Saturday, April 30, 2011

China's high speed rail march stumbles?

China's spectacular $300 bn high-speed rail projects of the past decade has to rank as one of the most breathtaking infrastructure achievements of the last half century. It has been staggering not only in its sheer scale, but also in the pace at which it has been executed. As the graphic below shows, in a matter of five years China has destroyed all competition and has emerged as the unquestioned global leader in this cutting edge sector.

However, as a recent Washington Post article highlights, the success is fast tuning sour. For a start, the pay-back time on debts incurred to finance the projects has arrived and the Ministry of Railways is left with a whopping $271 billion in debt. Ticket sales and other revenue streams are hardly enough to cover the massive $27.7 bn in debt service for 2011 itself. Tickets priced at two to three times the regular rail ensures that ridership is poor.

However, of even bigger concern are question marks over safety and reliability. Contractors have been accused of colluding with officials and skimming off tax payer resources by using cheap, low-quality concrete and equipments. Tales of corruption abound, with even the Head of Ministry of Railways getting sacked.

As the Post article writes, Chinese high-speed rail will soon require government bailout. In this it is following the experience elsewhere, which conclusively shows that such projects are rarely fully viable commercially. Japan’s bullet trains needed a bailout in 1987. Taiwan’s line opened in 2007 and needed a government rescue in 2009. In France, only the Paris-Lyon high-speed line is in the black.

High-speed rail networks, with speeds of upto 350 km/hr, can deliver competitive advantage over airline for journeys of up to about 3 hours or 750 km, particularly between city pairs where airports are located far from city centres. Construction and rolling stock capital costs typically range from $35-70 million per km, depending on the complexity of the civil engineering work, rolling stock capacity etc. A World Bank report on high-speed rail writes,

"Governments contemplating the benefits of a new high-speed railway, whether procured by public or private or combined public-private project structures, should also contemplate the near-certainty of copious and continuing budget support for the debt. A developing country must reasonably expect atleast 20 million passengers/year with significant purchasing power, just to have the possibility of covering the working expenses and interest costs of providing that capacity with high-speed service; and probably double that number of passengers to have any possibility of recovering the capital cost.

In summary then, high-speed rail is now a tried and tested technology that delivers real transport benefits and can dominate market share against road and airline transport over the medium distances that many inter-city travelers confront. However, the demographic and economic conditions that can support the viability of high-speed rail are, in global terms, limited. The number of passenger transport corridors of the requisite length, that are already capacity constrained, and where there is sufficiently dense potential demand by people of adequate purchasing power, is limited; some may be in countries where the implementation capacity may be lacking."

Update 1 (23/6/2011)

Excellent Times story captures the benefits of light-rail network for China's economy,

"Around China, real estate prices and investment have surged in the more than 200 inland cities that have already been connected by high-speed rail in the last three years. Businesses are flocking to these cities, now just a few hours by bullet train from China’s busiest and most international metropolises.

Meanwhile, a shift in passenger traffic to the new high-speed rail routes has freed up congested older rail lines for freight. That has allowed coal mines and shippers to switch to cheaper rail transport from costly trucks for heavy cargos. Because of this shift, plus the construction of additional freight lines, the tonnage hauled by China’s rail system increased in 2010 by an amount equaling the entire freight carried last year by the combined rail systems of Britain, France, Germany and Poland, according to the World Bank.

The bullet train bonanza, and the competitive challenge it poses for the West, is only likely to increase with the opening of the 820-mile Beijing-to-Shanghai line, which will create a business corridor between China’s two most dynamic cities. The railway ministry plans 90 bullet trains a day in each direction."

The new, high-speed lines owned by joint ventures between the rail ministry and provincial governments, have also generated criticism for high costs and pricey fares, the quality of construction and corruption, and huge bank loan exposures. From Changsha to Guangzhou, the one-way fare in economy class for the two-hour journey, at speeds of up to 210 miles per hour, is 333 renminbi ($51). That is comparable to a deeply discounted airfare, but expensive for a migrant worker from Hunan who might earn only $160 to $400 a month in wages in Guangzhou. The same trip takes nine hours on an older, diesel train. But it costs only 99 renminbi ($15).

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