 or so years of economic reform, but the basic shape of the empire remains intact. With its expanding spending and resources, the ministry has managed to retain its power and influence.

All previous attempts to push for reform have failed to break up the system.

Think-tank researchers and business commentators have been talking in recent years about the possibility of merging the ministry with the Ministry of Transportation into a 'super-ministry' called the 'State Commission of Transportation', but not before turning their administrative components into independent businesses or single-tasked regulatory bodies.

Compared with other industries, reform has been slow. According to Professor Wang Yukai of the Chinese Academy of Governance, before the scandal-tainted dismissal of former railways minister Liu Zhijun, his way of thinking was 'development first, reform second', which contributed to the massive debt the ministry now faces.

That notorious debt is only part of the monstrous bureaucracy's uncontrollable expansion.

Due to all the high-speed rail projects launched under Liu, by the end of the first quarter of this year, the ministry had incurred a total debt of 2.09 trillion yuan (HK$2.53 trillion), or more than 58 per cent of its total assets, worth about 3.57 trillion yuan.

By the end of the 12th five-year plan, in 2015, the ministry's total debt could exceed 4 trillion yuan, according to an analysis in the Chinese-language Economic Observer.

If this is the case, slow returns from its service, coupled with the cost of projects that have already started, could be a ticking time bomb for the next Chinese cabinet in 2013 unless operational revenues increase or the prospects of future returns become more promising.

Between now and 2013, the ministry no doubt hopes to bring in revenue from bond sales, but regardless of how much it brings in, it would still be raising new debt to pay off existing debt.

Without reforming the ministry's current system, which is a mixture of government and business, no other improvements can be realised, according to an editorial in the Shanghai-based China Business News on Thursday.

Earlier this year, Gao Xiaoping, secretary general of the China Public Administration Society, said Chinese authorities had been looking into the possibility of a new round of reform on its cabinet ministries.

'There will be a major decision,' he said, 'around the Communist Party's 18th national congress' in the autumn of 2012.

Another proponent of big changes within the railways ministry is Zhang Wenkui, an official with the State Council Development Research Centre.

He doesn't see hope for the industry without reform, and he proposes that be accomplished by allowing private investors to tap into the nation's railway business.

Pending that kind of change, the ministry's future remains uncertain, but it is almost assuredly not a positive one in the eyes of the public.

2m

The Railways Ministry has this number of full-time employees, nearly as many as Wal-Mart Stores, the world's biggest business