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Railway capacity lags behind coal demand

By Tong Hao (China Daily)
Updated: 2008-09-08 15:25

The national coal shortage has required a better, larger railway system; but how to build one that can be operated efficiently enough to satisfy demand is a subject of controversy in China.

The railway capacity system lags behind the national demand for coal.

In recent years, annual transport volume of coal has exceeded 1 billion tons, and more than 70 percent of that was transported by railway due to the relatively lower cost.

Coal production in 2007 reached 2.523 billion tons while the volume transported by railway was 1.54 billion tons. By 2010, the transportation demand of Shanxi, the major coal province in China, is estimated to increase by 230 million tons, while according to the 11th Five-Year Plan of Chinese railways from 2006 to 2010, the capacity will merely increase by 134 million tons, or about 100 million tons short of the demand.

"The current transportation capacity of railways can only meet 50 percent of the demand of Shanxi," then provincial governor Yu Youjun said in 2007.

To help solve the squeeze a 100-billion-yuan railway construction project has been jointly agreed to by Shanxi, Henan and Shandong provinces, says Li Ting, director of the Macroeconomic Institute of the Shanxi Development and Reform Commission.

A feasibility report will be given to the National Development and Reform Commission for approval.

The planned cargo railway would go from Shanxi's Luliang, (home of China's largest coking coal production base, Hedong Coalfield) and would end at Dongjiakou in Shandong's Qingdao, a port to be developed with a throughput potential of more than 200 million tons.

Another port Rizhao in Shandong is an alternative. The transportation capacity of the 1,200-kilometer railway is planned for 100 million tons in the short term and 200 million in the future.

"The railway will provide ample coal supply for industrial bases in the three provinces alongside the railway line. Especially, it would boost the economies of Shanxi Luliang and Taihang and Shandong Yimeng, the three less developed districts," Li says.

According to the feasibility report, a joint stock company will be organized to operate the railway. Shanxi and the Ministry of Railways (MOR) will each hold 30 percent of the shares while Henan and Shandong will take 20 percent each.

However, the MOR has also submitted a report in which it requires it to hold a 35 percent stake in the project.

If the MOR controls 35 percent of the shares, according to Article 104 of Chinese Company Law, it will possess veto power on certain important resolutions, in which case the market-oriented operation model of the joint stock company planned by the three provincial governments will be greatly affected.

"The MOR lacks transparency in network scheduling and financial settlement, which makes it hard to figure out the exact cost and income of the railway operation," Hu Xingdou, a professor from Beijing Institute of Technology, says.

Besides, "the MOR emphasizes the public service function of railways, while a typical market-oriented company focuses more on investment returns," Li added.

"The difference between 30 percent and 35 percent is merely 5 percent, but the difference is significant," Li tells National Business Daily, a Shanghai-based newspaper.

Currently, the MOR is a combination of an administrative department and a business operator. On one hand, it is responsible for the railway operation, construction, policy making and supervision. On the other, it is also the operator of the railway business.

Such a monopoly has also caused financial shortages in national railway construction.

According to statistics from the Chinese government, during the 11th Five-Year Plan, the overall investment in the railway network is to reach 1,250 billion yuan, more than 200 billion yuan annually. However, the MOR annually has only 20 billion yuan at its disposal to invest in railway construction. In addition to the 30 billion yuan loans every year from the China Development Bank, the total investment is no more than 50 billion yuan.

"The MOR can never resolve the financial shortage itself," an unidentified expert in the railway industry says.

In 2005, the MOR declared it would open four sectors including railway construction, transportation, equipment manufacturing and business operations to other interests. But it still insists on government control.

In this railway construction project, Shanxi province expects to attract investments from the coal industry, power plants and smelting enterprises in neighboring provinces. The operation of this joint stock company would be market-oriented and financially responsible for profits or losses.

However, the MOR insists that government control is necessary because the planned railway would merge with the nationwide railway network. It says the dispatch of trains, maintenance of the railway line and other duties should be placed under a unified command. In addition, construction of railways demands a large amount of resources such as land. Unified planning is needed to avoid a waste of resources and disorderly competition, MOR claims.

A successful model

But there has already been a successful example of a diversified railway construction project. The 600-kilometer Suozhou-Huanghuagang Railway successfully broke the monopoly of the MOR, with market-oriented management and independent operation.

It's a major railway line to transport coal from production bases in the west to coal-consuming provinces in the east. The Suozhou-Huanghuagang was a joint investment with Shenhua Group Corporation Ltd, the MOR and Hebei province in 1997, with the three respectively holding 52.7 percent, 41.2 percent and 6.1 percent of the shares. By the end of 2006, the railway had transported 390 million tons of cargo with a total income of 24.37 billion yuan and a profit before tax of 11.32 billion yuan. All the loans were paid off in 2006. In 2007, it transported 132 million tons of coal with a profit of 5 billion yuan.

The joint stock company operating the railway has established a well-structured corporate governance system which includes a board of directors and supervisors and a management stratum. A two-level management system has also been established. The head company is responsible for network scheduling, financial settlement and resource management, while branches are responsible for equipment maintenance and technologies. And the head company possesses independent operation rights to schedule the railway line.

"Shanxi, Henan and Shandong provinces want their railway project to follow the model of the Suozhou-Huanghuagang railway," Li says.

And if the "30 percent" proposal is passed, it will be a breakthrough, Li adds.