The Reform of China's Railway Construction Investment System

Background-A Lack of Capital for Construction

With the rapid growth of China's economy beginning in 2003, insufficiencies in railway transportation capabilities became increasingly grave. China's railway track length composes roughly 6% of the world's total railways, and yet the share of transportation on these tracks occupies 24% of the world's total railway transportation. Despite the fact that the transportation capabilities of China's major railway tracks are already operating at full capacity, as ever supply cannot match demand.

As a result, the State Council announced in January 2004 a “Mid-term and Long-term Railway Network Construction Plan”, with a development strategy focused on the construction of new railways alongside the speeding-up of existing railways. According to the plan, total railway length will be increased from the 2003 level of 73,000 kilometers to a total length of 100,000 kilometers by 2020. Furthermore, the total investment for railway construction is projected to surpass 2 trillion yuan, requiring yearly capital of over 100 billion yuan.

However, currently the procurement of this vast sum of railway construction capital means reliance on the railway construction fund, government bonds, local government investment, and bank loans. According to Jian-ping Zhang, assistant director of the Railway Department's Development Construction Association, China's total investment in basic railway construction reached 279 billion yuan between 2000 and 2004. Out of this, 47% came from the railway construction fund, 25% from bank loans, and only 9% was self-financed.

At the same time, beginning on March 1, 1991 the State council approved the Railway Department's taxation of 0.0535 yuan per ton-kilometer as a construction fee for companies who consign freight transportation. Out of this, 0.0415 yuan is earmarked for the railway construction fund. With approximately 40 billion yuan raised annually, this has become the root of important contributions for railway construction capital. However, the high level of taxation for initial railway construction funds increases the cost for the transport consignment side, which means that its competitiveness with water and air transport is comparatively weakened. Thus, the Railway Department has scheduled the abolition of the railway construction fund by the end of 2005. Securing a source of funding for railway construction and expanding funding routes has become an urgent issue for the reform of the railway construction investment system, and the Railway Department has set “government guidance, market-run management, and diversification of investment entities” as major reform policies.

Furthermore, in February of this year the State Council announced its “Act Concerning the Endorsement, Support, and Guidance of the Development of an Individual, Private, and Non-Governmental Economic System”. In the railway field, entry through stockholding, mergers, collaboration, and project finance by non-governmental capital has become possible, which has formed the backbone of reform of the railway construction investment system.

Current Problems with the Advancement of Private Capital

In this way, the policy limitations regarding investment in railway construction by private capital are being removed, but such private investment is lagging as a result of China's railage management system.

Reformation of China's railage system began in 1986, and despite numerous attempts at reform such as a contract system and an investment management responsibility system, none of them have led to increased results. On March 18, 2005, the Railway Department abolished 41 railway branches in 41 locations throughout the country and ended the decades-long, four-tiered “Railway Department, Railway Office, Railway Branch, Railway Station” vertical management system. This system was instead streamlined into a three-tiered “Railway Department, Railway Office, Railway Station” system. However, regarding the current reforms, the National Development Reform Council Transportation Research Center's assistant director, Ming Wang, points out that as long as the basis for the Railway Department's financial affairs system is not changed, railway offices will be unable to exert autonomous management over transportation companies.

Currently, as a result of the transportation management system and government policies, projected economic profits have not been attained even within railway joint ventures with private capital and diversified investors. Currently there are 29 railway joint ventures managing 32 routes throughout the country, and though mileage traveled on these lines accounts for 10.6% of the national total, 2003 saw a total deficit of 700 million yuan.

However, under the current conditions of China's extremely serious shortage of railway transportation capability, the State Council determined that drastic structural reforms would be difficult to enact, and thus it does not expect enforcement of comprehensive measures for railway reform by the end of the year. For the foreseeable future, premised on the support of the existing management system, railway managers will consider various measures regarding how to entice more private capital. In 2001, reformation of the freight system began, and instead of using revenue from ticket sales and freight charges for conventional “concentrated allocation”, managing railway offices and service-providing organizations are now being relied upon.

Future Trends

Following the commitment made at the time of its accession to the WTO, China recognized foreign investment in its railway freight transport companies beginning in 2003, and since 2004 China has acknowledged that foreign investment now accounts for the majority of total investment.

Furthermore, beginning in 2006 China is expected to enforce the full opening of the railway transport industry. In June 2005, the Shandong Government Asset Management Association announced plans for introducing foreign investment into the construction of six local railways; three out of those six, including the Lin Yi-Xin Shui line, will permit 100% foreign funding, and in two cases ownership rights will be ceded to foreign capital. This kind of use of private capital for railway construction and route operation is a strong step toward opening up to foreign investment. In this way, it is also imperative to reform the railway transportation management system in a comparable fashion, and reforming the stock system is one part of this process. Specifically, in the coming years such reform will include the reallocation of the Railway Department's existing prime railway assets that have a high level of profitability. Additionally, measures to increase funding in railway construction investment will also include the establishment and listing of business corporations, the offering of stock shares and increased capital for listed companies, and increasing stock dividends.

However, though railway construction will be opened to foreign investment, this does not mean that problems with fund shortages or inefficient management will be solved. First, transparency in railway administration and railway businesses is not secured, and radical management improvements and service upgrading do not appear to be on the horizon. Second, regarding fundraising from foreign investment, participation in planning and management by foreign investment is not yet recognized, and capital reimbursement plans are clearly not being considered. Third, these reforms do not touch upon management intervention by governmental administration that is contributing the most to the worsening performance of railway operations. If the current system is left unchanged, reassuring and encouraging participation by both foreign investment and national, domestic investment will be impossible.