Caution expressed over PPP railways

By Chu Daye Source:Global Times Published: 2017/12/12 21:43:39

Profit mechanism, legal framework uncertain: experts

A hostess welcomes passengers taking a Fuxing high-speed bullet train at Beijing South Railway Station. Photo: IC

Graphics: GT

Experts expressed a cautious view of the development of China's private-led railways, as news of the latest of these projects emerged on Tuesday.

The Beijing News reported on Tuesday that the provincial government of East China's Zhejiang Province has given a green light for a high-speed railway project linking the provincial capital, Hanghzou, and Wenzhou in southeastern Zhejiang.

The Hangzhou-Wenzhou Railway will have project capital of 9.806 billion yuan ($1.48 billion), in which private capital will take a 51 percent stake. This is the second private-led project in the province and the fourth railway involving private capital nationwide.

The Hangzhou-Wenzhou Railway project is a Public-Private Partnership (PPP) project under the build-own-operate-transfer model, according to a statement posted on the local government's website on Friday. The project will last for 34 years, and the first four years will be used for construction of the railway.

Experts said the PPP railway projects in China are still at the initial stage and more investors are waiting to see how profitable they turn out to be.

In September, Zhejiang rolled out the country's first PPP rail project with private capital led by Chinese conglomerate Fosun Group as the majority stakeholder in the 269-kilometer railway linking Hangzhou, Shaoxing and Taizhou. Both Shaoxing and Taizhou are in Zhejiang.

In that railway, the Zhejiang provincial government owns a 13.6 percent stake and the city governments hold a combined 20.4 percent stake. China Railway Corp (CRC), the State-run railway operator, holds a 15 percent stake.

For the Hangzhou-Wenzhou Railway, the ownership structure is similar, with private capital taking 51 percent and the three cities the railway passes through taking a 20.4 percent stake. Zhejiang province and CRC have the same shares as in the Hangzhou-Shaoxing-Taizhou railway.

Li Hongchang, a professor at Beijing Jiaotong University, told the Global Times on Tuesday that the progress of China's railway PPP projects has been quite slow.

"Although the earliest proposals for PPP railways were heard as early as 2010, the intensity, penetration and scale of PPP railway projects has not been impressive so far," Li said.

"To make these projects sustainable, the private investors must get sustainable profits, and as the two railways are still in the very early stages, the effectiveness of the payback mechanism remains to be seen," Li said.

The payback mechanism of the Hangzhou-Wenzhou Railway will be based on user payment and "feasible loophole subsidies," said the statement.

Other factors in the mechanism include a prearranged lending rate and the frequency of trains to be run on the railway. The subsidies will be allocated out of the provincial and local governments' fiscal budgets.

Previously, China had two railways involving private capital: the Datong-Qinhuangdao Railway in North China and the Guangzhou-Shenzhen Railway in South China.

Experts uncertain

Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology, said that PPP projects need to ensure transparency in order to be successful. 

"Also, in these projects, the government should refrain from making any kinds of endorsement regarding the profitability of the railways," Dong told the Global Times on Tuesday.

China's railway system is burdened with huge debts and many areas of it are reportedly operating at a loss.

Li noted that the PPP projects will be helpful for the nation to realize its goal of having 30,000 kilometers of high-speed railway connecting 80 percent of Chinese cities by 2020. Currently, China has about 23,000 kilometers of high-speed railway.

Li noted that relevant laws and regulations need to be improved to make investing in railways more enticing for investors.

"For instance, the current legal framework makes it more difficult, not easier, to combine railway development and real estate," Li said, noting that developed nations have better legal arrangements that encourage investment from the private sector.

Also, many of the newly built railways will expand into less populated areas with less traffic, and this reduces the attractiveness of these railways to private investors, Li noted.


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