Joint deal signals new direction for trains

The recently announced joint funding of a rail project in Guangxi Zhuang Autonomous Region may point to a move towards reforming the railways ministry and ease its heavy debt burden amid a cash crunch for such projects.

China's National Development and Reform Commission recently approved the 22.7 billion yuan Hechi-Nanning rail project, whose funding will be equally shared by the railways ministry and the Guangxi local government, the Railway Gazette International has reported.

'It's a sign of the reform of the railways ministry that the central government is trying to achieve. It's an interesting example of the ministry trying to decentralise authority to local governments,' said Guotai Junan Securities analyst Gary Wong said.

The move would disperse authority and investment in rail projects from the ministry to local governments, he said.

The huge investment in China's high-speed rail network pushed the ministry's debt up to a whopping 1.9 trillion yuan (HK$2.3 trillion) at the end of last year, from 868 billion yuan in 2008, while its gearing ratio rose to 57.4 per cent from 46.8 per cent in 2008.

Although joint funding of rail projects has occurred before, they are rare, and at least 90 per cent are totally funded by the ministry, which exercises a near-monopoly on the rail system.

The ministry originally budgeted 700 billion yuan for rail projects this year. But Wong estimated at least 30 per cent would not materialise. 'The situation is not good,' he said.

Wong said although there were safety concerns, especially after the July train crash and last month's Shanghai subway accident, the main reason why the funds would not be available was a cash crunch.

'Banks are reluctant to lend to rail projects because the risk appears high after recent accidents and the returns are low,' he said. 'Since some high-speed railway segments have started operating, the cash flow hasn't been as good as expected.'

Wang said the Wuhan-Guangzhou high-speed railway had been expected to break even by the end of this year after its launch in December 2009, but it was now unlikely to break even in the next one or two years.

'According to engineers acquainted with the project, the losses on the Wuhan-Guangzhou high-speed rail will amount to 3 billion yuan this year,' he said.

Zheng Tianxiang, a transport professor at Sun Yat-sen University in Guangzhou, said the number of jointly funded rail projects would rise because banks had tightened lending and the heavily indebted ministry had limited sources of financing.

'The Chinese government wants more rail projects in less developed western regions like Guangxi and Xinjiang but the ministry is reluctant to fully finance these projects because the payback is low in these sparsely populated regions,' he said.