Transcript RAILWAYS in CHINA

Comparative Evaluation of Highway and Railway
Development in China and India
1992-2002
Contrasting Approaches to Transport Constraints on Rapid Economic Growth:
Lessons Learned and Transferability Issues
Clell Harral and Jit Sondhi
March 28, 2005
HARRAL WINNER THOMPSON SHARP LAWRENCE, INC.
Our presentation today
• What was accomplished ?-- Early 1990s vs 2002
• Economic Development
• Highway Development
• Railway Development
• How was it accomplished?
• Investment Priorities
• Financing Mechanisms
• Key Strategies Pursued by China
• Institutional Development
• Potential Lessons for India
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Table 1. Key Economic Data for India and China, 1992-2002
China
India
1991-92
Population (million)
2001-02
1992
2002
846
1000
1171
1300
36
29
40
7
244.2
510.2
454.6
1232.7
5.5
4.4
14.4
8.0
26.7
42.3
26.6
50.7
43.9
34.3
51.7
33.7
Volume of trade (current $ billion)
46
157
165
623
Foreign direct investment (current $
billion)
1.8
4
11
53
Poverty rate (%)
GDP (current $ billion)
GDP growth rate (%)
Share of GDP (%) – Industry
Share of GDP (%) – Services
Source: World Bank “India at a Glance” and “China at a Glance”.
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At the beginning of the 1990s, India’s highway and railway infrastructure
was ahead of that of China.
Highways
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In total route km
In route km/square km
In route km/population
Highways & vehicles in both countries, however, were well below world
standards, and railways dominated in all but short-haul transport.
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Geometric standards
Pavement standards
Mixed traffic – much congestion & accident rates world’s worst point
No modern large trucks, few modern buses
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Over ensuing years, China leapfrogged India in highways
construction.
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China’s annual allocations for highway construction jumped from about US$
1 billion in 1991 to $38 billion (3.1% of GDP) in 2002
India’s highway allocation grew negligibly by comparison, rising from about
US$ 1 billion in 1991/92 to $3 billion in 2002.
India built more road km (600,000 vs China’s 443,000 km), but no
high-standard arterials.
The choice of investment priorities was very different.

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China chose to focus first on arterial networks linking its 100 largest cities –
the 35,000-km National Trunk Highway System + additional 25,000 km of
4-lane highways without access control
60% of China’s investment funding went to new arterial networks, 25% to
upgrading existing networks, and 15% to rural roads
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China chose (mostly) high design standards for its new highways
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The National Trunk Highway System (NTHS) is a 35,000-km network, all 4lanes with controlled access… 27,000 km (77%) of which completed by
2002
An additional 25,130 km of 4-lane highways without access control were also
completed
Building an arterial highway system of over 52,000 km in only 10 years is an
extraordinary accomplishment -- the USA took more than 30 years to
complete its Interstate System of 69,000 km.
Unfortunately pavements were commonly designed to accommodate legal
axle load limits, contrary to actual practice of overloading.
India has not yet completed Golden Quadrilateral which will
connect 4 largest cities by 4 lanes, but without controlled access
and traffic flow is still mixed.
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How did China do it?
1. Sources of construction finance
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A wide spectrum of financing methods was employed, with
extensive innovation of both private and public modalities.
Private finance contributed some US$ 11 billion, more than
in any other emerging economy
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Private finance was virtually total equity, as lack of maturity of
China’s capital markets & associated regulatory & legal infrastructure
causes high risk perceptions precluding most private loans, bonds, &
BOT structures.
> 80 PPP joint ventures between private developers in Hong Kong
& provincial or local governments in China contributed > US$ 9
billion
Post-construction sale of equity in established toll roads raised $ 2
billion
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How did China do it?
1. Sources of construction finance (continued)
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The total private finance was under 10% of China’s total road
construction costs…
=> more than 90% of construction funding came from public sources.
Since 1998, virtually half of road development has been financed by
domestic bank loans guaranteed by local government and by central
government bond proceeds which were on-lent to local governments.
This is unlikely to be sustainable.
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How did China do it?
2. Cost recovery: tolls, taxes, & other user charges
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China’s existing system of road use taxes is poorly related to road use &
funds only about 25% of road costs.
China has not yet imposed a significant fuel levy to support road costs.
Tolls are expected to provide major source of cost recovery & debt
service in future.
The tolls & proliferation of toll stations have caused substantial underutilization of new high standard highways & continued congestion of
existing lower-standard but untolled routes.
Arranging sustainable, economically efficient sources of finance for a
highway system that is still expanding rapidly is as yet an unresolved set
of issues in China.
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How did China do it?
3. Physical implementation: planning, tendering, & supervision
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Like India, China was not equipped with modern industries for highways
planning, design, or construction in 1992, and the massive expansion of
construction engendered countless problems.
The problem-solving capacities of its civil works industries -- fueled by
vast sums of money & assisted in some key aspects by the international
community -- rose to meet the challenge, but the transition of this sector
to a competitive market-based economy is still a work in progress.
International Competitive Bidding introduced from 1985 & competitive
tendering of one form or another (whether local or international) has
since grown to supplant direct labor (‘force account’) for most road
construction projects.
Construction enterprises were removed from the roads authority [PWD]
& many have been reorganized as financially autonomous corporations.
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Lessons for India
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China gave first priority to development of its arterial networks, with
high design standards, allocating 60% of a vastly expanded budget for
more than a decade to achieve that. The result is a highly modern arterial
network integrating markets across the country & the rest of the world.
Many segments were built ahead of demand, & tolling of these facilities
in parallel with untolled facilities has reduced utilization further – yielding
a poor return on invested capital.
India has made almost exactly opposite decisions, focusing on secondary
& tertiary networks with minimal design standards to stretch limited
budgets as widely as possible. This has left India with severe congestion
bottlenecks between its major cities & severe accidents problem.
The best strategy lies between these two extremes, varies from segment
to segment, and can be identified by proper analysis.
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Lessons for India (continued)
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A vast expansion of investments in highways will be required for Indian
industries to become more competitive in world markets & sustain more
rapid economic growth – of the order of 3% of GDP while catching-up.
Public finance is more severely constrained, but private finance can play a
larger role in India than in China

