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Former Minister of Railways Liu Zhijun is still facing criminal procedures for corruption, and the shadow of the high-speed train accident that killed and hurt more than 300 people in July last year has not yet disappeared. These two events drove calls by the Chinese public to reform the railway sector. On March 22, the State Council approved a reform plan for 2012 formulated by the National Development and Reform Commission (NDRC), which says that the government is researching a reform plan for the railway sector and that the Ministry of Railways (MOR) and the NDRC are responsible for the plan.
This means that China will restart the railway reform. Industry insiders say the reform will allow access of foreign and private capital to the construction and business operation of railways.
Since the People’s Republic of China was founded in 1949, the development of the railway sector has featured a state monopoly and powerful expansion. However, problems arising with monopolies, such as lack of responsibility, low efficiency and corruption, have also greatly damaged the further development of the railway sector and the safety of the transportation system, which invited continuous domestic calls for breaking the monopoly and reforming the railway industry. In 1986, 2000 and 2005, China tried three times to reform the railway sector, but failed to carry through the reforms for various reasons.
Different this time?
Since there is no detailed scheme, the market has to guess at the details of the reform, but it has been confirmed that “private capital will be encouraged to enter the railway sector.”The executive meeting of the State Council held on March 21 made sure to “encourage private capital to participate in transportation construction” and required to “complete some key railway projects and start at appropriate time some urgent and necessary projects.”This indicates that diversified operation will become the breakthrough point of the railway sector’s market-oriented reform.
Separating government administration from enterprise management will guarantee entry of private enterprises. Sheng Guangzu, Minister of Railways, said at the national railway work conference held in December last year that after separation of government administration from enterprise management, the MOR would only perform functions of government supervision, represent state assets investment and administer the industry. Other powers and responsibilities will be distributed to local railway bureaus, which will be the major market participants.
Hu Siji, professor at the School of Traffic and Transportation of Beijing Jiaotong University, said a mixture of government administration and enterprise management is the crucial cause of the problems bothering the Chinese railway industry. Such a mechanism has blocked the railway sector from introducing market competition mechanisms. Without breaking such a mechanism, it will be impossible to introduce market competition.
A mixture of government administration and enterprise management also leads to uncontrolled internal management of the railway sector. A major reason for the frequent corruption cases in the railway sector in recent years is the excessive concentration of power.“The railway mechanism must be reformed. Otherwise the existing problems are hard to solve, and the first thing to reform is to break the mixture of government administration and enterprise management,” Hu said.
It is said the Chinese Government is considering incorporating the MOR into the Ministry of Communications (MOC). Hu also said the Chinese Academy of Engineering is researching the initiative.
However, Hu said this would not fundamentally solve the problems existing in the railway sector. Without solving the fundamental problems and only incorporating the MOR into the MOC, the reform would just move the MOR into a new office site and change it into the railway administration bureau under the MOC.
Hu said the railway reform must follow two basic principles: market-oriented operational mechanisms must be established; and railway transportation should be under highly centralized command.
According to Hu, before Liu took his post, the MOR attempted to carry out reform to separate railway networks from transportation based on market-oriented operational mechanisms. The reform intended to encourage full competition in railway operations. There could be thousands of railway companies across the country, railway networks construction could be carried out by various investors and it would not be necessary for the MOR to maintain absolute control over each rail line. The reform was not carried out at that time, but could be attempted now.
Good examples
Zhao Jian, professor at the School of Economics and Management of Beijing Jiaotong University, said the railway sector could follow the reforms of the power grid and telecom industries and divide the railways into several regions for operation and management. After separating government administration from enterprise management, a railway transportation corporation and a railway construction and asset management corporation should be established. The railway construction and asset management corporation would be responsible for financing and construction of infrastructure, as well as related assets management and payment of debts. After railway facilities are completed, they will be entrusted or transferred to the railway transportation corporation for operation, with construction loans repaid with operational profits. Information from various sources show that these schemes are in consideration of the NDRC and the MOR.
