Reform of the railway sector appears further away after the Ministry of Railways (MOR) denied a recent media report that outlined a reform plan for China's rail networks. The denial has left observers guessing when and how reform might occur.

According to a June 17 report in the Beijing-based Economic Observer newspaper, the MOR was considering a plan to reform the railway sector by setting up three separate companies, each in charge of different areas: railway investment, construction and operations. The report cited unnamed sources from the MOR and State-owned railway construction firms.

But the MOR told the Xinhua News Agency on June 18 that the report was a "complete rumor," without elaborating. Since then, the Economic Observer has published an open letter apologizing for its "untrue report" and fired the reporter involved, according to news portal sohu.com.

Plans denied

According to the original newspaper report, the three railway companies would be supervised by the State-owned Assets Supervision and Administration Commission of the State Council, and the MOR would not intervene in day-to-day railway operations, but be responsible for industry supervision, as well as drafting policies and rules on railway financing, construction, operation and safety.

In March, the ministry also rejected media reports that it would be incorporated into a "comprehensive transportation ministry" through a series of reforms.

Breaking the monopoly of the railway sector is considered by many analysts to be the best way to deal with frequently cited problems such as corruption, low efficiency and a lack of responsible supervision.

These issues were clearly on display last year, when the minister of railways at the time, Liu Zhijun, was removed from his post after a corruption scandal. Last month he was stripped of his membership in the Communist Party of China.

"The mixture of government administration and enterprise management has caused problems, and their separation would fit in with recent social trends, using one power to balance another," Li Hongchang, an associate professor at Beijing Jiaotong University, told the Global Times.

"Market-oriented operational mechanisms would be effective at management and normal operations," Li said, adding that there are other reasons to reform the industry, such as public calls for higher standards of service and a government push to merge smaller departments into larger ones. 

Li added, however, that reform of the sector could not be rushed, as government investment and involvement in the sector are still needed. He said that any hasty withdrawal would cause other problems.

Reform should follow some key principles, such as improving technology, introducing competition mechanisms, and setting up an intermediartcy for scheduling and financial management, Li suggested.

"Though there are some organs that fulfill these functions, an environment that mixes railway administration and business operations causes problems such as arbitrary price adjustments."

The ministry tightly controls train schedules. Scheduling is critical in a country such as China, where passenger demand can soar suddenly at times like Spring Festival, dramatically impacting freight traffic along with any private cargo services.

"The central government has already determined an outline for the overall reform of the railway sector. The key issue now is to work out a feasible reform route without wasting resources," Zhao Jian, a professor specializing in railway economics at Beijing Jiaotong University, told the Global Times.

But so far, the reported reform plans have not proven feasible in terms of implementation, Zhao said.

"Reporting on the setting up of three separate companies was groundless, especially because it was impossible that the State-owned Assets Supervision and Administration Commission would supervise the companies," he said.

"The railway sector needs a reshuffle to break their monopoly and it could not be solved just by setting up a group company, or three companies. That would be meaningless." Zhao added.

Debt problems

The ministry's total posted assets reached 4 trillion yuan ($628 billion) by the end of March and an outstanding debt of 2.43 trillion yuan, with the debt ratio reaching 61 percent, the ministry's audit report showed.

To solve its financial problems, the ministry has made some efforts at reform in its business division, including measures allowing for private capital.

Last month, the ministry released a document regarding opening bids for railway contracts in local markets, to ensure transparency and fairness in the bidding process and prevent power-for-money deals.

It states that the country's current railway project transaction centers, which are responsible for trading bids and operate under the ministry and 18 railway bureaus, are to be shut down.

Bids for all large and medium-sized construction projects under the administration of the railways ministry fell under the jurisdiction of the Beijing Engineering Construction Trading Center, a local project transaction market, at the end of 2011.

Private investors may be hesitant to enter the industry, however, given the railway sector's high debt ratio and the long time it takes for railway projects to recoup investment.

The MOR is finding it more and more difficult to raise funds. In the first five months, investment in railway fixed assets was only 129.7 billion yuan, down 41.1 percent from the same period last year, according to data from the ministry.

"The railway sector, especially in terms of freight transport, is in urgent need of investment. But the MOR's existing system dampens private investors' enthusiasm," Sun Zhang, a professor at the Urban Rail Transit and Railway Engineering Department of Shanghai-based Tongji University, told the Global Times.

Private capital sniffs out profit-making potential, and may turn its back on projects with less money-making potential, Zhao Jian said.