Profit con­cerns for high-speed line

Shanghai Daily - - BIZ INSIGHT - Ly­dia Chen

China’s Min­istry of Rail­ways said this week that it ex­pects only a “slight profit mar­gin” from the oper­a­tion of the Shang­hai-Bei­jing high-speed rail­way and won’t break even “in the short term.”

But the min­istry re­mains “con­fi­dent and op­ti­mistic” that the new project con­nect­ing China’s two most im­por­tant cities will even­tu­ally be­come prof­itable, Wang Yong­ping, a min­istry spokesman, said at a press con­fer­ence in Bei­jing.

That glow­ing as­sess­ment may be too op­ti­mistic, ac­cord­ing to Zhao Jian, a pro­fes­sor with Bei­jing Jiao­tong Univer­sity and a vo­cal op­po­nent of China’s am­bi­tious plans to lay 16,000 kilo­me­ters of high-speed rail track na­tion­wide by the end of 2015.

Zhao told the Hong Kong-based news weekly Yazhou Zhoukan ear­lier this year that the 1,318-kilo­me­ter Shang­hai-Bei­jing line, along with many other high-speed lines con­nect­ing more sparsely pop­u­lated in­land re­gions, could lead to a “sub­primestyle cri­sis” in China.

Moun­tain of debt

Fan­ning those fears is the moun­tain of debt the rail­ways min­istry is amass­ing to pay for the elab­o­rate in­fra­struc­ture.

By the end of the first quar­ter, the min­istry had debts of nearly 2 tril­lion yuan (US$309.2 bil­lion), up from 868 bil­lion yuan in 2008, ac­cord­ing to its quar­terly fi­nan­cial re­port.

Most of the min­istry’s 58.24 per­cent as­set-li­a­bil­ity ra­tio is at­trib­uted to the build­ing of the high-speed rail­way net­work, which was part of the govern­ment’s 4 tril­lion yuan eco­nomic stim­u­lus pack­age un­veiled in 2008 to re­spond to the global eco­nomic cri­sis, Zhao said.

Govern­ment money was ac­com­pa­nied by hefty bank loans to un­der­write the con­struc­tion of high-speed tracks, which cost more than three times or­di­nary tracks, he added.

Cost blowouts have forced the min­istry to bor­row even more money, ei­ther from banks or from bond mar­kets.

Take the Shang­hai-Bei­jing line, as one ex­am­ple. The bud­get for the 24-sta­tion line has swollen from 130 bil­lion yuan to the nearly 221 bil­lion yuan.

The cost of a 120-kilo­me­ter line link­ing Bei­jing to Tian­jin, which has been in oper­a­tion since 2008, surged to 20 bil­lion yuan from 12.3 bil­lion yuan af­ter the speed of trains was in­creased to 300 kilo­me­ters per hour from be­tween 200 kph and 240 kph.

Ac­cord­ing to a re­port by the Na­tional Au­dit Of­fice is­sued last year, nearly 66 per­cent, or 1.3 tril­lion yuan, of the debt owed by the rail­ways min­istry at the end of 2009 was long-term li­a­bil­ity to banks and bond­hold­ers. That means con­tin­u­ing large sums of in­ter­est to be paid.

The min­istry has is­sued nearly 563 bil­lion yuan of bonds since 2006, and less than 100 bil­lion yuan of that debt has reached ma­tu­rity, au­di­tors said.

Min­sheng Bank fore­cast that the rail­way min­istry will have to pay more than 100 bil­lion yuan of in­ter­est alone every year in the next few years. That com­pares with the over 40 bil­lion yuan in in­ter­est the min­istry paid out in to­tal in 2009.

Min­sheng is fore­cast­ing the min­istry’s as­set-li­a­bil­ity ra­tio will bal­loon to 70 per­cent next year.

Start­ing from 2014, the min­istry will face a peak of ma­tur­ing debt, with more than 70 per­cent of the funds needed to re­al­ize China’s high­speed rail­way net­work dream com­ing from bor­rowed money, the au­di­tors warned.

Adding to the min­istry’s woes is its bal­ance sheet. It is in the red al­ready.

Data from the min­istry showed it in­vested al­most 607 bil­lion yuan from Jan­uary to Novem­ber last year, while re­port­ing rev­enue of 412 bil­lion yuan.

Yu Ban­gli, chief econ­o­mist of the min­istry, said in an ear­lier in­ter­view with China Busi­ness News that the min­istry’s debts are still at “safe, rea­son­able and con­trol­lable” level. Some peo­ple doubt that. In a re­vised bud­get plan re­leased af­ter the de­par­ture of for­mer rail­way min­is­ter Liu Zhi­jun on cor­rup­tion charges, the min­istry slashed its in­vest­ment bud­get for rail­way con­struc­tion in the next five years to 2.8 tril­lion yuan from 3.5 tril­lion yuan. Spend­ing for this year also shrank by 14 per­cent to 600 bil­lion yuan.

In a re­lated move, the min­istry has also taken steps to adopt a high-speed rail net­work slower than orig­i­nally planned.

Max­i­mum speed on the Shang­haiBei­jing line was low­ered to 300 kph from its de­signed max­i­mum of 350 kph.

Zhao Guotang, chief en­gi­neer of the Shang­hai-Bei­jing High Speed Rail­way Corp, said that will save hun­dreds of mil­lions of yuan spent on power sup­plies every year and make the trains more af­ford­able to or­di­nary pas­sen­gers. Other ex­perts said the low­ered speeds may also be the re­sult of safety con­cerns.

