This is the first major private capital purchase of a state-owned railway company in China.

At the ceremony held in Guangzhou, capital of South China's Guangdong Province, Cheng Qingbo, president of the Shenzhen Zhongji Industrial company, the investor, said that it was an ideal deal and the company expected to retrieve its investment in ten years.

The deal is considered a breakthrough for the policy issued by the central government last July encouraging non-public capital to take part in railway construction and reconstruction.

The Chunluo railway connecting Yangchun and Luoding cities in Guangdong was jointly owned by state-owned Luoding Railway Co., an unprofitable coal carrier, and the China railway construction and investment company. The Luoding Railway Co. held 84 percent of the shares in the Chunluo railway.

The government-funded Luoding Yongsheng Assets Management Company announced the auction of Luoding Railway Co. at the Guangzhou Enterprises Mergers & Acquisitions Services last month.

According to Cheng, Zhongji will take over the total debt of the Luoding Railway Co., which amounts to 793.66 million yuan.

Zhongji's first capital outlay is expected to be 40 million yuan, and the total investment will be nearly one billion yuan.

The Chunluo railway, brought into operation in 2000, has been handicapped by low freight transport volumes which are not even one-fifth of capacity.

Cheng is confident about future returns. When the railway is extended 76 kilometers and linked with the national railway grid, then "the profit margin will be large", he said.

The Zhongji company will invest 1.5 billion yuan to carry out the extension plan.

Established in 1996, the Shenzhen Zhongji Industrial company has been engaged in the operation of toll roads and bridges.

At the end of last year, the company reported total assets of 8.13 billion yuan and a profit volume of 440 million yuan, which "is sufficient to support the construction plan for the Chunluo railway", said Cheng.

According to Cheng, 65 percent of the investment will come from bank loans, for which Zhongji has signed a preliminary agreement with a national commercial bank. Construction is expected to be completed in three years.

"Non-public capital participation in railway construction and operation through acquisition will relieve local financing burdens and offer gains to investors", said Fu Dunan, general manager of the Luoding Yongsheng Assets Management Company.

According to Cheng, policy support from both local and central governments is a key factor in encouraging private companies to take over state-owned railways.

China is opening up traditional monopoly sectors such as power, telecommunications, railways, civil aviation and petroleum to private investors.

Non-public capital began to enter China's railway freight sector at the end of the 1990s. China's first railway involving non-public shares emerged last April.

Liang Renqiu, a Luoding government official acquainted with the whole takeover process, said that more detailed policies on construction, operation and income distribution will provide the assurances needed to see more non-public capital flow into the railway industry.

See also:

China Plans to Auction One Unprofitable State-Owned Railway

Xinhua: 2006-08-23
(First Published: July 24, 2006)

A 62-kilometer state-owned railway in South China will be sold off soon, which may possibly become the first railway in China to be completely owned by non-public investors.

The state-owned Luoding Railway Co., an unprofitable coal carrier servicing two undeveloped cities in South China's Guangdong Province, has been announced for auction at the website of Guangzhou Enterprises Mergers & Acquisitions Services last week.

An official with the Guangzhou Enterprises Mergers & Acquisitions Services told Xinhua Sunday that it's the first time for the agency to deal with an auction on a railway company's total assets.

"The local government has agreed to auction the Chunluo railway connecting Yangchun and Luoding cities, so as to raise money for constructing another railway," said Fu Dunan, general manager of the government-invested Luoding Yongsheng Assets Management Company, owner of the Luoding Railway Co., in an interview with Xinhua.

According to Fu, the Luoding Railway Co., has been cornered with a total debt of 793.66 million yuan (99.2 million U.S. dollars) by the end of last year.

"The main reason for the huge debts is the deficient freight transport on the Chunluo railway which failed to link with the national railway grid, " Fu said.

A new railway has been planned in the area to extend the Chunluo railway to Cenxi in the neighboring Guangxi Zhuang Autonomous Region, which will be a key railway linking Guangdong and Guangxi in the coming years, and will surely help boost economy of Luoding city.

Fu said the 75.71-kilometer Luocen Railway, with 33-kilometer within Luoding city, will need a total investment of 1.47 billion yuan (183.6 million dollars), which will be an impossible mission for the Luoding government whose financial income was less than 200 million yuan (25 million dollars) in 2005.

According to the auction announcement, the buyers of the Luoding Railway Co., must have a registered asset no less than 300 million yuan (37.5 million dollars) in 2005, with the total asset no less than 7 billion yuan, debt to asset ratio lower than 50 percent and annual turnover no less than 2 billion yuan.

The buyers will not only take over all debts of Guoding Railway Co., but also undertake the construction of Luocen railway, said the announcement.

Chen Huiyong, vice general manager of Luoding Railway Co., said the company has applied to the Ministry of Railways whether the railway can be sold to foreign investors, but the ministry has no answer yet. "There is still possibility," said Chen.