domestic capital markets & legal infrastructure better established

the arterial networks yet to be built in India provide attractive
opportunities for Private-Public Partnerships
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ownership & management of toll roads can be better organized with
multiple projects grouped under regional authorities with risk
pooling

… but private finance unlikely to carry the major burden.
Reform of the construction industry in India is vital
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greater, genuine competition among domestic contractors is needed
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state construction units could be spun off and made autonomous,
accountable entities
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international contractors can play a more effective role
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private finance will spur improved construction management.
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Lessons for India (continued)
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India should seek to minimize China’s problem of a myriad of short
tolled segments with attendant high costs of collection & delays to
travelers by grouping toll finance initiatives through state- or region-wide
highway corporations that can pool assets to reduce operational costs,
improve risk management, & facilitate network extension through
securitization of revenue streams from existing assets.
Until such time as revolutionary new technologies may be invented that
permit tolling of all highways, India’s current policy mix -- to place main
reliance on fuel levies combined with direct tolling on new facilities
primarily where the traffic is heavy with inelastic demand -- is
appropriate.
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The Railways of China and India
1992-2002
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RAILWAYS OVERVIEW
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ROUTE KM: Similar size – China network 6% smaller in 1992 but
14% larger than that of India in 2002.
TOTAL OUTPUT (equated units= pass km + ton km):
CR two-and-a-half times that of IR in 1992 & in 2002.
TRAFFIC GROWTH: The growth rates of passenger (57/58%) and
freight (31/34%) in decade 1992-2002 of the same order in both
countries.
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RAILWAYS in CHINA (1)
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Four types of railway in China
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CR was until recently a vertically integrated railway
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National Railway (CR) is the main system (84%) owned and managed by the
Ministry of Railways.
Joint Venture Railways (9%)
Local Railways (7%), and
Private Railways (negligible).
it has now divested most of its social support, manufacturing, and
construction activities.
CR has become more commercially oriented
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former subsidiaries now compete with other suppliers for CR needs
incentives established to encourage commercial attitudes & results
about 100 unprofitable branch lines separated from CR and operating losses
reduced
assistance provided to redundant employees to qualify for new roles.
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RAILWAYS in CHINA (2)
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MOR retains all profits, pays taxes on profits, and finances most of
its own construction and purchases of rolling stock.
Construction surcharges on all freight transportation
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The fixed and rolling assets (except freight wagons) allocated to
Regional Railway Administrations (RRAs)
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which are required to pay MOR a rate of return on the value of assets
allocated to the respective RRA.
Wagon allocation and operations are managed on a system wide
basis from Beijing using a computerized transport management
information system (TMIS).
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used only for investment in railway construction with the approval of NDRC
and the government
RRA pays hire charges to MOR for wagons in use on its territory.
Managers in RRAs receive bonuses that are linked to performance.
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TRAFFIC AND ASSET UTILISATION
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In 1992 and 2002 the two railways carried almost exactly the same
volume of passenger km
(314 vs 315 billion pkm in 1992 and 493 vs 497 in 2002)
But CR carried 4½ times the freight of IR
(1,157 vs 257 billion tkm in 1992 and 1551 vs 336 in 2002).
In fact, the increase in freight on CR over 10 years was more than the
