The Ministry of Railways (MOR) has reiterated its commitment to opening up to non-State investors in recent months. But this news has not been warmly received.

The ministry has promised to open up several sectors of the industry previously off limits to non-State investment. The announcement sends the message that the railway construction funding shortfall has worsened, hindering development.

But the invitation to invest has not been welcomed.

It is unlikely investors will be able to make quick profits by pumping funds into the railways. But long-term returns are stable and therefore a good choice for strategic investors.

The ministry has released information on industrial opening up, but it has mainly focused on such aspects as the amount of capital needed and the bright prospects of China's railway industry, to attract investors. It has stopped short of explicit commitments to the protection of investors' interests.

There is a lack of legal stipulations on railway investment and it is not made clear how the industry will be reformed to adapt to the new investment structure.

This is what potential investors care about most. The ministry has not given clear answers to the doubts expressed by investors.

The main obstacle to investment from non-State players is the mixture of government administration and corporate management. As a government department, the MOR has direct involvement in the corporate management of railway enterprises.

As the market matures, this mode of industrial regulation has increasingly been in conflict with the macroeconomic situation.

The ministry has given its own reasons to justify its insistence on directly managing the sector. It has said the railway network as a whole cannot be broken up and therefore the ministry must manage the sector in a unified way. But if the ministry's claim held water, there would not be so many cases of separation of administration and corporate management in the railway sector in other countries around the world.

Regarding the financing of the railway sector, it should be stressed that the major player in the process of investment in railway construction should be the enterprise, not the government.

The blurred role of the government in the management of the industry has led to the undesirable scenario of there not being any legal entities with clear market status in the sector. The railway transportation enterprises are the administrative subsidiaries of the MOR.

The lack of market-based status for rail firms means they are not able to pool funding from potential investors.

In this way, the MOR, by announcing its plan to woo outside investment, has stuck to the old government-directed mode. This is in reality reinforcing the mixture of administration and corporate management in the sector.

The government has been wrongly cast in a role that should be played by enterprises as part of the reform of the financing of the sector. This arrangement is actually obstructing the market-based financing process.

The MOR is not right to say the inseparability of the railway network should be maintained by relying on the MOR's unified management and its transportation resources.

With the market playing a dominant role in allocating resources, enterprises must face a separated transportation market. They must do their business independently and make decisions in accordance with changing market conditions.

Therefore, in the market economy, the operational inseparability of the railway network is unjustifiable. The railway network is geographically connected, but can be broken up and managed by different market players.

The MOR has gone too far in holding on to operational power over all transportation resources while the enterprises are left virtually deprived of the ability to operate independently. They cannot make decisions on their own.

Regarding the introduction of outside investment, with domestic enterprises unable to operate independently, how can the interests of outside investors be guaranteed and their independent rights to operate be ensured?

Past experience of joint-venture railway management, in which foreign investors are involved, provides lessons for policy-makers. As local-route and foreign operators have suffered from discrimination, they cannot make proper use of the rail network and transportation resources on an equal footing with their State counterparts.

As the MOR imposes unified management on transportation resources, non-State investors may baulk at being encouraged to invest in the sector. Although the ministry has pledged to open up several sectors of the railways to foreign investors, if it cannot update its ideas about resource distribution, investors will remain sceptical about whether its pledges are serious.

The rigid pricing mechanism and lack of a clear internal financial system are another obstacle in the way of potential investors.

The prices of services have to be reported to and get approval from the MOR, periodically. While the ministry's introduction of outside investors is market-based, the pricing mechanism of the sector will remain centrally planned. This is illogical.

There is still a lack of a clear financial settlement mechanism that could provide accurate information about the revenues, costs and profits of transportation enterprises. Without sufficient information, how can investors be expected to part with their cash?

Besides, there is a lack of legal stipulations protecting the interests of investors. The existing law on railway management fails to list such stipulations. Although it is being revised, we will have to wait for changes to take effect. Given the legal vacuum, investors will tend to be timid when making decisions.

The railway sector must open up to non-State investors, otherwise it will not be able to achieve sustainable development. But this opening up must be proceeded by internal reforms and restructuring.

If the MOR just repeats its invitation to non-State investors while dragging its feet in reforming its own structure, no substantial progress will be made.

The ministry should send stronger and clearer messages, and take action to attract non-State investors.

(China Daily December 20, 2005)