Railway reform on track

China has decided to open up the construction and operation of its railways to private investors and will build more lines in the economically backward western regions, moves that will both boost the railway sector and unleash the vitality of the overall economy.

A State Council executive meeting on Wednesday said that multiple fundraising sources would be sought to finance more railway construction, including a greater role for private capital and a larger focus on the western regions.

The move provides a boost to the western provinces as the country accelerates its economic restructuring drive among different regions to seek a balanced and all-round development.

In particular, it constitutes a crucial step in ushering in more non-State investors into the railway sector to fill the financing gap and increase the operational efficiency of the railways.

It is a breakthrough for the largely State-monopolized sector to open the ownership and management rights of intercity and local railways to private investors. And it marks a further step toward market-oriented operations, following reform of the railway regime in March, when the administrative function of the now-defunct Ministry of Railways was incorporated into the Ministry of Transport and the China Railway Corporation was formed.

The railway sector's monolithic regime, together with the fast-paced expansion of costly high-speed lines in recent years, brought serious financial pressure, which forced the government to accelerate reform.

At the end of the first quarter, CRC registered a total debt of 2.84 trillion yuan ($460 billion), pushing its debt/asset ratio to 62.3 percent from 54.5 percent at the end of 2010.

But experts are divided over the operational sustainability of the corporation given its high debt level. The corporation urgently needs to increase its profits and lower its debt level.

Encouraging non-State investment is certainly a good option. Given the past experiences, however, it is way too early to predict any success.

In previous cases, many private investors quickly pulled out of local railway projects because they were not satisfied with the low level of returns, while the railway authorities were unwilling to concede more commercial benefits.

This time, the CRC must ensure that private investors can make a reasonable return, so that more potential investors can follow suit and join hands with the cash-thirsty giant.