Rail & Infrastructure

End of the line

Railway ministry on verge of break up, as Li Keqiang reforms bureaucracies

End of the line

Taking his cut: Liu Zhijun

Reforming a bureaucracy is never easy. Just ask Jim Hacker, the Minister of Administrative Affairs in the classic UK television show Yes, Minister. He regularly battled with his top civil servant Sir Humphrey Appleby in seeking – in Hacker’s own words – to “streamline this creaking old bureaucratic machine”.

Sir Humphrey, on the other hand, proved instinctively resistant to anything likely to make the bureaucracy smaller, and less powerful. Indeed, when the permanent secretary is asked to give evidence to a committee tasked with reform, Hacker asks Appleby whether he will support the view that the bureaucracy is “overmanned and feather-bedded”.

To this Sir Humphrey offers the response: “Minister, if I am pressed for a straight answer I shall say that, as far as we can see, looking at it by and large, taking one thing with another, in terms of the average of departments, then in the last analysis it is probably true to say that, at the end of the day, you would find, in general terms that, not to put too fine a point on it, there really was not very much in it, one way or the other. As far as one can see, at this stage.”

China has men like Hacker in its ranks (although hopefully rather more effective) who are intent on reforming government agencies to make them more efficient. For instance, back in 1998, then premier Zhu Rongji set about cutting back the number of government bodies that reported to the State Council. Zhu knew it would be a difficult task but swore “to have my body torn and my bones crushed just to do it”. After back-to-back meetings with dozens of ministers, he slashed the number of state bodies from almost 60 to 29, dismissing 16,500 officials.

But according to Sina Finance, China’s equivalents of Sir Humphrey then fought a successful rearguard action. After Zhu retired the number of government departments began to grow again, and today they number around 80.

Another senior politician now looks intent on taking on the bureaucratic leviathan. This time it is Li Keqiang, the man expected to be confirmed as premier at the ongoing National People’s Congress. CBN and other local media say that Li’s first major target will be the powerful Ministry of Railways. The plan is to roll the ministry – which employs 2 million people – into the Ministry of Transport as part of a wider reform of its remit.

By any standards, the Ministry of Railways is a strange beast. It was grafted from the Soviet model and has traditionally been structured more like a military unit with its own police force, court system and university. Some in the Chinese media liken it to a state within a state.

For much of the past decade, the ministry was the fiefdom of Liu Zhijun. He enjoyed extraordinary power, ramming through massive budgets to expand China’s rail infrastructure and build a new high-speed train network. Liu’s bureaucratic empire looked indestructible. Back in 2008 he successfully fought off an attempt to merge his department into the Ministry of Transport, by arguing that railways were critical to national defence, reports 21CN Business Herald.

That was probably Liu’s political heyday. When his fall came, it was swift. As we reported in issue 95, he was detained in 2011 for suspected graft, with Southern Metropolis Daily speculating Liu had grabbed at least Rmb1 billion ($160.7 million) in bribes from contractors (and kept himself busy in the evenings with at least 18 mistresses by CBN’s count). He is still awaiting trial.

Liu’s legacy was then further tarnished by the tragic bullet train crash outside Wenzhou in 2011 (see WiC117). This led to widespread recriminations that a corrupt ministry had cut corners on safety as it raced to complete its new network.

The net effect of Liu’s fall and the Wenzhou crash was quickly evident: irreparable damage to the Ministry of Railways’ hegemony. In an early sign that it would be restructured, its jurisdiction over the railway court system was transferred to local governments last May. Now, government insiders have confirmed to Chinese journalists that plans to integrate the rail bureaucracy into the Ministry of Transport have largely been finalised.

21CN reckons the consequences could be far-reaching. It quotes Professor Rong Chaohe of Jiaotong University, who explains the purpose of the reform. First, the plan is to take this Soviet-style institution and modernise its oversight function. Currently the railway ministry does too much: procuring, building and operating the country’s train network. It also regulates it, a situation that creates conflicts unlikely to be in the best interests of passenger safety or in policing graft.

The forecast is that once the ministry is subsumed into the broader transport portfolio it will lose the right to operate trains and build new track. Instead these functions will go to a National Railway Transportation Corporation, which will operate a series of joint venture-like arrangements with local governments. The rail bureaucrats will then be restricted in their activities to regulation – a move more akin to international practice.

Of course, another pressing reason for reform to the ministry is financial. As WiC has mentioned on earlier occasions, the ministry’s rail ambitions have burdened it with Rmb2.66 trillion of debt. In the first three quarters of 2012 it made operating losses of Rmb8.5 billion, suggesting that servicing the debt could become increasingly tough.

Last year the liabilities were reclassified as government debt, easing bond investor fears of default. But that doesn’t solve the fundamental problem that there is too much borrowing (not to mention that the debt is still growing, with a plan to spend a further $67 billion on 38 rail projects this year, according to Economic Information Daily).

21CN reckons that the debt question is the trickiest part of the reform process. After the ministry “disappears” it will be hard to define the nature of the bonds that it leaves behind, because the debtor (the ministry) will be separate from the beneficiary (the new railway operators).

The ultimate solution as far as 21CN is concerned? “The key to solving the debt issue lies in transforming the Chinese railways investment and operating model, and improving the rail system’s competitiveness and efficiency. More private investment should be encouraged and more markets in the rail transport sector should be opened to non-state-owned enterprises.”

That is easier said than done, as 21CN recognises. Earlier this month the newspaper broke the news that just such an outside investor already wants to exit its rail exposure. The fund in question is Ping An Asset Management, which owns 13.9% of the Beijing-Shanghai High Speed Railway Company. The railway firm built and also operates the bullet train line between the capital city and the nation’s financial centre, and was established in 2007 as a pilot scheme to lure external capital (the Ministry of Railways retains a majority stake).

21CN reports that Ping An has asked the ministry to buy back its shares. Ticket prices are lower than it expected, while corporate governance has been poor and the fund feels it has no input into how the line is run, says the newspaper.

The Beijing to Shanghai high-speed route is unquestionably the most commercially attractive line in China. If outside capital is already deserting it – only a year and a half after the line launched – that doesn’t bode well for the rest of the network.

This week Minister of Railways Sheng Guangzu told Economic Information Daily that one means to attract private funds might be to offer guaranteed returns to investors. One plan, he says, is to launch railway development funds.

Meanwhile Xinhua reports that to avoid a messy outcome with bondholders, the rail debt might just be assumed by the government.

Little wonder that 21CN estimates that, owing to its sheer difficulty and complexity, the reform of the Ministry of Railways could take up to five years to implement.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.