URUMQI - Track-laying on the Hongliuhe-Naomaohu Railway, one of the largest privately funded rail projects in China, was just completed in early July, but insiders have already begun to worry about its future.

The 435-km-long cargo line, with Xinjiang Guanghui Industry Investment Group Co. Ltd. as a major investor, aims to make transporting coal from resource-rich Xinjiang Uygur Autonomous Region to the booming eastern provinces easier.

Guanghui, the largest private energy company in Xinjiang with 109 billion yuan (17.7 billion US dollars) in 2013 sales revenue, is considered the most capable player to fund the local railway in the far western region.

Along with two other private investors, Guanghui will borrow 7.868 billion yuan, or 72 percent of the railway's total investment, to ensure the region's first private railway can be put into operation next year.

However, without adequate support from the central government, the massive investment is likely to suffer losses and negatively impact the regional economy, said Li Jie, transportation department head of the Xinjiang regional government's development and reform commission, the region's top planning agency.

Past failures

Railways are a strategic resource in China and their construction and operation have been monopolized by the central government, leading to huge debts and forcing the government to reform its financing model.

China began to explore the use of private capital in railways back in 2005, when the State Council issued a statement easing investment controls on state-monopolized infrastructure.

But early experiments were not always successful. China's first private railway, the 75-km-long Luoding-Cenxi Railway, which linked Guangdong Province and Guangxi Zhuang Autonomous Region, was abandoned after construction began in 2006 due to financing problems.

Another railway, the 93.5-km-long Balgantai-Illgen railway in central Xinjiang, had planned investment of 4.2 billion yuan and was largely funded by a private company from neighboring Qinghai Province. It kicked off construction last year but was suspended as a guaranty bank quit the project this year for fear of losses, according to Li.

Challenges ahead

So far the central government has no specific plan on preferential policies for privately funded railways, which has stirred worries among industry insiders.

As the railway industry has a high demand for capital, few private companies are capable of funding projects, said Wang Mengshu, a railway expert at the Chinese Academy of Engineering, adding that the government should declare a clear scheme for profit distribution to attract private capital.

Without preferential policies on power tariffs and loans to put privately funded railways on equal footing with the national railway operator, China Railway Corporation, the chance of success is slim, Li told Xinhua on Wednesday.

Economic returns for private rail are uncertain, as operation remains under the leadership of the state-owned railway administration, which sets freight rates and power tariffs, according to Li.

Since Guanghui has no bargaining power at present, if freight rates or tariffs are set too high, Guanghui's investment will be in trouble, Li said.

Rich in resources, short on railroads

Covering a sixth of China's territory, Xinjiang has about one-third of China's coal reserves and a quarter of the country's oil and natural gas reserves. The underdeveloped ethnic minority-dominated region is desperate to improve its infrastructure in order to ship out its raw materials.

Xinjiang has only 4,911 km of railways, less than 5 percent of the country's total and hardly enough to transport the massive resources out of the region, said Wang Ning, a researcher with the Xinjiang Academy of Social Sciences.

The central government's railway investment has focused on high-speed passenger rail in recent years. Construction of local cargo railways has been delayed and funding is insufficient, which prompted the Xinjiang regional government to seek private funding, said Wang.

As a major coal, oil and natural gas producer in Xinjiang, Guanghui has the incentive to invest in the Hongliuhe-Naomaohu Railway, which will cut the route to bring coal from Hami Prefecture to neighboring Gansu Province by at least 1,000 km, said Wang.

Guanghui runs reserves of more than 20 billion tonnes of coal in Xinjiang, 1.592 billion tonnes of oil and 421.3 billion cubic meters of natural gas in Kazakhstan, according to its official website.

To improve logistics, Guanghui built a 479-km-long highway in 2010 specifically to transport coal in eastern Xinjiang to Gansu Province. The company is expected to transport 39.5 million tonnes and 60 million tonnes of coal annually by 2016 and 2020 respectively thanks to the new railway.

The company has pinned high hopes on the cargo line as it will not only help move Guangui's own coal out of Xinjiang, but will also be able to transport materials for other major coal producers, including huge state-owned mining companies.

Call for solutions

Given railway infrastructure's prospects for long-term returns and public benefits, private rail projects must enjoy favorable treatment on power tariffs, financing and interest rate cuts, Li said.

"Private railway investors should have some decision-making power on freight rates when the railway is completed," she added.

Li called for the central government to formulate a detailed preferential policy for privately funded railways as soon as possible to guarantee reasonable economic returns for investors.