China opens vast rail system to private investment

BEIJING Mon May 21, 2012 1:37am EDT

BEIJING May 21 (Reuters) - China's railway industry will open to private investment on an unprecedented scale, according to a document issued this weekend by the Ministry of Railways, which is struggling with mounting debts and a corruption scandal while attempting to resolve the country's infrastructure bottlenecks.

Private investors will be encouraged to bid for contracts, subsidiaries will be allowed to list shares, and pension funds welcomed to invest in railway companies, the ministry said in a policy document issued late Friday.

The document did not address allowing foreign firms to invest directly in rail. While foreign companies such as Alstom , GE, Bombadier and Kawasaki Heavy Industries have won lucrative tenders to supply China's rail expansion, in many cases their participation has been limited to supplying components.

Many foreign firms have also complained that they have been forced to transfer technology to win contracts only to see China compete against them in international rail tenders.

The announcement follows Chinese officials' statements during the annual parliamentary session that rail would be one of seven industries allowed to open for private investment.

The need for funding is acute. China still needs billions more in rail investment, to remove bottlenecks in cargo transport, ease overcrowding in passenger transport and develop commuter lines in its sprawling megacities.

The ministry lost $1.1 billion in the first quarter of this year, due to high operating costs and debt payments. It had $384 billion in debt at the end of March.

Rail investment slowed in early 2011 after a fatal crash and the firing of the minister and some of the ministry's senior staff.

Analysts expect investment to pick up in the second half of this year.

The document specifically called for encouraging private investment in Chinese rail projects overseas. To date, showcase projects such as a Chinese-built railroad to Mecca have struggled with uncontrolled cost increases.

China's Ministry of Railways is the only central government bureaucracy that has never been restructured in more than six decades of Communist rule. In addition to a vast and growing rail network, it maintains its own hospitals, courts, police force and schools.

China began to face difficulties funding rail expansion, including high-speed lines, after costs blew out on a politically-mandated, high-altitude track to Tibet. In 2006, the ministry listed two lines in Hong Kong and began issuing bonds.