Rail & Infrastructure

Network effect

Signs of strain as another $100 billion in railway spend is promised

CHINA-RAIL/INVESTMENT

Plenty more of these to come: a high-speed Harmony bullet train gets a wipe down in Shenyang

On the face of it, China’s railways seem to be going from strength to strength at home and overseas. On a visit to Europe in November prime minister Li Keqiang announced that Chinese firms will build a railway linking the capitals of Serbia and Hungary; in December work started on a Chinese project linking Nairobi and Mombasa in Kenya, and this month Pakistan takes delivery of the first of 58 freight locomotives from Chinese manufacturers.

Railway bosses have been busy in Britain too, bidding to revive a short stretch of line abandoned almost a century ago. China Railway Group says it wants to rebuild seven miles of track that would connect Birmingham’s airport with the proposed national high-speed rail link. If the project comes off, it will strike a historical chord: China’s first railway was built in Shanghai over a similar distance by British firm Jardine Matheson in 1876, although it was then dismantled within a year by a fearful Qing government. Any apprehension has long gone: by the end of last year China’s rail network had grown to more than 100,000km, carrying more than two billion passengers.

Bullet trains account for a quarter of passenger traffic and about 10% of the track, with high-speed rail now well established after a period of crisis that began with a major crash in Wenzhou (see WiC117) and extended into the scandal surrounding the arrest of the railways minister for graft (see WiC95 for our first mention of his detention).

Any fanfare surrounding the network’s launch was soon muffled in a nationwide safety audit and the beginnings of an industry shake-up. This culminated in the separation of the regulatory and operational functions of the railway ministry last year.

But while this was going on millions of passengers were buying tickets for bullet trains, including WiC, which was impressed by its own high-speed trip to Tianjin last October (see issue 213). Most crucially of all there have been no more fatal accidents. Mathematicians at the Massachusetts Institute of Technology have calculated that the “mortality-risk” on China’s railways compares favourably to the world’s safest airlines.

Safer performance seems to have given China Railway Corporation – the new network operator – more confidence to push ahead with railway construction. Six new lines delivering 2,000km of track were opened on the same day at the end of December, while another Rmb630 billion, or more than $100 billion, is going to be spent on launching 6,600km more railway line this year.

Ten years ago, the rail build-out focused on establishing a “4+4” structure of four vertical and four horizontal lines as a national backbone for the network, connecting China’s largest cities and most vibrant economic hubs. But railway administrators are now turning their attention to more local city-to-city routes in less-developed parts of the country. One of the new lines opened in December is in the northwestern province of Shaanxi, connecting towns that traditionally made up early stops on the Silk Road. Another is further south in the Guangxi Zhuang autonomous zone, providing a new bridgehead for trade with neighbouring ASEAN countries, says Xinhua. Progress is also being made on a link to the border town of Dandong, China’s main conduit for trade with North Korea, which is scheduled to be ready next year.

Yet much of the current focus on China’s railways is less about their operational readiness than how they are being financed, after shares in China Railway Group and China Railway Construction Corp – the two largest railway builders – dropped sharply following the death of a senior executive.

Bai Zhongren, president at China Railway Group, fell off a roof at the beginning of January. State media first described it as an accident but then admitted that Bai had killed himself, prompting inevitable rumours about yet another corruption scandal. But speculation has now switched to China Railway Group’s financial condition, after its debts more than doubled over the last five years. Newspapers have been hinting at tension with banks and suppliers too, while worker representatives are said to have met Bai a few days before his death, demanding payment of wages in arrears.

China Railway Group issued a statement saying that its debt levels are comparable to others in the sector. That offers little comfort: it owed Rmb532 billion ($88 billion) at the end of September last year, according to Bloomberg, with one of the worst debt-to-equity ratios on the Hang Seng index in Hong Kong, and one of the weakest capacities to cover interest payments with earnings.

Account receivables had also grown to $19 billion by the end of the third quarter last year, piling further pressure on its management. “Cashflow is tight,” Wang Menshu, a senior engineer at the company, admitted to the South China Morning Post this month. “There have been many instances when they couldn’t recover the project expenses or were stuck in disputes with local governments, pushing up costs.”

It sounds like the network operator must shoulder some of the blame. China Railway Corporation is “the worst customer in terms of the difficulties of getting paid on time” Wang told Bloomberg, warning that the railway supremo is a major contributor to delayed payments across the industry.

The implication is that the state-owned firms that dominate the sector are playing a debilitating game of financial pass-the-parcel. China Railway Corporation itself now owes about Rmb3.1 trillion or the equivalent of the government debt of Brazil. But the other obvious difficulty is that a lot more track needs to be laid before the end of next year to reach targets set by the State Council. Much more than has been delivered over the past two years, says the Economic Information Daily, as railway bosses try to catch up after two years of relative hiatus.

Most analysts believe that railway spend will pay for itself in improved productivity for the wider economy over the longer term. But in the shorter term, the key players need to find ways of shifting some of the financial burden. Fares could be raised, although that might reduce take-up for travel, putting pressure on passenger volume goals. Freight could be priced more aggressively too, but this would soon have the larger industrial firms complaining. More likely is that the central government waives some of the former railways ministry debt, reducing the financial stress on China Railway Corporation and indirectly on some of its commercial partners too.

Perhaps the cash crunch explains some of the enthusiasm for overseas projects, with hopes that international customers might pay their bills more readily than domestic ones. But many projects are already being financed with Chinese money and may take years to generate returns. Similarly, while China Railway Group might be optimistic about reviving a patch of Britain’s antiquated rail network, it might need reminding that the British are less reliable when it comes to delivering infrastructure projects on time. Factor in the inevitable planning delays and political wrangling about the high-speed link (which isn’t scheduled to start services until 2026 at the earliest) and it could be 20 years before Birmingham needs its proposed feeder line…


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