China’s Railways Ministry Gone, Problems Remain; with total debt at 2.66 trillion yuan, the MOR accrued 15 billion yuan in annual interest

Railways Ministry Gone, Problems Remain

04-09 15:00 Caijing

The CRC, a super monopoly which inherited all of the railways ministry’s assets, debts, and personnel, urgently needs to evolve into an efficient modern enterprise.

By staff reporters Chen Xiaoshu and Wang Kai

The dissolution of the Ministry of Railways (MOR) and subsequent establishment of China Railway Corporation (CRC) in March constitute the first step in marketization of the railways industry. But problems remain even though the MOR, which performed administrative functions and ran business operations at the same time, is no longer around.

“What about the MOR’s debts? What kind of business entity is the CRC? How will public transportation be subsidized? None of these questions have been answered yet,” said Zhao Jian, a professor at Beijing Jiaotong University who participated in brainstorming railway reform plans in 2001, 2007, and 2011 respectively.

The CRC, a super monopoly which inherited all of MOR’s assets, debts, and personnel, has 2 million staff, 1.036 trillion yuan in registered capital, and over 4.3 trillion yuan in fixed assets. The wholly state-owned enterprise urgently needs to evolve into an efficient modern enterprise.

Statistics show that the MOR had an asset-liability ratio of 61.81 percent as of Sept. 2012, with total debt at 2.66 trillion yuan, including 2.12 trillion yuan in long-term debt. With debt of that magnitude, the MOR accrued 15 billion yuan in annual interest.Wang Mengshu, an academician of the Chinese Academy of Engineering, proposed setting up an asset management company to handle the MOR’s debts.

The Institute of Comprehensive Transportation (ICT) of National Development and Reform Commission (NDRC) recently submitted a research report regarding an overall railway reform plan. “A realistic option is to sell the MOR’s assets to pay off its debts. This way, the debt burden can be alleviated soon without affecting the overall situation of the railway industry,” said Liu Bin, director of Transportation Management Department under the ICT, who participated in the research.

The protection of property rights, including usufruct, the right to use, and the right to dispose of property, is the heart of railway reform. International experience highlights the importance of recognizing and protecting the property rights of private or foreign-funded railway construction and operating companies.

Even if the CRC is split into several moderate-sized companies, a trading mechanism which treats different types of railway companies equally needs to be put in place, as local railways, private railways, and the state railway system still have to share certain facilities and assets.

“The two things private investors in the railway industry dread most are the state railway system that controls train dispatching and discriminates against private railways and the fact that private investors have no say in joint ventures’ operating decisions and dividend distributions. Private capital will be discouraged from entering the industry if the state railway system remains monolithic after the reform,” said Liu.

In addition to property rights, restructuring the railway system to promote competition in the industry is also crucial.

The first step in restructuring railway companies should be separating passenger services, which are eligible for government support and subsidies, from freight services, which should fully compete with other modes of transportation. This has been the most popular railway reform method in many countries, said Sun Lin, former researcher at the Economic and Planning Research Institute of the Ministry of Railways.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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