Tuesday, August 2, 2011

When it comes to High-Speed Rail, watch and learn from the mistakes of China

We recently pointed out that often the perceived problem is not the real problem, but only a symptom.  China is a great case in point. 

Despite news black-outs, threats to Chinese media, and other obstructions on the part of a rigid autocratic government determined to never let news critical of the government go public, lots of information got out of China anyhow.

Looking for faults, people pointed to lightning strikes, faulty PTC (positive train control), inadequate engineer safety training, hasty and sloppy construction, corruption, and, for all we know, gremlins.  Well, maybe.  But, we would argue here, these are only symptoms of more deep-seated problems, and these are well described here in this Wall Street Journal article.

The government of China acts with great contempt for its people, and treats them all like disposable parts of a great machine which the elite bureaucrats operate in their own interests.  We saw millions of people arbitrarily re-located with the construction of the Three Gorges Dam. 

The government is determined to outrace all Western and Eastern Industrial nations by coming from behind and by blindly throwing of all the resources at the most massive infrastructure development growth at their command.  That's how they attacked rail development by promising more miles of high-speed rail track in China than all the rest of the world combined.  Furthermore, there were determined not to do this in an incremental, evolutionary way, but as one more dazzling aspect of their economic revolution.

The game was not to create an effective rail system, but a superior, prestigious one, a symbolic one, one to envy.  The Chinese copied and stole patent rights and technologies from the HSR leaders such as Japan and France and ignored the instruction manuals by making these trains run faster than intended.  They valued the appearance more than the substance.

With the vast amounts of funding being thrown into this effort, and the culture of corruption rampant, small wonder that lots of the funding went into personal black holes.

The message here ought to be clear.  We have colleagues who have instructed us not to make too much of the Chinese train wreck.  Well, as a worst-case-scenario blog, we intend to make "too much" of this accident. It's an object lesson for California that all HSR supporters ought to pay close attention to.  

It's becoming quite obvious, even to some of the Chinese, that HSR was not the best way to run a railroad.  They should have created a standard passenger AND freight rail system throughout China first.  And, incrementally, added HSR to such a network on the most high-demand routes first.  And they should not have initiated their program with the fastest trains and in such a ridiculously forced short schedule, but moved up gradually, learning on the way.

California is about to make the exact, same mistakes.  We lack a serious regular passenger rail system.  Amtrak has a very long way to go in our state before it can be taken seriously, with, say, 110 mph trains.  That should clearly come first.  But, improving California's existing rail capacity was never the intention of the promoters, such as Quentin Kopp, Rod Diridon, Curt Pringle, Jerry Brown and the others. That would not have been spectacular enough for them.

These guys has visions of sugar plum dollars dancing in their heads.  By-passing the drudgery of Amtrak choo-choos, our politicians saw a macho fantasy train that would capture the admiration of all the residents of this state, and make gobs of money for a lot of their croneys, besides.  Let's be clear, they knew next to nothing about railroading.  Their rail education came from expensive junkets to Europe, Japan and China where they were "sold bills of goods," so to speak.  Great food, great hotels and great train rides.

Politicians being who they are, the idea, never more than a vague, macho concept, became packaged as the salvation of all of California's troubles.  And, not having done any homework, the voters bought it, hook, line and sinker in 2008.

Well, it's not too late to throw this wretched fish back in and forget that it ever happened.  Look what's going on in China now. Is that what we need here, in the United States?  We are on track for a financial train-wreck of epic proportions.  Nobody is in charge with their hand on the brakes.  Right now, it's a run-away train. Time to jump off before we all get "killed" in this economy. 

AUGUST 2, 2011
Crash Spotlights China's Train Crisis 
The Railways Ministry, Whose Products Beijing Hoped to Export Globally, Now May Need a Bailout

BEIJING-China's debt-burdened Railways Ministry, under fire after last month's deadly train crash, might need a central government bailout and will have difficulty raising new funds, some analysts predict, adding to concerns around the country's high-speed rail system.

A high-speed train arrives at Beijing's south railway station on Thursday.

