When Canadian transportation company Bombardier received its first order from China for 300 intercity railcars nearly a decade ago, it came to the table armed with a string of vehicle designs that had been tried and tested all over the world. Executives had even picked out a Swedish model they thought would be particularly suitable for China. But the Ministry of Railways officials were not content.
“What they demanded was so much more than what was featured in the Swedish model,” recalled Dr Zhang Jianwei, president of Bombardier China.
The end result was a railcar unseen outside of China. Able to travel at 160 kilometers per hour, it is tailor-made for China’s new high-speed rail lines. For Bombardier, the effort more than paid off. In the last three years alone, the company has won contracts worth a total of US$6.9 billion to supply railcars, locomotives, propulsion equipment and signaling systems for China’s railways.
With China planning to build 17,000 km of new lines by 2010 to take the total network to over 90,000 km, Bombardier can expect a few more contracts to come its way.
In fact, the contracts could come sooner than expected. Given Beijing’s current concerns about weakening growth, most economists expect the government to boost its spending in an attempt to stimulate the economy. Infrastructure investment is earmarked as a priority.
According to Andy Rothman, China macro strategist at CLSA, more money is already being invested: State spending on urban fixed-asset investment rose 42% in the first half of 2008, compared with 19% in the first six months of last year.
“What they are doing now is saying that they want fixed-asset investment to keep on growing at 25% year-on-year and they will make up the difference,” said Rothman. “The investment is very short-term driven – it is used to mitigate a slowdown in private spending.”
Many of China’s infrastructure needs are tied to the ongoing expansion of its cities. A study published earlier this year by McKinsey, a consultancy, predicts that China’s urban population will swell by 325 million between now and 2025. Sustaining this urban growth will require the construction of 1,100 gigawatts in additional power production capacity, 5 billion square meters of roads, 28,000 km of commuter rail and as many as 50,000 skyscrapers.
Many of these projects have already received approval but boosting government infrastructure spending simply means a quicker delivery time.
“Looking back at Shanghai, the first wave of infrastructure development here was the ring roads, elevated highways and subway line one,” said Steven McCord, senior manager of the research department at Jones Lang LaSalle in Shanghai. “What we are seeing today is a rapid catch-up in investment in the metro network.”
Shanghai plans to increase the total length of this network to 400 km by 2010, up from 230 km at the end of 2007.
Other cities have similar aspirations. Ten cities currently operate metro services, and there are plans to make it 25 by 2010. Many other local governments are believed to have drawn up metro plans.
“There are 37 cities working on urban mass transit and we follow them all very closely,” said Bombardier’s Zhang. “There are in fact more than 300 projects you can bid on once you break it down into different products for different lines.”
Although Bombardier has sold a total of 1,300 metro cars so far in China, it faces stiff competition from local rivals that enjoy much lower operating costs.
The domestic advantage stretches to the operation of the metro lines themselves. Bombardier has only ventured into this territory once: It built the shuttle service at Beijing airport’s terminal three, and is contracted to operate and maintain the system for two years. Zhang believes such opportunities are few and far between.
“We hope to do more of this [management service], but it really depends on what the customer wants,” he said.
The one foreign firm to make significant headway in subway construction and operation in China is MTR Corp, the firm behind Hong Kong’s metro system.
MTR Corp has a 49% stake in Beijing metro line four, which is run as a public-private partnership (PPP) with two firms owned by the Beijing government. It also put forward the entire US$875 million budget for the Shenzhen metro’s line four under a build-operate-transfer (BOT) structure, which will ultimately see the line return to state control.
“We continue to explore further investment opportunities in other cities including Hangzhou, Suzhou, Tianjin, Wuhan and Shenyang,” MTR Corp told CHINA ECONOMIC REVIEW.
Although MTR Corp may continue to make progress in metro construction, a clutch of domestic companies will remain the big winners. This is particularly true for the high-speed intercity rail lines.
“The major infrastructure firms in the sector will all benefit from this investment because their capacity is so high,” said Jack Xu, a Shanghai-based analyst with Sinopac, the Taiwan bank. “The government is also more likely to place orders with them than anyone else.”
These major players are China Railway Group (CRG) and China Railway Construction (CRC), which account for about 90% of all railway construction nationwide. Between them they secured US$46.2 billion in new contracts during the first half of 2008. Rail projects account for 50-60% of the total.
The money for these contracts comes from the Ministry of Railways (the high-speed intercity lines) or local governments (urban mass transit). The BOT and PPP models may have gained a foothold in the metro market, but the funding structures for the intercity lines – which tend to require a much larger total investment – are far less sophisticated.
Furthermore, many of the planned new rail lines are intended to foster economic growth in western China, which means social need is often put before profit.
“No foreign investor would enter into this kind of project without a guarantee of a certain level of revenue and the government isn’t allowed to do this,” said Stéphane Vernay, a Beijing-based partner at law firm Gide Loyrette Nouel.
Vernay believes the only way to ensure foreign – or even general private sector – participation is to copy the Hong Kong buisness model whereby parcels of land are attached to projects. MTR Corp, for example, is able to offset the costs of installing rail lines in Hong Kong by building apartments on the extra land.
However, Manmohan Parkash, senior rail transport specialist at the Asian Development Bank (ADB) says the investor roster is already becoming more diverse. For example, the Taiyuan-Zhongwei line, which will run from Shanxi to Ningxia, is backed by the Ministry of Railways, three provincial authorities and one private group, as well as the ADB.
In addition to provincial authorities and private enterprises, Parkash expects firms like CRG and CRC to join the ranks of investors, effectively taking stakes in the projects they are currently only contracted to build. Pension funds, which are well-suited to long-term investments like rail projects, are also possible participants.
But this can’t happen overnight.
“To do all of this you need the proper environment, a more open system,” Parkash said. “You need a separate company structure which takes over from the Ministry of Railways and has its own profit and loss account and more clarity over things like tariffs.”