China rides slow train to reform as private investors shun railway

Corruption, bureaucracy and a lack of transparency are hindering government plans to reform the mainland's railway industry and attract private investments

PUBLISHED : Monday, 13 August, 2012, 12:00am
UPDATED : Sunday, 12 August, 2012, 10:07pm

The central government is working to reform the nation's rail industry and encourage more private investment in the sector, but analysts warn it's going to be a long and arduous task.

"I think the government wants to reform the Railways Ministry slowly. There are many things that hinder reforms," said Guotai Junan Securities analyst Gary Wong.

Increasing private investment in the nation's railway will not be easy, said Zheng Tianxiang, a transport professor at Sun Yat-sen University in Guangzhou.

Many changes are needed to make rail projects attractive for private investment, said Jefferies analyst Julian Bu. "The government needs to reform the ministry but reforms won't be easy," he said, adding that the Railways Ministry is the most backward and one of the most corrupt in China.

The mainland's railway is dominated by the ministry, which acts like a fiefdom with two million employees. About 90 per cent of the rail projects are funded by the ministry, and the rest by the private sector and local governments, estimates Wong.

"The Railways Ministry has too many people and too many divisions. It is even into businesses such as hotels. If there is reform, these will be separated from the ministry."

Separating so many non-core businesses from the Railways Ministry will make any attempt at reform difficult, believes Wong.

On July 30, a State Council meeting chaired by Premier Wen Jiabao called for the launch of major infrastructure projects to draw private investment in railways, urban development, energy, telecommunications, finance, health care and education. The meeting called for government policies to make it easier for private investment in these sectors, including reforms, if necessary.

An unnamed Railways Ministry official announced that in line with the government's policy to encourage private investment in railways, the ministry would initiate policies to ensure a level playing field and protection for investors, according to the Chinese government website.

But private investors do not seem too eager. Asked if he would invest in Chinese rail projects, a US venture capitalist, who did not want to be identified, said: "Where is protection for my returns on investment? What laws are we going to arbitrate under?"

Another deterrent is that the costs of projects are not transparent, said Masterlink Securities analyst James Chung. "The costs published by the ministry are not detailed enough. Investors need more information. Many rail tenders are not transparent. And, getting good short-term returns is a challenge as rail projects take three to five years to complete."

Although the most expensive and high-profile portion of China's railway is the high-speed variety, most such projects are not profitable, Chung said.

And even if there are lucrative rail projects, the Railways Ministry might not allow the private sector to share them, said Zheng. "Breaking this monopoly requires a lot of effort by the central government. It's not easy."

Wong said there won't be any significant reform of the ministry until at least next year because of the impending leadership changes. What is likely to happen is that business services will be taken out of the Railways Ministry, which will retain its regulatory role, predicted Bu, of Jefferies.

However, Wong warned that: "When business and policy are controlled by the same bureaucracy, corruption is easy. If you separate them, a large group of people will lose their benefits. That's the biggest obstacle to reform."

In 2008, the then railways minister Liu Zhijun launched the expensive high-speed railway. China's fixed-asset investment in railways soared from 416.8 billion yuan (HK$510 billion) in 2008 to 704.5 billion yuan in 2009 to 842.7 billion yuan in 2010. After Liu's arrest for suspected corruption in February last year, fixed-asset investment in railways plunged to 590.6 billion yuan last year.

As far back as 10 years ago, the government wanted to separate the regulatory and business functions in the Railways Ministry but it has not happened, said Bu. "But there are a few catalysts for change now."

One is heavy debt from massive expenditure, Bu added.

The ministry's gearing ratio rose to 60.62 per cent at the end of March from 53.06 per cent at the end of 2009, while its debt nearly doubled to 2.4 trillion yuan at the end of March from 1.3 trillion yuan at the end of 2009.

Another factor driving reform is the high-speed train crash of 23 July last year, which revealed the weaknesses of the nation's railway system, Bu said. "So there are all these pressures. There is going to be reform, but it is not going to be easy."