A market of huge potential

According MOR plans for the next five years, China will build 17,000 km of railways. By 2010 the total length of railways in operation will surpass 90,000 km. In 2007, the State plans to invest 256 billion yuan in railway infrastructure construction, including 2,099 km of new lines, the doubling of 2,347 km of railways in operation and 2,019 km of electric railways. Construction of express railways between Beijing and Shanghai will begin. Investment in railways is expected to remain strong this year.

However, intervention from the MOR alone is not enough to meet the demand for railway infrastructure investment. In recent years, actual investment by the MOR has stood at around 50-60 billion yuan, leaving a great deficiency of funds.

Wu Weiping, researcher at the Economic and Planning Research Institute of the MOR, contends that this fact allows more opportunity for private and foreign investment. "For social investment funds, this is quite a big piece of the pie," Wu said.

In his opinion, with present railway passenger and cargo transportation demands, there is little need to worry about investment returns. Figures from the MOR indicated that in 2006, 1.26 billion passengers traveled by train, up 8.7 percent over the previous year. China sees one-fourth of the world's passenger train transportation, yet only 6 percent of the world's total mileage in commercial operation. In 2006, Chinese railways generated 236.6 billion yuan in revenue from both passenger and cargo transport.

By the MOR's estimation, demand for railway transport will remain high in 2007, with an expected 1.37 billion passengers and 3.06 billion tons of cargo, growing 8.3 percent and 6.6 percent, respectively, year on year. On April 18, Chinese trains sped up for the sixth time in recent years, reaching 200 km per hour. In some sections, 250 km per hour was achieved. With higher speeds, trains can transport more passengers and goods, attracting more people and businesses to their services as well.

Currently, there are 26 joint venture railways with nearly 10,000 km in business operation. Among them, 60 percent are profitable or have balanced budgets.

For example, the 594-km Shuozhou-Huanghua Railway is a joint venture that began operations in 2000. Investors are the China Shenhua Energy Co. Ltd., the Zhongtie Construction Group Corp. Ltd. and the Construction Investment Corp. of Hebei Province, holding shares of 52.7 percent, 41.2 percent and 6.1 percent respectively. In 2000, when the railway started operation, it witnessed cargo transportation of 5.46 million tons, outpacing the previous projection of 5 million tons. It is now one of the most profitable joint venture railways in China.

Luo Renjian, researcher at the Institute of Comprehensive Transportation of the NDRC, believes that the railway construction peak in China will last at least 10 years and that increasing energy prices worldwide promise continued growth for railway transportation all over the world. He estimates that even in 2020 railway transportation will still not meet the demand of the national economy.

Unavoidable structural reform

Although supporting policies have been available for years, most private and foreign investors have taken a "wait-and-see" approach.

"They want to invest but don't dare because the mechanisms are not transparent enough," said Luo. "Since the pricing is monopolized at present, reasonable investment returns cannot be ensured."

According to Luo, when investing in railway construction, what investors worry about most is the MOR monopoly which features the mixture of government administration and enterprise management. Under such a mechanism, the MOR not only makes the rules, but also takes charge of examination and approval, in a sense serving as the judge, jury and executioner. In such a configuration, private investors may lose their rights and interests as integral legal entities.

Zhao Jian, professor at the Beijing Jiaotong University, also holds that since the railway sector has not separated government administration from enterprise management, the MOR still controls enterprises with administrative orders, so railway transportation companies do not have the independence to operate. Moreover, under the present railway revenue clearance mechanism, outside investors cannot determine what the real profits of the railway industry are. Because of these factors, even though Chinese railway construction is quite alluring to them, many investors are waiting on the sidelines.

But the times may be changing. Chen Deming, Deputy Director of the NDRC, said on April 2 that the commission, together with related departments, has agreed to research and put forward a general reform scheme for railway restructuring.

Although a detailed scheme has not been released, the present mixture of government administration and enterprise management is expected to be reformed to cope with the opening-up of the railway sector, said an official from the MOR. In December 2007, all passenger and cargo railway services will be open to foreign investment. Foreign investors and various types of private investors at home will be able to form passenger and cargo transportation companies at that time.