China’s first private railway opens the door for private capital to enter this long-closed market. However, owing to systemic obstacles, insiders are not optimistic about the privatization of this once monopolized sector
　　
　　On August 22, Shenzhen Zhongji Industrial Group Co. Ltd., a private enterprise in south China’s Guangdong Province, bought 100 percent of the property of a local state-owned railway at the price of 41.86 million yuan through auction. Thus, China’s first private railway, Luoding Railway, emerged.
　　The 138-km railway connects Chunwan of Guangdong Province and Cenxi of Guangxi Zhuang Autonomous Region. Because of the shortage of funds, only 62 km of the railway has been constructed. According to the transfer agreement, the buyer should not only construct the rest of the railway within three years, but also be responsible for the 846 million yuan of liability for the railway.
　　Railways traditionally have been one of China’s monopolized industries, constructed and operated only by the state. While many have sought rail expansions in recent years, capital problems are still severe obstacles in the way of their development. Under such circumstances, the Chinese Ministry of Railways began reforms to create a railway investment system. Opening the railway market to private capital is one of the major actions under this system. The emergence of China’s first private railway undoubtedly is the result of the ministry’s reform. However, insiders still doubt the substantial significance of the railways and wonder whether it will lead to a higher tide of private investment into the railway industry.
　　
　　Only 62 km in eight years
　　
　　Luoding Railway is China’s first railway planned to be constructed entirely by a county-level city. However, the construction of the 62-km long first half of the railway took eight years.
　　Inconvenient transportation is the most challenging hurdle restraining Luoding’s economic development. Thus, constructing a railway has been a dream for local people for several generations. Many local officials indicated that Luoding Railway, once completed, would serve as an important channel linking the Pearl River Delta with southwest China, which will bring huge profits to local people by giving a greater impetus to local economic development.
　　In 1994, Luoding Railway began construction. Owing to the lack of funds, the Luoding Government decided to construct the railway in two sections by first building the 62-km railway between Luoding and Chunwan. Only after the first section proves profitable after construction and operation, the second one, from Luoding to Cenxi, will be constructed.
　　According to Lai Wen, Director of the Information Department of Luoding Railway Corp., the cost of the first section is 400 million yuan. The Ministry of Railways appropriated 50 million yuan and the local government must finance the remaining 350 million yuan, which is impossible for a county-level city with total fiscal revenue in 2005 of only 190 million yuan. Under such circumstances, bank loans became the main capital source.
　　However, not long after the railway began construction, loans were strictly controlled, and the construction halted afterward.
　　Four years later, the Central Government allocated 180 million yuan to the Luoding Railway construction. The construction restarted after two years of halt. Owing to the suspension, the construction cost rose dramatically, doubling the original budget.
　　In 1999, the first section of the railway was complete and started operating in 2003.
　　“Luoding Railway was basically constructed on loans and national debts, with heavy debt from the very beginning,” said Song Jinqiu, General Manager of Luoding Railway Corp.
　　To make things worse, the first section of Luoding Railway did not bring the expected profit to the local people. On the contrary, it has become a heavy burden that local people cannot get rid of.
　　The railway is not totally completed and only one section is in operation, which also influences its transportation scale. Its transportation capability cannot be fully used. According to Liang Renqiu, Director of the Publicity Department of Luoding Party Committee, Luoding Railway only transported 1 million tons of goods in 2005, far behind the expected objective of annually transporting “5 million tons in the short term, 11 million tons in the medium term and 18 million tons in the long term.”
　　Insufficient transportation volume directly leads to serious losses for the railway. According to statistics released by Guangzhou Enterprises Mergers and Acquisitions Services, which auctioned the railway, up to May 2006, Luoding Railway Corp.’s liabilities after three years of operation reached 720 million yuan.
　　According to Liang, the Luoding Government devised many plans, trying to change the status quo, such as investing in the railroad itself. However, such plans failed since Luoding’s annual fiscal revenue is only 200 million yuan. They also considered applying for the state railway construction fund, but the fund is very difficult to tap into because there are still many other projects prepared by the Ministry of Railways and Guangdong Province. Then, the Luoding Government decided to auction 100 percent of the railway’s property and invite competent enterprises to save the dying railway.
　　“We do not want to sell the railway, but we have no other choice,” said Lai.
　　
　　Prospect of a private railway
　　
　　To some extent, Luoding Railway reflects problems in China’s railway market.
　　The Ministry of Railways’ data shows that up to 2005, China’s railways in service reached 75,000 km, ranking third in length worldwide and first in Asia. However, this is a far cry from meeting the real demands of China’s development. According to a mid- and long-term plan of the Ministry of Railways, China’s railways in service will increase to 100,000 km by 2020. This grand plan also met with a difficulty-lack of capital.
　　The Ministry of Railways estimates that from 2005 to 2020, China will invest 2 trillion yuan for railway construction, and on average, the annual investment will exceed 100 billion yuan. But, the actual annual investment in railway construction is only about 50 billion yuan.