Zhang said disposal of debts might affect the process of railway reform. Although the MOR has not publicized its fiscal report in 2011, according to the auditing report of the MOR for the third quarter of 2011 issued by Shanghai Clearing House by the end of September 30, 2011, debts of the MOR had totaled 2.23 trillion yuan ($354.53 billion), a rise of 18 percent from the end of 2010, and the debt asset ratio had risen to 59.6 percent from 57.44 percent at the end of 2010.
Who will cover the debts of the MOR is a problem to be solved by the reform. During the reform of the four biggest state-owned commercial banks, namely, the Industrial and Commercial Bank of China, the Bank of China, the Agricultural Bank of China and the China Construction Bank, all the nonperforming loans were stripped off to assets management corporations. Concerns have been voiced about whether the railway reform will follow this method to dispose of debts, and this is also difficult to solve.
Previous Reform Initiatives
l In 1986, Ding Guangen, then Minister of Railways, proposed a reform for“full economic responsibility” for local railway bureaus, with more control over finance and human resources. According to the plan, the Ministry of Railways(MOR) would turn over 5 percent of all its business revenues to the Central Government and keep the remainder. The goal was to drastically reduce MOR’s financial dependence on the Central Government, gain more decisionmaking power and stimulate innovation. The plan was not implemented due to Ding’s resignation over a series of train accidents.
l In 2000, Minister of Railways Fu Zhihuan proposed establishing a national railway network company along with several passenger transportation and cargo companies, in an effort to separate the country’s railway networks from the business of transporting passengers and freight, and breaking the MOR’s mixed functions of both government administration and enterprise management. In 2003, the MOR submitted another reform scheme, calling for “integrating railway networks with transportation and regional competition.” Both schemes failed to be approved by the State Council.
l In 2003, Liu Zhijun became the minister of railways. In March 2005, the biggest internal reform in the railway industry started, with all 41 railway sub-bureaus being dissolved. However, the reform was still initiated internally, without fundamental reform in the administration mechanism. It was also far from getting to the essence of reform—breaking the monopoly and mixed functions of government administration and enterprise management.
This means that China will restart the railway reform. Industry insiders say the reform will allow access of foreign and private capital to the construction and business operation of railways.
Since the People’s Republic of China was founded in 1949, the development of the railway sector has featured a state monopoly and powerful expansion. However, problems arising with monopolies, such as lack of responsibility, low efficiency and corruption, have also greatly damaged the further development of the railway sector and the safety of the transportation system, which invited continuous domestic calls for breaking the monopoly and reforming the railway industry. In 1986, 2000 and 2005, China tried three times to reform the railway sector, but failed to carry through the reforms for various reasons.
Different this time?
Since there is no detailed scheme, the market has to guess at the details of the reform, but it has been confirmed that “private capital will be encouraged to enter the railway sector.”The executive meeting of the State Council held on March 21 made sure to “encourage private capital to participate in transportation construction” and required to “complete some key railway projects and start at appropriate time some urgent and necessary projects.”This indicates that diversified operation will become the breakthrough point of the railway sector’s market-oriented reform.
Separating government administration from enterprise management will guarantee entry of private enterprises. Sheng Guangzu, Minister of Railways, said at the national railway work conference held in December last year that after separation of government administration from enterprise management, the MOR would only perform functions of government supervision, represent state assets investment and administer the industry. Other powers and responsibilities will be distributed to local railway bureaus, which will be the major market participants.
Hu Siji, professor at the School of Traffic and Transportation of Beijing Jiaotong University, said a mixture of government administration and enterprise management is the crucial cause of the problems bothering the Chinese railway industry. Such a mechanism has blocked the railway sector from introducing market competition mechanisms. Without breaking such a mechanism, it will be impossible to introduce market competition.
