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Main Issues in the Current Railway Investment and Financing System
2005-02-11
Lai Youwei, Development Research Center of the State Council
Research Report No.151, 2004
Since reform and opening up, China’s railway construction has lagged behind the development of the national economy. Railway transport has become unable to meet growing public demand and the tasks of railway construction and reconstruction are extremely complex. Meanwhile, the enormous funding shortage arising from the current single system of investment and financing in railway construction has seriously impeded the industry’s healthy development. While the country improves its socialist market economy and deepens the reform of the investment system, it must promote the reform of the railway investment and financing system in an active and consistent way so as to overcome its current shortcomings.
I. Present State of China’s Investment and Financing System for Railway Construction
China’s railway system was one of the sectors that the planned economy influenced the greatest, and for the longest time. As a result, the railway investment and financing system bears the hallmarks of the planned economy. Under this system, there have been chronic fund shortages for railway construction. In order to ease this problem, the Chinese government and in particular the Ministry of Railways have adopted some measures to broaden the financing channels for railway construction and explore new ways for railway investment and financing. Some early achievements have been made.
1. Government investment
Currently, the government is still the principal investor in China’s railway construction. There are three forms of government investment: through government bonds and State assets, from regional finance, and via the Ministry of Railways. Government bonds began injecting funds into railway construction from 1998, and by the end of 2002 had contributed a total of 34.12 billion yuan. These funds were mainly used in the western region. Specifically, 5.8 billion yuan was spent on the Qinghai-Tibet Railway, 3.45 billion on the railway in southern Xinjiang Autonomous Region, and 3.45 billion on the Neijiang-Kunming Railway. Government assets and policy-oriented investment came mainly from land investments and tax rebates. Investment from regional finance refers to the funds from the local provincial and municipal governments. In the 1990s, ten provinces and municipalities levied railway construction surcharges on the existing regional railways (including joint-invested railways) as their investments in the construction of regional railways (including joint-invested railways). But the surcharges levied by most of these provinces and municipalities were outlawed by the State. At present, some provinces use regional tax rebates to support their regional railways. The participation of regional governments in railway construction created conditions for lowering the construction cost of the joint-invested railways. The governments of provinces, municipalities and autonomous regions also offered diverse preferential policies on land acquisition, resident resettlement and taxation, which have effectively reduced the costs of railway construction.
The investment from the Ministry of Railways mainly came from the ministry’s own funds and the railway construction fund. In order to ensure a relatively stable funding source for railway construction and with the approval of the State Council, the ministry began collecting railway construction funds by increasing railway freight charges from March 1, 1991. The fund was collected from the owners of the cargo at a ratio of the ton/kilometer freight charge. The railway construction fund was externally collected from freight charges and was used solely for investment in railway construction. Since the introduction of the policy on the railway construction fund, the total amount collected each year has been increased due to the rising charge rate, the growing freight volume and the launch of new railways. The fund collected was about 10 billion yuan in 1991, 36 billion in 1995, 38.36 billion in 2000, and close to 50 billion in 2004. The fund was used mainly for three purposes: first, repaying long-term loans for railway construction; second, being used as guarantee for the issuance of railway construction bonds; and third, being directly invested in railway construction. The establishment of the railway construction fund has raised huge funds for China’s railway construction. From 1991 when the railway construction fund began operating to the year 2002, the Ministry of Railways invested a total of 388.1 billion yuan in capital construction, of which the railway construction fund invested 199 billion yuan, occupying 51.3% of the total capital construction. At present, the railway construction fund is the principal and most stable funding source for railway construction. But collecting the fund has distorted the freight charge and can only be used as a transitional measure rather than a permanent one.
2. Other investment and financing channels
In addition to government investment, China also has other main investment and financing channels for railway construction.
(1) Loans from domestic banks
Lending by domestic banks is a main channel for railway investment and financing. From 1991 to 2002, the Ministry of Railways used a total of 112.3 billion yuan in bank loans. Currently, the duration of the loans offered by the State Development Bank for railway construction projects has been extended to 25 years and that offered by the Construction Bank of China to 20 years, with their interest rates being lowered by 10 percent. This type of loans is noted for preferential interest rates and long repayment duration and therefore is very conducive to railway construction. But long- and medium-term loans are subject to the state limits on the scale of annual loans and also to the constraint of the relevant stipulations to enterprises and related projects. For this reason, it is by no means an easy task for railway enterprises to acquire this type of loan. In face of funding shortage, railway enterprises have no alternative but to utilize short-term commercial loans with higher interest rates.
(2) Loans from international financial organizations and foreign governments
From the beginning of reform and opening up to the end of 2002, China utilized a total of 6.1 billion dollars of loans from international financing organizations and foreign governments for railway construction. These loans were mainly used for 37 construction projects and yielded excellent economic and social results. Beginning from 1984, the Ministry of Railways began utilizing loans from the World Bank. So far, it has used eight World Bank loans, totaling 2.19 billion dollars. In 1994, the ministry began utilizing loans from the Asian Development Bank. So far it has utilized three such loans totaling 600 million dollars. Since 1979, the ministry has utilized four Japanese government loans totaling 466.182 billion Japanese yen or 2.715 billion dollars at the current prices. In addition, the ministry has utilized government loans and export credits from Germany, France, Norway, Australia, Canada and Britain and loans from Nordic investment banks.
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