Construction of the fast-train network was a linchpin of China's economic stimulus plan to counter the global financial crisis. Led by lending from commercial banks, the Railways Ministry's debt burden increased to hundreds of billions of dollars, largely used for accelerating the construction of the high-speed network, which Beijing heralded as world class.

The railways' debt woes are part of the larger stimulus tab now starting to weigh on China's government and could also call into question the economics-and not just the safety standards-of an industry China had hoped would become a significant global export.

The July 23 collision between two high-speed trains, which killed 40 people and injured 191, has unleashed widespread public anger that analysts say has likely weakened the clout of the formerly powerful Railways Ministry-the only Chinese government agency other than the Finance Ministry allowed to issue bonds-both within the government and with investors. That in turn is fueling doubts about its ability to raise more funds needed to cover its existing debts and keep building the prized high-speed network and is prompting some to call for the ministry's restructuring or abolition.

"Given the way the accident has drawn attention to the [Railways Ministry's] management practices, it may well be awhile before the [ministry] can come back to the debt markets," Standard Chartered economist Stephen Green said in a research report. "There will be financing difficulties and, inevitably, increased pressure on interest payments."

Mr. Green said he doubts the rail ministry's operations generate enough free cash flow to cover the interest payments on its debts. He and other analysts said that the Ministry of Finance likely will have to step in at some point with a capital injection.

China's Railways Ministry didn't respond to requests to comment.

For the central government, the ministry woes add to concerns around debt from the stimulus plan. Special borrowing entities created by local governments have also racked up enormous debts--about $1.65 trillion, or 27% of China's gross domestic product last year, according to a June estimate by the National Audit Office. Private-sector estimates have put the total higher.

While few question the government's ultimate ability to cover such debts, analysts warn that the burden could suck funds away from other fiscal priorities and could saddle China's state-run banks with bad loans.
Zhao Jian, professor of economics at Beijing Jiaotong University, said that ultimately the Ministry of Railways needs to be restructured, splitting the commercial elements of the rail network from the government's control.

"Currently people are paying the most attention to the crash and safety side of the issue, but this will lead them to scrutinize more Ministry of Railways' debt and finance issues," said Mr. Zhao.

Even before the crash, the high-speed network was under fire over corruption and expensive tickets that put the high-speed trains out of reach for ordinary Chinese.

"Building high-speed rail cannot generate enough cash flow. Cash flow comes from the number of passengers," said Mr. Zhao. "They should have built ordinary trains, but instead they built high-speed ones, which doesn't correspond to market demand."

The Railways Ministry's debts have ballooned in recent years. At the end of the first quarter its obligations totaled 1.98 trillion yuan ($307 billion), about 5% of China's gross domestic product, up from about 2% in 2007.

Deadly Train Crash in China

Workers at the site of China's high-speed train crash near Wenzhou, during clean-up operations on July 24.
In a prospectus issued July 14 for a planned bond issue, the Railways Ministry disclosed that its operating costs in the first quarter exceeded its operating revenue by 3.8 billion yuan, raising the prospect it may struggle to find enough cash to cover interest payments, particularly if its debt burden expands further.

"There is no evidence that operating revenues can grow significantly faster than operating costs," said Mr. Green. "Indeed the evidence at present suggests the opposite may be true."

The bond sale, which occurred two days before the July 23 accident, failed to find enough buyers for the full 20 billion yuan issue.

As a sovereign issuer backed by the financial resources of the Chinese government, there is no concern it will default on its bonds. However, sentiment is clearly moving against the ministry as a debt issuer.

A Shanghai-based analyst with a brokerage firm who deals with the Railways Ministry said he originally expected it to issue between 140 billion yuan and 160 billion yuan of bonds over the rest of this year-more than doubling the 2010 figure. He now expects the amount to be scaled back given indications demand is fading for the debt. The ministry has already issued 105 billion yuan of new bonds this year, up from 115.5 billion yuan for the whole of last year.

-Ina Zhou and Yoli Zhang contributed to this article.
Write to Dinny McMahon at dinny.mcmahon@wsj.com 

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