Analysts welcome railways ministry's break-up as move towards reform
Break-up will encourage investment and make debt more manageable
The break-up of the Ministry of Railways will encourage greater private investment in the railways, foster more initial public offerings (IPOs) of rail companies and alleviate its massive debt, industry insiders say.
The once-powerful ministry will be dissolved, with the Ministry of Transport taking over railway planning, safety and standards, while the business side will be spun off into a state-owned company, China Railway Corporation, the central government said this week.
"The biggest impact of this reform is the greater diversification of rail investment," said Luo Ping, transport-planning director at the National Development and Reform Commission (NDRC).
"Many companies have money and wanted to invest in railways but couldn't. In the past, the railways ministry grabbed all the good rail projects. Now, the railways ministry has become a regulatory body, allowing any company to invest in and build its own rail projects."
The ministry accounts for more than 90 per cent of the multi-trillion-yuan investment in the mainland's rail projects.
Spinning off China Railway Corporation from the ministry was "a good step", Guotai Junan Securities analyst Gary Wong said. "After setting up a company, the company can raise debt and equity financing from the capital markets. It can package the better assets to go into an IPO."
The Ministry of Railways said on its website yesterday that it would accelerate reforms of rail financing, rail freight rates and passenger ticket prices.
Making freight rates and passenger ticket prices more market-driven will attract private investment in the sector, Wong said.
"That is an important step in resolving debt," he said.
The ministry's debt doubled from 1.3 trillion yuan (HK$1.6 trillion) at the end of 2009 to 2.66 trillion yuan in September last year, while its gearing ratio rose from 53.1 per cent to 61.8 per cent. The ministry suffered a loss of 8.54 billion yuan in the first nine months of last year, against a profit of 31 million yuan in 2011.
China Railway Corporation will probably not bear all the railways ministry's debt, only part or none of it, said JP Morgan analyst Karen Li. "If the company takes over the debt, its capacity to raise more debt will be limited," she said. "If you have 2.66 trillion yuan of debt on your balance sheet, what banks will want to lend to you, because you are now a company and not part of the government any more?"
Ivan Chung, a senior credit officer at Moody's, the international credit-rating agency, agreed. "The ministry is so highly indebted its balance sheet is not sustainable if you put it in the company," he said. "Going forward, the new corporation will be required to do financing without direct guarantees from the government like other SOEs [state-owned enterprises]."
Resolving the railways ministry's debt would be left to the next step, Wang Feng, deputy director of the State Commission for Public Sector Reform, told a news conference in Beijing.
Li Jiansheng, chief financial officer of China Railway Group, one of China's leading rail construction firms, said the spin-off would make the business side of the mainland's railway system more market-driven and raise its level of management.
"Currently, the management of the railways ministry has room for improvement," Li said.