China is opening up some of its monopolized industries to private investors in the recent years, such as power, railway, aviation, telecommunications, and petroleum.

Beginning with the end of 1990s, China's private investors were allowed to enter the railway freight sector, then expand business to passenger transportation on some railways.

But till April last year, the country has its first railway built with a portion of private investment. The Quchang Railway in East China's Zhejiang Province was jointly invested by Shanghai Railway bureau, Changshan county government and a cement company in Changshan, with the company sharing about one-third investment.

A document released by the Ministry of Railways last year said the ministry will encourage all kinds of non-public investment into the construction and innovation of the country's national rails, branch rails and local rails.

See also:

China Working to Reform Railway Finances

CRIENGLISH.com: 2006-08-06

The People's Daily Overseas Edition reports China is working to reform the finance system for its railways.

After initiating the reforms earlier this week, The Ministry of Railways is considering related measures, like absorbing more foreign investment, listing more railway enterprises and issuing more bonds.

China's plan to build 17,000 kilometers of new rail lines in the next 5 years, which needs a total investment of 1.25 billion yuan, or more than 156 million US dollars.

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New Deal for Railway Investment

China Daily: 2006-08-21 By Xin Dingding

Measures are being drawn up to attract investors to China's 2 trillion yuan (US$250 billion) railway expansion.

The Ministry of Railways is fast-tracking legislation to encourage foreign and domestic firms to invest in railway construction projects, said a spokesman.

For the first time, the ministry plans to give investors more say in ticket and freight pricing, said Wang Yongping.

Other measures include setting up a transparent system to ensure railway companies receive a fair share of ticket revenues.

Meanwhile, three new regulations will be drafted to ensure foreign and domestic investors are clear about how to get into the railway construction and transportation industry, said Wang in a recent interview.

The moves are part of the creation of a new railway financing mechanism, which the ministry hopes will help it fulfill its long-term goals.

By 2020, China plans to build an additional 100,000 kilometres of track at an estimated cost of at least 2 trillion yuan (US$250 billion).

To fund the network's expansion, the ministry needs to find an average of 250 billion yuan (US$31 billion) every year, at least twice the current annual investment in railways.

To bridge the funding gap, the ministry has mapped out a plan to push forward changes in the financing mechanism during the 11th Five Year Plan (2006-10).

As well as attracting increased private foreign and domestic investment, the ministry aims to encourage railway companies to restructure and list on the stock market.

The ministry is also looking into establishing a nationwide railway investment fund, which large investors such as insurance companies could buy into, and increasing the issue of railway construction bonds.

But despite the reforms, investors who complain that the lack of a say in setting train timetables has influenced their returns will be left disappointed the ministry insists that it will retain complete control over network schedules.

"Keeping the railway network as a whole and centralizing timetables will be the prerequisite and base for our reforms," said Wang.

He stressed that only a centralized railway system would improve national productivity, the ultimate aim of the reforms.

In addition, a centralized timetable system would be more efficient and increase profits, he said.

At present, the ministry is setting up a transparent system for financial clearings within the railway industry.

Under the system, investors will be able to get information about their share of revenues from the ministry to help them minimize risks, said Wang.

Transport pricing reforms are also under way, with the aim of setting up a more flexible pricing mechanism.

"For restructured railway companies as well as new jointly invested railways, there will be a flexible pricing mechanism where prices can change within national guidelines," said Wang.

The reform will gradually expand the amount ticket prices can vary by. It is targeted at building a transport price management system in which the market is the key player and national guidelines are only a minor factor, he added.

Besides the reforms, the ministry is also drafting regulations on railway construction, passenger travel and freight.

"We are making efforts to have the regulations listed in the State Council's legislation plan as soon as possible," said Wang.

Through the legislation, the ministry hopes to safeguard investors' rights and specify the government's supervision responsibilities.

The ministry is currently looking for investors both at home and abroad and, so far, it has recommended 43 projects to investors, not 70 as some media had previously reported, said Wang.

The 43 projects include passenger lines between Wuhan and Guangzhou, Shijiazhuang and Taiyuan, and Zhengzhou and Xi'an, which the ministry expects to be profitable as they connect provincial capitals.

In the first seven months of this year, 72.49 billion yuan (US$9.1 billion) was poured into railway construction projects, 73.6 per cent of which came from the ministry itself.

Local governments and private companies provided the other 19.13 billion yuan (US$2.39 billion), 5.5 times as much as they contributed in the same period last year.

See also:

China's First Railway IPO Set to Expand
China to Issue Railway Bonds Worth US$5b
China Pours Heavily into Railway Construction
Insurers to Invest in Rail Link

Ministry of Railways' New Plan:
• Drafting three new regulations;
• Give investors more say in pricing;
• Set up a transparent system for financial clearings.

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