Sav­ings an­nounced to date are far from enough to off­set the deficit, es­pe­cially for the Shang­hai-Bei­jing line, the most costly rail project China has ever un­der­taken.

China in­vested 220.9 bil­lion yuan on the line. Half the money came from bank loans.

That means in­ter­est pay­ments of 6.05 bil­lion yuan and prin­ci­ple pay­ments of 5.5 bil­lion yuan each year for the next 20 years.

Other costs add up

Al­lowance for de­pre­ci­a­tion on rail­way fa­cil­i­ties is around 3 to 4 per­cent every year, ac­cord­ing to Li Changhong, also a pro­fes­sor at Bei­jing Jiao­tong Univer­sity. That adds up to about 6.6 bil­lion yuan to 8.8 bil­lion yuan for equip­ment and line main­te­nance and re­pair.

Salary for rail­way staff amounts to more than 3 bil­lion yuan a year, and then there is the ris­ing cost of elec­tric­ity.

Ac­cord­ing to the cur­rent sched­ule, the Shang­hai-Bei­jing line will run 90 pairs of trains be­tween the cap­i­tal and the fi­nan­cial hub every day. The start­ing fare for a one-way econ­omy seat for the nearly five-hour jour­ney is 555 yuan. That’s al­most the same as a dis­counted air­line ticket be­tween both cities.

If 80 per­cent of the 1,100 seats are sold on each run, the line will gen­er­ate ticket rev­enue of 37.6 bil­lion yuan a year, com­pared with com­bined op­er­a­tional costs, ex­clud­ing en­ergy, of more than 24 bil­lion yuan.

But whether rail­way op­er­a­tors can sell 80 per­cent of seats on the line is un­known.

Sup­port­ers say the line is likely to sup­plant Ja­pan's Tokaido Shinkansen in the fu­ture as the world's most prof­itable high-speed rail­way.

They point out that the line con­nects China’s two most de­vel­oped cities, serv­ing 26.7 per­cent of the pop­u­la­tion.

But catch­ing up with Ja­pan's achieve­ment or even sur­pass­ing it is a “very dif­fi­cult” propo­si­tion, Sun Zhang, a rail­way pro­fes­sor at Tongji Univer­sity, told China Busi­ness News.

“The Ja­panese have done an ex­cel­lent job in cost con­trol,” Sun said. “They tried to save every penny in every step as much as pos­si­ble dur­ing the con­struc­tion.”

A seven- day Ja­pan Rail Pass al­lows un­lim­ited travel on the na­tional rail­ways net­work, in­clud­ing the Shinkansen. The pass costs 28,300 yen (US$350) for an adult in or­di­nary class.

But China is not Ja­pan, as crit­ics note.

Zhou Yimin, for­mer chief en­gi­neer with the rail­way min­istry, told China Times only 5 per­cent of pas­sen­gers on the Shang­hai-Bei­jing line will buy tick­ets to travel from one end of the line to the other. The rest will get on and off at stops in be­tween.

Dong Yan, a re­searcher with the Na­tional De­vel­op­ment Re­form Com­mis­sion, said China is al­most cer­tain to lose money on high-speed rail­way projects, at least in the ini­tial stages.

Cheap seats pop­u­lar

Zhao Jian, the Bei­jing Jiao­tong Univer­sity pro­fes­sor, de­scribed the Shang­hai- Bei­jing line as a 120story ho­tel, with only 25 per­cent oc­cu­pancy.

Ac­cord­ing to him, more than 94 per­cent of Chi­nese pas­sen­gers tra­di­tion­ally choose the cheap hard-seat or semi- cush­ioned berths when they travel on trains.

Un­der ex­ist­ing rail ser­vice be­tween Shang­hai and Bei­jing, the cheap­est fast trip takes 13 hours and costs 179 yuan for a hard seat.

Zhao said he doubts whether Chi­nese, whose per capita in­come is less than one-tenth that of the Ja­panese, would be will­ing to pay the ex­tra cost to shave the trip time by about half.

But the build­ing of a high-speed rail­way net­work ap­pears to be good news for freight op­er­a­tors.

The rail­ways min­istry said this month that rail freight in the first five months of this year jumped 7.8 per­cent from a year ear­lier. In 2010, it rose 9.3 per­cent.

The min­istry cred­ited the gains to the open­ing of sev­eral high-speed rail routes.

Shuai Bin, a pro­fes­sor with South­west Jiao­tong Univer­sity, said China’s cur­rent rail­way net­work can meet only up to 70 per­cent of the coun­try's freight de­mand.

Longer lines on routes of be­tween 300 kilo­me­ters to 800 kilo­me­ters have an ad­van­tage over other forms of haulage, he said.

Karen Li, a rail sec­tor an­a­lyst with JP Mor­gan, told Reuters that she thinks much of China’s rail­way in­vest­ment in the past three to five years has been spent in the freight side to help lower lo­gis­tics costs, which are much higher in China than in de­vel­oped coun­tries.

The Hong Kong-based an­a­lyst said she doesn’t think China’s high-speed rail net­work will turn prof­itable for five to 10 years af­ter the trains start run­ning.

Rail­way min­istry chief econ­o­mist Yu put the es­ti­mate at be­tween four and seven years.

“But build­ing the net­work is an es­sen­tial step we need to take if we want to drive the econ­omy in the west­ern area and bal­ance de­vel­op­ment in dif­fer­ent re­gions,” he said, try­ing to strike a note of con­fi­dence.

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