China Spending less on Unprofitable High-Speed Trains, wants Private Investors to Lose Money Instead

Posted by PITHOCRATES - May 26th, 2012

Week in Review

Governments everywhere want to build high-speed trains.  They like them because they’re very high profile and can stand as memorials to the politicians that gave them to us.  They like them because they are so costly, both to run and to operate.  Requiring higher taxes and lots of government borrowing.  They like them because they are so labor intensive.  Both to build and to operate.  This creates a lot of jobs.  Yes, they are all of these things.  But one thing they are not is profitable (see Railways try to get investors on track by Wei Tian and Xin Dingding posted 5/21/2012 on China Daily).

Experts predict lukewarm response as sector seeks private capital…

Zhou, who is chairman of the Wenzhou Small and Medium-sized Enterprises Development Association, represents a group of wealthy industrialists in East China’s Zhejiang province.

The railway authority in Wenzhou, he said, has been negotiating with entrepreneurs but so far the government is offering just 8 percent of the profits.

“Eight percent is not attractive,” he said. Railway programs require huge investment, the sector has suffered losses and entrepreneurs are cautious, he said.

According to data released by the ministry, its debt reached 2.43 trillion yuan ($384 billion) by the end of March, with a debt ratio of 60.6 percent.

The ministry also reported a loss of 6.98 billion yuan in the first quarter.

Meanwhile, fixed investment in railways was 89.6 billion yuan, 48.3 percent less than the same period last year…

…private capital is already involved in railway construction, he said, explaining that a 624-kilometer coal transport line, partially funded by the privately owned Xinjiang Guanghui Industry Investment Group, had begun construction in late March.

However, he warned that it will not be easy to attract private investors into industries that are no longer profitable.

Building these railways gave the government a huge debt.  That debt ratio (total liabilities divided by total assets) means lenders are not all that happy.  With over half the total assets of the railway programs paid for by debt and an annualized loss of 27.9 billion Yuan (4 X 6.98 billion Yuan) investors see these railway programs for what they are.  Investment losers.  They rack up debt and can’t operate at a profit.  Even the government doesn’t want to pay for them anymore and is trying to find private investors to throw away their money.

Railroads are so costly because there is infrastructure everywhere a train travels.  And the revenue from the train has to pay for this infrastructure.  From the first survey to the first grading to the first ballast to the first track to the first switch to the first signal there are nothing but high capital costs.  Followed by high operating costs to make everything work.  From maintenance crews to engineers to conductors to train crews to dispatch centers to ticket sellers.  High-speed passenger rail is the most expensive rail of all.  Because they’re typically electric which requires even more infrastructure wherever that train travels.  And no grade crossings.  So that’s more tunnels and bridges.

Only two high-speed lines earn enough revenue to pay both their capital and operating costs.  One in Japan.  And one in France.  Governments subsidize all other passenger rail.  Only the freight railroads are profitable.  Which is why companies in the private sector still own the freight railroads.   Why freight?  Because there is no more cost effective way to move containers or bulk freight.  Like coal.  Which is where private capital is currently going to in China.  Because coal is never an investment loser.  And there is no better way to move coal overland than by train.

The bidding process has come in for harsh criticism by the public after a crash involving two high-speed trains in Zhejiang province killed at least 40 people and injured more than 200 others in July.

According to the findings of an investigation announced last December, malpractice and illegal contracts were found in the bidding process administered by the Ministry of Railways and its subordinate bureaus, which resulted in the failure of a train control system that had never undergone field tests before launch, Xinhua reported.

The national auditor said in March that it had uncovered evidence of fraud, waste, mismanagement and irregular accounting and procurement totaling billions of yuan at the ministry’s flagship high-speed Beijing-Shanghai railway.

And here’s the other reason why politicians love high-speed rail.  It is so much easier to conceal fraud, waste and irregular accounting and procurement practices when the money amounts are so large.  It’s a sad thing that government is not very good at building and running trains but is very good at the fraud.  We should remember this the next time government wants to spend a fortune on high-speed rail.

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