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SCMP Reporter

IN a bold move to break the stranglehold the overburdened transport system has on the economy, China is planning a radical shift in pricing policies designed to encourage efficiency.

  Beijing hopes that by selectively lifting price controls in the transport sector, it will open the way for more foreign investment in the cash-starved sector.

  According to China analysts, the ministries of railways and communications are pushing to have a market-based pricing system for some types of transport. But when, and to what extent, the changes will take place, depends on the state of the economy and the level of inflation.

   Enterprises operating general transport facilities, such as ports, airports and highways, would be given complete autonomy to set prices on the basis of supply and demand.

  At present, enterprises running ports, highways and airports enjoy a degree of flexibility in setting prices but railways do not.

  But deregulation in areas run as monopolies, such as the railways, would be partial and gradual. In these cases, the state would continue to fix general price levels but enterprises would be given some leeway to set fares.

  However, price deregulation is inflationary and at a time of double-digit inflation would tend to be politically unpalatable.

  The proposed pricing shift is part of a package designed to revitalise the ramshackle transport sector.

   The package also would involve deeper reforms to improve management of transport, establish an effective fund-raising and investment system, and a clearer separation of roles between local and state governments in transport projects.

   A multi-pronged approach to improve management would include:     Greater delegation of the control of ports and airports.

       Strengthening the experiment to set up railway conglomerates.

     Singling out a few enterprises to try out the shareholding system.

     Encouraging conglomerates to expand into other related industries.

   Hong Kong analysts applauded the measures, adding that the rigid pricing policy dictated by the state had long discouraged foreign investors.

   Vincent Chan, an economist with Peregrine Investments Holdings, said: ''The biggest problem facing China's transport sector is the shortage of funds and we're talking about investments in the region of hundreds of millions of US dollars.

   ''And, when the state controls the prices, it means that they are set way below the cost of operation, which means it is unattractive to any foreign investor.''    A Peregrine survey released last week shows that China needs to invest as much as US$111 billion in the transport sector to improve its railways, highways, airports and ports.

   One analyst said that under existing circumstances, the only way to interest foreign investors would be to guarantee a rate of return.

   ''But even a guaranteed rate of return may not be attractive enough. Look at the case of the power industry. Although China guarantees a rate of return of about 15 per cent, foreign investors feel the rate is not high enough to compensate for the risk they are taking,'' he said.

    Indeed, experience bears out the view that the tighter the price controls, the smaller the size of foreign investment.

    In railway construction, foreign capital accounts for only five per cent or $2.3 billion of China's projected investment because of the rigid pricing structure.

   ''Under the current price structure, foreign direct investment is limited, given the lack of market forces to determine prices,'' says the Peregrine survey.

    As a result, the major source of funding for railway investment comes mainly from the Railway Construction Fund, launched in 1991.

    ''If they actually press ahead with price reforms, I can see more foreign investors taking equity participation in several major national projects,'' said Mr Chan.

   Although domestic financing is still the key source of funding for the construction of highways, foreign capital is playing a larger role because road tolls are not as tightly controlled as railway fares and tolls vary from area to area.

   Fund-raising for port development is easier than it is for railways and highways, again because of the flexibility given to enterprises to set charges.

   Several Hong Kong companies have gone into port development in a big way.

   Hutchison Whampoa has taken equity in ports in Shanghai, Yantian and Shanghai, Wharf Holdings in Wuhan, Swire Pacific and Peninsula & Oriental in Shekou.

   Foreign participation in civil aviation has also been growing. Foreign players include Hong Kong Aircraft Engineering, Cathay Pacific, Japan Airlines, and Singapore Airlines, in a state-of-the art maintenance facility in Xiamen.

   Wharf group, Hume Industries and Malaysia's Hong Leong group are also involved in airport development projects on the mainland.



Shake-up for China transport