Is Railway Reform Finally On Track?

A Viewpoint by Hu Shuli

Finally, it seems the railways ministry may soon be restructured as part of a wider exercise by the government to streamline its ministries. Putting railway reform on the agenda of this year’s meetings of the National People’s Congress and the Chinese People’s Political Consultative Conference will be highly significant.

Rail development has been an issue of major concern. We hope that restructuring will herald a new round of reform aimed at unraveling the tangled relationship between business and government in this country, to further boost development.

The rail system is one of the last bastions of a planned economy. The Ministry of Railways is both the company that operates the system and the regulator that oversees operations. No doubt this perverse dual role was shaped by the peculiarities of the industry, but its drawbacks have become clearer over the years. This cannot continue, and calls for its reform persist.

To be fair, an attempt was made a decade ago to try to separate the ministry’s business and regulatory functions. Sadly, such experimentation was halted when Liu Zhijun took over as the railways minister. Liu’s approach of “leapfrog development” won the endorsement of decision-makers, and reform became a taboo subject.

Under pressure, however, the ministry did try to undertake minor restructuring, such as by trying to separate its national rail infrastructure from its freight business, and downsizing to improve efficiency. But the larger problems remain, including its finance structure.

The latest round of government restructuring may well be the turning point for rail development.

A string of recent scandals has raised public concern about the ills of stalled reform: the misdeeds of Liu and Zhang Shuguang, then the ministry’s deputy chief engineer, exposed the extent of rent-seeking and corruption that went on; the Wenzhou crash and other mishaps have highlighted safety issues; and the revelations of massive waste on the high-speed rail system, the inadequate attention given to freight infrastructure, and low efficiency all illustrate the problems of over-investment and a lack of market awareness. Does development come before reform? These facts speak for themselves.

According to those in the know, the plan now is to break up the railways ministry. Its regulatory functions will be absorbed by the Ministry of Transport, while the operation of its rail business will be transferred to a separate company. This company will take charge of the passenger lines, including the high-speed rail, as well as the signal system, the facilities, and ticketing arrangements.

Such a move will be a good start for future reform.

Opinions are divided on the details of reform, but all are agreed that it should take a market-oriented approach. The government should take rail operations out of the hands of rail authorities; introduce competition; open up investment; and ease regulation. As the industry’s regulator, the railway authority should concern itself only with safeguarding the network, ensuring transport safety, preventing monopolistic price-setting, and ensuring the smooth function of the market.

Separating administration from commerce can also help to further reform of financial investment, and address issues of inefficiencies of investments and inadequate protection of stakeholders’ and creditors’ rights.

In the absence of government interference, private capital could be persuaded to invest, leading to more competition. How to ensure healthy competition while curbing monopolistic behavior is the biggest challenge facing policy-makers.

Reform of this nature will not be easy. The high-speed rail system, which was funded as part of the 4 trillion-yuan stimulus package pursued by the government at the outset of the global financial crisis, has saddled the ministry with debts of more than 2 trillion yuan. Government support is now propping it up; without it, how these huge debts could be repaid would test policy-makers’ resolve to press on with reform.

In addition, the plan to set up subsidiary businesses under the new rail company may still not achieve the goal of introducing competition. Debate is also still continuing over whether reform should proceed by separating the network from line operations, or by adopting a regional model.

Reform of the rail sector will be even more complicated than that for other industries of a similar nature, such as electricity, telecoms, and petrol. But as the experiences with these other industries show, a small change can often lead to huge improvements. Policy-makers must meet the challenge head-on, making adjustments to their strategy when necessary. They must be prepared for a protracted battle.

China has learned some hard lessons from the rounds of reform over the past thirty years in telecoms, civil aviation, and the electricity and petrol sectors. One of the most painful lessons was the cost of reform—the longer we delay change, the higher the costs will be. And the costs of not reforming would be higher still.

After years of delay, rail reform will be particularly painful. Its crux lies in policy-makers’ determination to correct the distortions of the government-market relationship.

Economy, Politics
Railways, Economic Reform