By Chen Yong (陈勇) and Sun Li (孙黎)
Issue 585, Sept 03, 2012
News, page 6
Translated by Zhu Na
Original article: [Chinese]

Fang Bin (方斌), the chairman of an engineering company that belongs to one of China's large Railway construction groups recently bemoaned how, "The railway business is getting worse and worse each year. Cost pressures are increasing year after year, it's really very difficult. No one takes the decision to invest lightly."

Fang has worked in the railway-engineering field for more than 20 years. He says that last year was the most difficult time ever for the industry. In the middle of the year, many railway projects were suspended because of funding shortages. Then the Wenzhou train crash in July killed 40 people which led to a futher reduction in overall construction.

The situation started to improve the following November, but as of Mar 31 this year, the Ministry of Railways' debts totaled 2.43 trillion yuan. Construction funds are still experiencing a serious shortage.

The government and the Ministry of Railways are now shifting strategies and trying to attract private capital to the rail system. In a Jul 30 State Council executive meeting, Premier Wen Jiabao said that a slew of major projects must be introduced as soon as possible to guide private investment. These include projects in the railway industry, energy, telecommunications, finance, health care, education, and other fields.

The "New 36" polices, which were introduced in 2010, encourage private investment and outlined the various categories of railway investment that are open to private capital. They include encouraging private investors to participate in the construction of main railway lines, railway extension lines, railway ferries, station facilities, coal transportation channels, passenger lines, inter-city lines, and other projects.

Fang said he wanted to invest, but the whole situation was still unclear to him.

Skeptical Investors

On May 7, 2012, Beijing Equity Exchange Ltd. issued an announcement that 8 percent of Taizhongyin Railway's shares were for sale.

However, there was little interest in purchasing the shares.

Fang said he went to inquire about it, but gave up because the profit margin seemed too low and private investors would have little say in the projects.

Sun Yongle (孙永乐) from Beijing Equity Exchange said that althougn many reporters inquired about the sale, not many people were actually interested in investing. So far, no substantial negotiations or transactions have taken place.

The Taizhongyin Railway, which stretches 942 km and connects Shanxi, Shaanxi and Ningxia provinces, opened in Jan 2011. It's sometimes called the "Golden Channel" since it passes through resource-rich cities like Taiyuan. Since construction began in 2006, it's garnered a lot of attention.

An audit document shows that Taizhongyin adopted the model of Build-Own-Operate. The Ministry of Railways and local governments jointly invested in it.

At of the end of 2011, Taizhongyin Railway Company's total assets were 43 billion yuan, with debts totaling 31 billion yuan.

"I have done some research and the overall situation doesn't look good." Fang said. "Some factors will influence investors' confidence. Labor costs this year increased 30 percent and interest rates on loans also went up."

During an audit of Taizhongyin Railway, the National Audit Office discovered that the railway's construction projects involved illegal activities like false inspections and project funds being diverted into personal bank accounts.

Wang Mengshu (王梦恕), an expert in China's high-speed rail, believes that in order to win the favor of private investors, market competition must be introduced, as well as diversifying investments.

Winning Confidence

Zhang Zhongjie (张仲杰), an analyst with Essence Securities, said that the Ministry of Railways is currently undergoing reform. By going public, the funding problem may be solved and more railway assets will appear in the capital market.

However, private investment in railways isn't entirely new.

In 2005, the Ministry of Railways issued guidelines for encouraging and supporting private investors to participate in railway construction and operation. The guidelines specified that railways are open to private capital in four areas: railway construction, railway transportation, equipment manufacturing, and diversified operation.

Later, some private enterprises started to become involved in railway investment, but in the end it proved unsuccessful. For example, in 2005 a privately-owned enterprise in Zhejiang province, Coslight Group (光宇集团), gained 34 percent of the privately-owned Quzhou-Changshan railway. However, one year later, when the Zhejiang Railway Group also became a shareholder, Coslight Group's holdings were reduced to 18.9 percent. In 2007, Coslight Group completely withdrew from the investment.

Whether or not profit can be made is a major issue. Although private investors invest money, they don't have the right to decide prices and arrangements related to the operation of railways. Simply completing construction of rail lines is insufficient for
their purposes. The lines must be integrated into the greater rail network in order to have an effect. If there aren't enough suppliers of trains and carriages, for example, there will be little reward for private investors from the railways they've built.

Li Hongchang (李红昌), a member of the expert panel with China International Engineering Consulting Corp., said, "If we don't reshape the current thinking and establish a new mechanism for market competition, then there won't be any profits to talk of."