After halting approval of all new subway and light rail projects at the end of last year, the central government is expected to announce a comprehensive package of policies, including fiscal subsidies, to encourage urban rail transportation development.

The new policies may give the green light to investment of at least 200 billion yuan (US$24.1 billion) for the construction of new urban rail systems in the next five years and create a US$16-billion demand for trains over the next 20 years.

As soon as the State Council implements the new approval procedures, a number of earlier projects that were stalled even though they met the requirements will get the go-ahead, according to an official with China International Engineering Consultancy Co who asked to remain anonymous.

Competition will be introduced in the construction and operation of urban rail projects, now monopolized by State-owned enterprises, while reforms to the administration system for urban rail transport systems will also be carried out.

As part of the reforms, supervision rights may come under one governmental department instead of several as is now the case.

Foreign and private investors will be allowed to launch construction or operation joint ventures and co-operative companies, or entrust other companies to operate urban rail systems.

For the first time, the government will grant fiscal subsidies and other incentives to secure the interests of private and foreign investors, the official said.

The government will also support contractors and operators to optimize their assets, issue long-term construction bonds and go public to gather financing, he said.

Furthermore, the new policies are expected to adjust the current requirement of a localization ratio of at least 70 per cent for foreign investors, the official said but did not elaborate.

The policy shift results from suggestions made by the consulting company after it concluded that the government should encourage construction of more subways and light rail systems as a vital solution to urban transportation needs.

A comprehensive nationwide inspection of urban traffic problems recently carried out by the company, with the authorization of several ministries including the National Development and Reform Commission (NDRC), led to the recommendation.

China International Engineering Consultancy Co plays an important role in government decisions on urban rail transportation, as the only appraisal organization authorized to evaluate such projects before they are submitted to the commission for official approval.

Meanwhile, strong government support for the new policies is expected to attract a new wave of investment.

Urban rail projects are usually only attractive to investors when they can foresee profits, said Ma Jian, a senior official with the State Development Bank, which promised to lend a total of 49 billion yuan (US$5.9 billion) for such projects by the end of last month. The actual amount of loans made by the bank reached 32 billion yuan (US$3.9 billion) by then.

Motivated by the 2008 Beijing Olympic Games and 2010 Shanghai World Expo, as well as China's fast economic growth and massive urbanization, rail transportation will kick into high gear in the next 10 years.

Construction Craze

Total investment in urban transportation is expected to reach 800 billion yuan (US$96.4 billion) during the next five years, according to an NDRC estimate, of which at least 200 billion yuan (US$24.1 billion) will be injected into subways and light rail systems.

Of the 34 Chinese cities with populations in excess of one million each, 20 are building or planning to construct rail communication systems.

Altogether 14 such projects are currently under construction in eight cities, with a total designed length of more than 340 kilometres and demanding a combined investment in excess of 100 billion yuan (US$12 billion), said Qin Guodong, a senior researcher with the subway and light rail research centre under the Ministry of Construction.

Of those eight cities, Beijing, Shanghai and Guangzhou are expanding their rail systems while Nanjing, Changchun, Shenzhen, Chongqing and Wuhan are building their first such projects.

In addition, five new projects have already won NDRC approval, including 110 kilometres of track in Beijing with a planned investment of 50 billion yuan (US$6 billion).

Another 10 cities, -- Shenyang, Chengdu, Xi'an, Dalian, Qingdao, Tianjin, Harbin, Zhengzhou, Suzhou and Ningbo -- are also planning rail systems.

In total, 18 new projects with a combined length of 390 kilometres have passed appraisal by China International Engineering Consultancy Co, requiring a total of 136 billion yuan (US$16.4 billion), according to the unnamed official.

"China will become the world's largest urban rail transport market in the next five to 10 years," he said.

Beijing has announced plans to extend its city rails by another 157 kilometres to 252 kilometres by 2008, indicating an annual investment of 10 billion yuan (US$1.2 billion), while Guangzhou, which will soon start building its third subway line, is planning another five projects with a combined length of 170 kilometres and estimated investments totalling 73.8 billion yuan (US$9 billion).

According to its long-term plans, Shanghai, which already has 65 kilometres of mass-transit track, will build another 11 subway lines and 10 light rail systems covering 384 kilometres and 186 kilometres, respectively. The plans require an annual investment of 10 billion yuan, while completion of all of the projects will come to more than 300 billion yuan (US$36.1 billion).

Shenzhen also plans to invest 69 billion yuan (US$8.3 billion) into building 250 kilometres of rail systems by 2010. The city government has approved construction plans for eight lines and hopes to start building four of the lines next year.

Meanwhile, a number of cities, including Wuhan and Nanjing, are already planning for additional projects after their first subways go into operation either next year or in 2005.

The NDRC estimates that China's urban rail systems will stretch to 2,000 kilometres in 2050 and be capable of accommodating 50 to 80 per cent of public transport commuters.

China's first subway started running in Beijing in 1969, and only four cities, including Shanghai, Tianjin and Guangzhou, have metro rail systems.

The sudden explosion in new urban rail projects will create untold business opportunities for foreign manufacturers of related facilities.

"China still lags behind international levels in the production of trains and power supply and signalling systems," said Qian Qingquan, a member of the China Academy of Engineering and a professor at Xinan Jiaotong University.

The demand for trains alone will reach 20,000 units in the next 20 years, worth US$16 billion at the very least. And Shanghai, Guangzhou and Shenzhen are all importing their trains from France and Germany, rather than using domestically made units.

Potential Problems

Commenting on the construction craze, many experts warn the government to apply the new policies with caution.

A strict approval process should be in place to control the scale of construction to avoid potential problems and waste of tax-payers' money.

First, subway construction is very expensive and investment returns are slow and thin. Blind construction may lead to huge financial burdens and create losses.

Second, China, lacking professional talent and sophisticated know-how, along with design, development and manufacturing abilities, will inevitably have to rely on expensive imports, which, in turn, will force up construction costs.

Third, without uniform standards governing the construction and operation of urban rail systems in China, localization and linking of systems among different cities could suffer.

The Yangtze and Pearl river deltas are already facing this problem in their efforts to join their urban rail systems.

Fourth, as many cities considering building rail systems have no similar previous experience, authorities should spend more time on preparation, by studying their overall urban development plans to come up with mature construction schemes, for example.

Fifth, city authorities should carefully investigate the feasibility of their rail system plans.

According to researchers with the State Development Bank who investigated the rail transportation systems of 120 foreign cities, a city must have a population of at least three million, cover an area of 200 square metres, boast a gross domestic product of 100 billion yuan (US$12 billion) with fiscal revenues in excess of 10 billion yuan (US$1.2 billion), and be sure of a peak passenger flow of 30,000 people before even considering building such a system.

Experts caution that China's tradition of blind construction could surface in the midst of the urban rail system boom.

The central government must strive to discourage an irrational investment craze, they say. Any new projects must be carefully evaluated for their feasibility, cost-effectiveness and the financial capabilities of their home cities before being approved.

(China Daily HK Edition September 16, 2003)