　　Under the current system where railroad is one of the few state monopolized industries, railway construction funds are mainly derived from the Ministry of Railways or local governments. According to analysts, in order to resolve the capital problems, the Ministry of Railways should diversify railway investments.
　　In recent years, many high-ranking officials from the Ministry of Railways indicated that they encourage private capital to enter the railway sector. The ministry also took on some projects to attract investments. In an administrative regulation issued by the Ministry of Railways on July 23, 2005, China, for the first time, allows foreign capital and private capital to enter the construction of arterial railways, China’s economic lifeline.
　　However, insiders say although the Ministry of Railways has been gradually adjusting its policy, the outcome is not satisfying.
　　On June 23, 2005, the Wuhan-Guangzhou Railway invited investments from home and abroad, hoping to collect a fund of 18 billion yuan. After the proclamation was published, nearly 30 enterprises showed interest in the project and negotiated with the Ministry of Railways, including some foreign and private enterprises. But, up to early September, no enterprise signed a letter of intent.
　　At the same time, the Shandong Railway Bureau went to Hong Kong to seek investments for six local railways, including three projects allowing exclusive foreign investment and two projects that would transfer the current rail properties to foreign ownership. It was the first time for China’s railway industry to have the intention to transfer entire railways to foreign ownership. However, no deal has been made up to now.
　　According to Dong Yan, Director of the Institute of Comprehensive Transportation of the National Development and Reform Commission, the railroad is an industry in short supply in China with optimistic prospect, especially busy energy and passenger arterial lines.
　　“Investing in railways is a good opportunity for private capital and in the future, more private enterprises will enter the railway industry,” said Dong.
　　Nonetheless, a private railway could run into substantial red tape. The Ministry of Railways has the authority to allow certain railways to operate and disallow others. When a railway is privatized, there is a chance that the Ministry of Railways may interfere in the operation.
　　“It is a natural law for capital to pursue profit,” Dong said. “How can an investor invest in an area if he or she cannot totally control the expected profit?”
　　In order to enhance the chance that investors would profit from a rail purchase, the Luoding Government has decided to sell the entire Luoding Railway, including the unborn section from Luoding to Cenxi.
　　The first private railway opens the door for private enterprises to enter China’s long-closed railway market. However, insiders are still not optimistic about the future development of private railways. Dong predicted that China’s railway market “will not change greatly in the near future and more private enterprises will still take a wait-and-see attitude. Large scale private capital investment to the railway industry is impossible.”
　　
　　Resolving financing problems
　　
　　Obviously, China’s private railway sector cannot be developed if financing problems cannot be resolved.
　　Currently, the financing sources of China’s railway construction mainly include railway construction funds provided by the Ministry of Railways and bank loans. Aside from fees for transporting goods, Cargo owners are charged additional fees of 0.0535 yuan per ton-km that helps to fund railway construction. This way, the construction fund maintained by the Ministry of Railways can collect more than 40 billion yuan a year. But this amount of money is only a small part of actual demand in funds needed.
　　To narrow the wide financial gap, starting in 2004, the Ministry of Railways signed agreements with 22 out of China’s 31 provinces, municipalities and autonomous regions to jointly construct railways, and established a joint working mechanism of railway construction supervised by ministerial and provincial leaders. Currently, local governments have become important investors of railway construction in the form of fiscal direct investment. They also have developed a unique way to fund railways in another way. When rail is constructed, residents are often compensated for any of their land that must be expropriated. Traditionally, they have received money for expropriated land from the Ministry of Railways via the local government. But now, local governments directly pay residents instead of using money from the Ministry of Railways.
　　But, financial problems still exist. Zhang Jianping, Deputy Director of the Development and Planning Department of the Ministry of Railways, indicated that his ministry would make efforts to get more preferential loans and would actively attract foreign direct investment in railway construction. For this purpose, the Ministry of Railways intends to choose a batch of excellent assets of certain scales for regrouping, collecting capital through share transferring, issuing shares or enlargement of stocks.
　　To achieve the objective of doubling annual transport volume to reach 400 million tons by 2010, Datong-Qinhuangdao Railway, the major rail line for transferring coal from China’s west to the east, issued shares last July, trying to finance 15 billion yuan.
　　However, according to Wang Ming, Deputy Director of the Institute of Comprehensive Transportation of the State Development and Reform Commission, under the system of mixing administration and business in railway management, the possibility of financing enough construction capital from the stock market is very small. Meanwhile, only main rail lines can be financed by the stock market.
　　To many experts, what the Ministry of Railways should do is to make a firm decision to separate business operation from its administrative function, and this is the basis for resolving all problems. “The ministry should only be responsible for devising long-term plans and creating a sound policy environment and should hand operation over to the market,” Wang told Beijing Review.

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