A mixture of government administration and enterprise management also leads to uncontrolled internal management of the railway sector. A major reason for the frequent corruption cases in the railway sector in recent years is the excessive concentration of power.“The railway mechanism must be reformed. Otherwise the existing problems are hard to solve, and the first thing to reform is to break the mixture of government administration and enterprise management,” Hu said.
It is said the Chinese Government is considering incorporating the MOR into the Ministry of Communications (MOC). Hu also said the Chinese Academy of Engineering is researching the initiative.
However, Hu said this would not fundamentally solve the problems existing in the railway sector. Without solving the fundamental problems and only incorporating the MOR into the MOC, the reform would just move the MOR into a new office site and change it into the railway administration bureau under the MOC.
Hu said the railway reform must follow two basic principles: market-oriented operational mechanisms must be established; and railway transportation should be under highly centralized command.
According to Hu, before Liu took his post, the MOR attempted to carry out reform to separate railway networks from transportation based on market-oriented operational mechanisms. The reform intended to encourage full competition in railway operations. There could be thousands of railway companies across the country, railway networks construction could be carried out by various investors and it would not be necessary for the MOR to maintain absolute control over each rail line. The reform was not carried out at that time, but could be attempted now.
Good examples
Zhao Jian, professor at the School of Economics and Management of Beijing Jiaotong University, said the railway sector could follow the reforms of the power grid and telecom industries and divide the railways into several regions for operation and management. After separating government administration from enterprise management, a railway transportation corporation and a railway construction and asset management corporation should be established. The railway construction and asset management corporation would be responsible for financing and construction of infrastructure, as well as related assets management and payment of debts. After railway facilities are completed, they will be entrusted or transferred to the railway transportation corporation for operation, with construction loans repaid with operational profits. Information from various sources show that these schemes are in consideration of the NDRC and the MOR.
Zhang said disposal of debts might affect the process of railway reform. Although the MOR has not publicized its fiscal report in 2011, according to the auditing report of the MOR for the third quarter of 2011 issued by Shanghai Clearing House by the end of September 30, 2011, debts of the MOR had totaled 2.23 trillion yuan ($354.53 billion), a rise of 18 percent from the end of 2010, and the debt asset ratio had risen to 59.6 percent from 57.44 percent at the end of 2010.
Who will cover the debts of the MOR is a problem to be solved by the reform. During the reform of the four biggest state-owned commercial banks, namely, the Industrial and Commercial Bank of China, the Bank of China, the Agricultural Bank of China and the China Construction Bank, all the nonperforming loans were stripped off to assets management corporations. Concerns have been voiced about whether the railway reform will follow this method to dispose of debts, and this is also difficult to solve.
Previous Reform Initiatives
l In 1986, Ding Guangen, then Minister of Railways, proposed a reform for“full economic responsibility” for local railway bureaus, with more control over finance and human resources. According to the plan, the Ministry of Railways(MOR) would turn over 5 percent of all its business revenues to the Central Government and keep the remainder. The goal was to drastically reduce MOR’s financial dependence on the Central Government, gain more decisionmaking power and stimulate innovation. The plan was not implemented due to Ding’s resignation over a series of train accidents.
l In 2000, Minister of Railways Fu Zhihuan proposed establishing a national railway network company along with several passenger transportation and cargo companies, in an effort to separate the country’s railway networks from the business of transporting passengers and freight, and breaking the MOR’s mixed functions of both government administration and enterprise management. In 2003, the MOR submitted another reform scheme, calling for “integrating railway networks with transportation and regional competition.” Both schemes failed to be approved by the State Council.
l In 2003, Liu Zhijun became the minister of railways. In March 2005, the biggest internal reform in the railway industry started, with all 41 railway sub-bureaus being dissolved. However, the reform was still initiated internally, without fundamental reform in the administration mechanism. It was also far from getting to the essence of reform—breaking the monopoly and mixed functions of government administration and enterprise management.