China’s railway industry will open to private investment on an unprecedented scale, according to a document issued this weekend by the Ministry of Railways, which is struggling with mounting debts and a corruption scandal while attempting to resolve the country’s infrastructure bottlenecks.
Private investors will be encouraged to bid for contracts, subsidiaries will be allowed to list shares, and pension funds welcomed to invest in railway companies, the ministry said in a policy document issued late Friday.
The document did not address allowing foreign firms to invest directly in rail. While foreign companies such as Alstom, GE, Bombadier and Kawasaki Heavy Industries have won lucrative tenders to supply China’s rail expansion, in many cases their participation has been limited to supplying components.
Many foreign firms have also complained that they have been forced to transfer technology to win contracts only to see China compete against them in international rail tenders.
The announcement follows Chinese officials’ statements during the annual parliamentary session that rail would be one of seven industries allowed to open for private investment.
The need for funding is acute. China still needs billions more in rail investment, to remove bottlenecks in cargo transport, ease overcrowding in passenger transport and develop commuter lines in its sprawling megacities.
The ministry lost $1.1 billion in the first quarter of this year, due to high operating costs and debt payments. It had $384 billion in debt at the end of March.
Rail investment slowed in early 2011 after a fatal crash and the firing of the minister and some of the ministry’s senior staff.
Analysts expect investment to pick up in the second half of this year.
One pilot project for private investment in rail infrastructure will be a light rail system in the city of Wenzhou, a cradle for China’s private entrepreneurs that was recently designated a pilot zone for private lending reforms.
Wenzhou citizens are being called upon to finance 50 percent of the 7 billion yuan ($1.11 billion) project, at a cost of 10,000 yuan per share that’s benchmarked to interest rates on bank deposits. They may withdraw their investment after one year, Caixin magazine reported.
Other municipalities are luring private investment, whether by opening tenders at fixed rates of return, or offering build-transfer contracts, or by selling shares in projects, said Zhou Dewen, chair of the Wenzhou Small and Medium Sized Enterprises Development Association.
“We’ve heard back that regional investment tenders are not very profitable. They need to allow the market to set the rates of return, to allow appropriate profits,” Zhou told Reuters.
Regional tenders are in line with ministry plans to decentralise its tender process to local jurisdictions.
The ministry also specifically encouraged private investment in Chinese rail projects overseas. To date, showcase projects such as a Chinese-built railroad to Mecca have struggled with uncontrolled cost increases.
China’s Ministry of Railways is the only central government bureaucracy that has never been restructured in more than six decades of Communist rule. In addition to a vast and growing rail network, it maintains its own hospitals, courts, police force and schools.
China began to face difficulties funding rail expansion, including high-speed lines, after costs blew out on a politically-mandated, high-altitude track to Tibet. In 2006, the ministry listed two lines in Hong Kong and began issuing bonds.
But its ability to tap the private sector may depend on more than just acceptable returns, said Zhou of the Wenzhou association.
There was also the matter of China’s on-again, off-again embrace of the private entrepreneurship that has made Wenzhou people some of the wealthiest in China. Wenzhou investors have repeatedly seen rules change as Beijing renationalised some coal mining and made housing investment more restrictive.
“The problem in any government project is the issue of trust,” Zhou said. “They can’t welcome us in today and kick us out again tomorrow.” -By Lucy Hornby