entire freight carried by IR in 2002
(394 btkm vs 336 btkm)
CR achieved this through more efficient exploitation of track,
locomotives, and wagons.
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TRAFFIC AND ASSET UTILISATION
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China has a larger proportion of double as well as electrified track.
CR has adopted automatic signaling more aggressively than in
India.
Reliability of CR assets is higher, as they are relatively new, and
quality of maintenance is better.
As a result CR operates roughly twice the number of trains on
electrified double tracks as IR.
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FINANCIAL PERFORMANCE
Transportation revenue
billion
Revenue including
construction surcharge bn.
Operating Expenses and
pensions billion
Depreciation billion
Total working Expenses
including depreciation and
pensions billion
Working ratio %
Operating ratio %
IR (INR)
CR (RMB)
1991-92
2001-02
1992
2002
137
378
47.9
142.0
69.9
181.3
104
343
24.6
112.0
20
124
20
363
13.5
35.8
22.3
134.3
0.76 0.94
0.895 0.96
0.35
0.51
0.62
0.74
Internal accruals fund 57% and 35% investments on CR and IR,
respectively.
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COST and FARE STRUCTURE 2002
IR
Total Revenue $ billion
8.2
Passenger pkm of total output %
59
Passenger revenue of total %
30
Average cost per equated unit US c 0.75
Average freight tariff per tkm US c 1.6
Average pass. fare per pkm US c
0.55
*including construction surcharge of 0.4 c
CR
17.1
24
41
0.65
0.96*
1.25
Cost per unit on CR is lower by 15% than IR,
Freight tariff on CR is lower by 40%.
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EXPENDITURE
Staff costs
•
IR 53%, CR 25% of ordinary working expenses
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•
•
•
•
IR’s staff cost level is not sustainable
Depreciation
IR 2% of historical value of assets
CR 4.4% of net value of assets
IR is eroding its asset base
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ASSET and LABOUR
PRODUCTIVITY
INDIA
199192
Traffic
9.1
density*
(Indian
BG
14.2
system)
Output
402
per employee#
200102
CHINA
%
1992
2002
13.1 +44 27.4 34.4
Remarks
%
+25
China/India
ratio 2002
2.6
17.6 +24
1.95
648
2.1
+61 728 1385 +90
*Million equated traffic units per route km
# Million equated units
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FREIGHT BUSINESS
INDIA (BG)
1991-92 2001-02
Wagon turnaround
(days)
Daily output per
wagon operated
(tkm)
Average trip
(km)
Average Speed
(kmph)
CHINA (CR)
1992
2002
11.1
7.2
4.15
5.10
2878
4446
9924
9100
740
677
734
760
22.7
24.4
29.9
32.4
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STRATEGIES
IMPLEMENTED IN CHINA
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Focus on core business, separated non-core activities, established
independent entities that compete for CR business
Passenger services profitable, separated on accounting basis within
CR
Minimize labour costs, assist excess labour to set up small
businesses
Rail Construction Fund to develop railways
Technology upgrades to improve capacity, service quality and
efficiency
Asset Operation Liability System with RAs (to promote benchmark
competition and financial performance and provide management
incentives).
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AREAS WHERE IR COULD EMULATE CR (1)
Government should
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Resolve the conflict between IR’s role as a commercial organisation and
one to serve social obligations
Support IR in making only financially viable investments
Fund all social/politically driven investments and resulting operational
losses
Hold IR management accountable for service and financial performance –
benchmark against CR
Offer significant incentives to railway managers and labour if agreed
targets are exceeded.
Have an independent operations auditor carry out an annual review of
IR’s operational performance over time, across units within IR and across
railways in other countries, including an assessment of the impact on
Indian economy.
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AREAS WHERE IR COULD EMULATE CR
(2A)
IR should
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Recognize that highways and airlines will increase competitive
pressure on IR immensely
Recognize the substantial scope for improving productivity of
assets and labour and reducing unit costs on IR
Recognize that railway restructuring is inescapable if IR is to serve
the needs of the growing Indian economy
Separate non core activities, reorganize management on business
lines focusing on customers
Implement an incentive system for managers based on
“benchmark competition” between zonal railways.
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