Subway boom brings worries of efficiency and losses

By Zhao Hongyi

More than 1,500 kilometers of subway are under construction in China today, and another 2,500 kilometers are set to start construction in the next five years with an investment of more than  1,000 billion yuan.

There will be 6,100 kilometers of subway lines in the country by 2020, according to a report by the bimonthly magazine Outlook. But the boom has exposed new problems of inefficient operation and financial loss plaguing the subway industry.

“In the 12th Five Year Plan (2011-2015), investment on subway construction will exceed investment in aviation construction and water transportation; it follows only railway and highway construction,” the report said, quoting Li Xiaojiang, director of the Institute of Urban Transportation Studies under the Ministry of Construction.

Last year, as many as 40 cities applied to expand or start their subway systems: 28 were approved by the central government. But the huge investment has raised doubts about how local city government can improve its efficiency and repay its subway loans.

China Development Bank is the most important financing source of most of these projects. By March this year, the bank had issued 345 billion loans with another 135 billion under consideration, Zhang Qingmin, director of project evaluation for the bank, said.

In 2003, the central government encouraged diversification of financing sources and operation. Local governments were allowed to finance their projects using overseas commercial banks and issue bonds and shares. They were also encouraged to use joint construction, operation and leasing rather than relying entirely on the central government.

But the financial crisis damaged market-oriented financing. “If you can obtain money from the central government, why would you try to get it on the market?” said Jin Yongxiang, general manager of Dayue Consulting Company in Beijing.

Wasted investment is estimated at 20 percent, Jin said.

Construction of underground subway lines costs 500-700 million yuan per kilometer; elevated subway cost 100-250 million; and light rails cost 50-100 million.

Operational efficiency of the lines is far from satisfactory. The Beijing municipal government invests 10 billion yuan from its budget each year to build new lines and another 2 billion to subsidize the operation of existing lines, said Wu Lishun, manager of financing and planning from  Beijing Investment.

By 2015, operational losses in Beijing will total 4.3 billion without factoring in depreciation and management costs. Total losses will reach 17 billion, equivalent to the construction of a new line.

The subway line in Shenzhen is in a similar predicament.

It has accumulated losses of more than 1 billion yuan since it went into operation earlier this decade. Total losses between now and 2016 – including depreciation of the equipment and facilities and interest paid on loans – are expected to reach 22 billion yuan.

“The problem in Shenzhen is that it has not formed a complete network of subway lines. It will be a common problem in most of the second-tier cities,” Jin said. In these cities, it could be even more serious.

“The problems are in the structure of the corporations constructing and operating the lines,”  said Wang Hao, former deputy director of Beijing’s State-owned Assets Supervision and Administration.

Subway operators are state-oriented rather than market-oriented. They have no interest or enthusiasm for efficiency or repaying their government loans.

Another problem is the aggressive attitude by which governments, both central and local, financed these projects. Neither level requested concrete supervision of the projects and detailed repayment schedules when issuing the huge loans, he said.