China opens railways to
foreign investment By Candy Zeng
SHENZHEN - One aim of China's
economic-reform endeavor is to privatize the
state-owned enterprises (SOEs). Although the
reform has been ongoing for more than two decades,
a few industries remain firmly in the hands of the
state. Railways are one of them.
Recently,
therefore, China has taken the first steps, though
small ones, to open the door for private
investment in the state-monopolized railway sector
in a bid to boost the development and
improve the efficiency of its
transport sector.
On August 23, Shenzhen
Zhongji Industrial Co became the ice-breaker by
acquiring for 41.8 million yuan (US$5.2 million)
100% of a state-owned railway company, Luoding
Railway Group, which maintains a 62.1-kilometer
rail line.
Luoding had invested more than
800 million yuan over eight years to build the
railway linking two cities in Guangdong province -
Luoding and Chunwan. But the company has suffered
from persistent losses ever since the railway was
put into operation in 2003.
The Luoding
railway is part of a designated shortcut linking
the national rail network from Luoding in
Guangdong to Cenxi, Guangxi province, to the
west. However, Luoding is a small city with an
annual income of some 200 million yuan, and the
local government was unable to help the
state-owned group extend the railway from Chunwan
to its planned terminus in Cenxi.
So the
rail line from Luoding to Chunwan now only goes
halfway, and thus it has not been adequately used,
with last year's transport volume reaching only
about a million tons. That fell far short of its
designed annual capacity of 5.5 million tons.
With the acquisition, Shenzhen Zhongji
committed to stretch the railway to Cenxi within
three years. After being completed, the
Luoding-Cenxi railway with a total length of
75.7km will cut the traveling distance from
Guangzhou to Kunming, provincial capital of Yunnan, by 103km.
Last year, Changshan Cement Co put money
into the construction of Quchang Railway in Zhejiang province. The
cement company, however, transferred or resold
almost half of its total 34% stake in the railway
to Shanghai Railway Bureau and state-owned
Zhejiang Railway Investment Group just one week
before the Zhongji deal was signed.
This
is one element of a long-term development plan
that will see China expand its railway network to
100,000km by 2020 from the current 74,408km. The
expansion would require a total investment of 2
trillion yuan through 2020, with an average annual
input of 100 billion. The investment will be
front-loaded with the average annual investment
estimated at 160 billion yuan up to 2010,
according to the Railway Ministry.
Statistics from an industrial-research
firm show that China's investment on railway
construction exceeded 100 billion yuan in 2005,
almost double the 51.6 billion yuan expended in
2004. Railway construction was further accelerated
in the first half of 2006 with investment for the
first five months amounting to 74.5 billion yuan.
And this year, the Railway Ministry has
set a goal of investing 163.3 billion yuan in
railway construction across the country. However,
the investment in the first eight months of this
year totaled just 82.2 billion, fulfilling only
50.4% of this year's target. That means that in
the remaining four months, the country needs to
pump more than 80 billion yuan of into rail
development, which is certainly not an easy job.
Accordingly, the Railways Ministry recently held a
meeting to urge all construction units to make
efforts to fulfill the yearly railway construction
plan.
The government wants to boost rail
transport because it consumes less fuel than
motor-vehicle and air transportation. To implement
its ambitious plan, the government decided to
allow private companies to invest in railway
construction, running railways, and manufacture of
railway equipment. In April, it further
liberalized the designing, project construction
and supervision businesses in the railway
industry.
On August 26, three days after
the inking of Zhongji's deal, a German company,
Business Media China, announced that it had
obtained exclusive operation rights for outdoor
advertising in railway stations from China Railway
Century Media, becoming the first foreign company
to get a piece of this business. The German
company will handle outdoor advertisements at
Beijing West Railway Station, Beijing Central
Railway Station, Tianjin Railway Station and
Shijiazhuang Station for six years, according to
the agreement.
For Zhongji, a
Shenzhen-based company founded in 1996 with total
consolidated assets of 8.1 billion yuan in 2005,
the acquisition of Luoding Railway is an ideal
project. "We opt for fee-collecting projects, in
particular the long-term ones," said its chairman
Cheng Qingbo.
His company is heavily
involved in capital-intensive industries such as
real estate, toll roads and hydropower stations in
Beijing, Shanghai and Chongqing.
"Few
companies have studied the railway industry," said
Cheng. Zhongji turned out to be the only bidder
after the public tender for the Luoding Railway
was announced in mid-July.
Market research
by the Second Surveying and Designing Institute
under the Railway Ministry last October estimated
annual yield of the completed Luoding-Cenxi
Railway would be 14.97% in at least 10 years,
higher than the industrial benchmark of 6%.
Cheng is optimistic about the future of
the newly bought asset in his company's portfolio.
It runs through a mountainous area rich in mineral
resources. The finished railway will shorten the
distance from Guangdong to Guangxi or even Hunan province.
But many industrial analysts are not so
optimistic as Cheng.
The major obstacles
facing private investors are pricing and
dispatching, said Guo Lixin of the China
Transportation Association. So far,
railway-transport prices and train-dispatching
schedules are set by the government. Such official
intervention will undermine the operating ability
of a private company, increasing investment risks.
For example, Sichuan province set the
transport price for a local offshoot railway at
four times that of the trunk line in a bid to
attract private investment. The "favorable" price
to investors, however, makes the company less
competitive in the market.
Candy
Zeng is a freelance writer based in
Shenzhen.
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