The national coal shortage has required a better, larger railway system; but how to build one that can be operated efficiently enough to satisfy demand is a subject of controversy in China.

The railway capacity system lags behind the national demand for coal.

In recent years, annual transport volume of coal has exceeded 1 billion tons, and more than 70 percent of that was transported by railway due to the relatively lower cost.

Coal production in 2007 reached 2.523 billion tons while the volume transported by railway was 1.54 billion tons. By 2010, the transportation demand of Shanxi, the major coal province in China, is estimated to increase by 230 million tons, while according to the 11th Five-Year Plan of Chinese railways from 2006 to 2010, the capacity will merely increase by 134 million tons, or about 100 million tons short of the demand.

"The current transportation capacity of railways can only meet 50 percent of the demand of Shanxi," then provincial governor Yu Youjun said in 2007.

To help solve the squeeze a 100-billion-yuan railway construction project has been jointly agreed to by Shanxi, Henan and Shandong provinces, says Li Ting, director of the Macroeconomic Institute of the Shanxi Development and Reform Commission.

A feasibility report will be given to the National Development and Reform Commission for approval.

The planned cargo railway would go from Shanxi's Luliang, (home of China's largest coking coal production base, Hedong Coalfield) and would end at Dongjiakou in Shandong's Qingdao, a port to be developed with a throughput potential of more than 200 million tons.

Another port Rizhao in Shandong is an alternative. The transportation capacity of the 1,200-kilometer railway is planned for 100 million tons in the short term and 200 million in the future.

"The railway will provide ample coal supply for industrial bases in the three provinces alongside the railway line. Especially, it would boost the economies of Shanxi Luliang and Taihang and Shandong Yimeng, the three less developed districts," Li says.

According to the feasibility report, a joint stock company will be organized to operate the railway. Shanxi and the Ministry of Railways (MOR) will each hold 30 percent of the shares while Henan and Shandong will take 20 percent each.

However, the MOR has also submitted a report in which it requires it to hold a 35 percent stake in the project.

If the MOR controls 35 percent of the shares, according to Article 104 of Chinese Company Law, it will possess veto power on certain important resolutions, in which case the market-oriented operation model of the joint stock company planned by the three provincial governments will be greatly affected.

"The MOR lacks transparency in network scheduling and financial settlement, which makes it hard to figure out the exact cost and income of the railway operation," Hu Xingdou, a professor from Beijing Institute of Technology, says.

Besides, "the MOR emphasizes the public service function of railways, while a typical market-oriented company focuses more on investment returns," Li added.

"The difference between 30 percent and 35 percent is merely 5 percent, but the difference is significant," Li tells National Business Daily, a Shanghai-based newspaper.

Currently, the MOR is a combination of an administrative department and a business operator. On one hand, it is responsible for the railway operation, construction, policy making and supervision. On the other, it is also the operator of the railway business.

Such a monopoly has also caused financial shortages in national railway construction.