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A Study on How to Deepen the Reform of China’s Railway System in the New Development Period
2016-05-16
By Wei Jigang
Research Report Vol.18 No.2, 2016
I. Necessity of Deepening the Reform of China’s Railway System in the New Period
Railway, a basic, strategic and leading industry of the national economy, ensures economic operation and growth, the implementation of industrialization, urbanization and modernization. In the early 1980s and 1990s, the traditional centralized planning system of railway petered out in China, and the government reformed the railway system by delegating power and yielding profit to rail companies. In mid and late 1990s, the railway system carried out pilot projects of modern enterprise system and separating rail infrastructure and transportation operation, etc. At the beginning of the 21st century, Ministry of Railways divorced non-transport enterprises, like Railway Rolling Stock Corporation, colleges and universities. Since 2003, enterprises engaged in railway materials, designing, and construction were managed by State-owned Assets Supervision and Administration Commission (SASAC) as well as subordinate enterprises, and railway hospitals, elementary and middle schools were all handed over to the hand of local governments. In March 2013, the State Council began a new reform on Ministry of Railways by separating the administrative arm from the commercial arm, thus setting up China Railway (hereinafter referred to as Railway) and National Railway Administration of the People’s Republic of China. The former undertakes corporate functions of Ministry of Railways, like unified control and command of railway transport, operation and management of passenger and freight transport, special transport, dedicated transport, railway construction and principal responsibilities for railway safe production. In contrast, the latter has administrative functions, like drafting railway technical standards, supervision of railway safe production, transport quality and the quality of railway projects. Such separation marks significant progress made by the reform of China’s railway system. In June 2013, Railway initiated the reform of freight transport service, including transporting all legal goods, instant transport, fixed fee, and door-to-door service, which promoted railway transport to change from traditional planed production to planed organization. In April 2015, Railway proposed to deepen the reform of railway freight transport and strive to be a world-class modern logistics enterprise in three years.
A series of reforms are waking up the railway system, the sleeping giant, and some good signs have shown up. But attention should be paid to the fact that the reform is yet to be completed and long-term deep-seated problems still sit tight.
First, Railway has not yet become the major market player. As the commercial arm is still linked with the administrative arm, Railway is still considered mainly an administrative body, without deep understanding of modern market, timely response to market demand, effective measures against competitors, and strong ability to meet the market demand. As the railway system aims at middle and long-distance transport of mass freight, it has gone increasingly further away from market demand, with the tertiary industry surpassing the secondary industry in China’s industrial structure and products mainly small and light, instead of large and heavy. In 2014, the railway freight volume was 3.9 percent lower than that in 2013. In the first three quarters of 2015, the number fell by 11.5 percent year on year, while highway and water transport saw an increase of 6 percent and 3.8 percent respectively.
Second, the railway transport is greatly monopolized. As of 2013, there are 187 railway transport enterprises, including China Railway (made up of 18 regional railway administrations), 109 joint-ventured railway companies with China’s Railway as a shareholder (managed by local railway administrations), 21 joint-ventured railway companies not involving China’s Railway, and 56 local railway transport enterprises. In terms of the number of passengers or the turnovers, Railway grabs a share of over 70%, and the number will jump to 98%, should joint-ventured enterprises with Railway as a shareholder are counted. Besides, its volume and turnover of freight account for 70% and 85% of the whole picture respectively, and such numbers will go up to 91% if joint-ventured companies with Railway as a shareholder are considered. This typical monopolistic market structure, plus with the integration of infrastructure ownership and transportation operation, makes monopoly wide in railway transport. For example, social capitalusually funds railway jointly with China’s Railway, but a series of problems, like unclear property rights, imperfect corporate governance structure, unreasonable ROI (Return on Investment) mechanism, little financial transparency, and non-standardized management and operation without a social legal environment, make it difficult for shareholders to reflect the demands and interests, make independent management decisions, win high yield, and realize their rights and interests.
Third, the railway pricing mechanism is yet to be market-oriented. Railway freight fares are guided rather than set by the government; the joint-ventured railway sections are allowed to have policy-led rise in passenger fare; and some joint-ventured EMU and high-speed trains enjoy market-oriented pricing. However, as railway rate is formed under the central pricing regulatory system, the current pricing mechanism cannot fully reflect the cost of transport, and how the relationship between supply and demand changes in different seasons and routes, thus unable to guide the optimal allocation of resources and stimulate market players.
Fourth, railway debt causes more financial risks. By the end of September 2015, China’s Railway had liabilities of 3.94 trillion yuan. In view of the medium and long-term development of China’s railway, railway network will cover some 200,000 kilometers by 2030, and require another 8 trillion to 10 trillion yuan, which will cause much pressure and more financial risks for Railway due to its lack of sustainable financing. Therefore the debt issue should be given much attention.
Fifth, efforts are still needed to improve China’s railway management and regulatory mechanism. Though Railway undertakes major government functions, like drafting plans on national railway network construction, as an enterprise, it prioritizes financial benefits and interests, while neglects non-profit railway transport, and the requirements raised by local governments and social capital. Moreover, railway network planning is incapable of fully reflecting the goal of maximizing comprehensive benefits. National Railway Administration of the People’s Republic of China, however, needs to enhance the regulatory system, agencies, mechanism, functions, ability, and rules, as it has weak regulation on Railway.
Sixth, it is urgent to optimize railway laws and regulations. Railway Law of the People’s Republic of China was released in the early 1990s, and many articles have been out of date, especially it lacks clear stipulations concerning railway reform, government regulation, major market player, and new market trading and regulatory rules.
Such problems, born a long time ago, block sustained and sound development of the railway sector, the economy and the society, which must be addressed by deepening reform in the new period (especially the 13th Five-Year Plan period).
II. Goals, Principles and Ideas of Deepening the Reform of China’s Railway System in the New Period
1. Goals It is important to build a mechanism to comprehensively promote the development of the railway sector, enhance its competitiveness and sustainable development, and better serve China’s economic and social development. What’s more, it is necessary to make railway enterprises the major market players, form a unified, open, and fair railway transport market with efficient competition, realize efficient management, regulation and governance of the sector, as well as a complete legal system. ...
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