A recent World Bank research report speaks highly of China's high-speed rail construction achievements. It says construction costs are only two-thirds those of France, Germany and Japan, and tickets are one-fifth or a quarter of the price of tickets in those countries.

Far be it from me to deny or talk down China's high-speed railway construction achievements, but the data presented in this report and a simple calculation suggest that low construction costs and low ticket prices are bound to bring serious financial losses. This is a major worry for China's high-speed rail.

Also recently, the National Development and Reform Commission, the Ministry of Finance and the Ministry of Transport made public the administrative measures for a railway development fund aimed at attracting social capital in railway construction. Although the measures draw on methods used by private equity funds, allowing subsidiary funds to be established through a limited partnership to attract social capital, the measures have disappointed the market.

First, the measures can hardly be said to amount to introducing private equity. Even if the way private equity is involved is very market-oriented, private partners are not involved in managing the fund. Under the measures, China Railways Corporation is the fund's main sponsor, the Railway Development Fund commissions investment managers to operate it, and the investment manager is also China Railways Corporation. Furthermore, funds can be invested in projects approved by the central government. While institutional investors can get stable and reasonable returns from their investment, they are not directly involved in operating and managing the fund.

In other words, the fund has been set up and is being managed by China Railways Corporation, and in essence is still dependent on government credit to borrow from social capital. China Railways Corporation's balance sheet can be made to look good, railways funds being seen as an investment rather than as liabilities.

Second, because under this structure social capital does not take part in the management, the existing monopoly system and structure remains intact.

It is difficult to improve operational efficiency of railway investment. As financial reform and opening up have continued apace in recent years, capital costs have risen. If returns are too low, it will be extremely hard to attract social capital. If attractive returns with strong market appeal are the order of the day, China Railway Corporation's losses will increase, and the public will ultimately have to foot the bill.

In fact, private capital expects reform of the railways to be stepped up, with the monopoly gradually being broken, based on principles such as separating government functions from enterprise management.

In Chinese railways, the gap between supply and demand is still big, but it is not just railway lines that are missing. In fact, after several years of concentrated high-speed railway construction, the length of the network has increased significantly. What is missing is an improvement in quality.

As restructuring and upgrading of the economy continues, demand for transport and logistics also becomes more pressing. Individuals and businesses are crying out for all kinds of transport as part of a package of logistics service solutions that are available, but China Railways can only provide basic services that fall well short of this demand.

More advanced services that can meet that demand rely on the forces of the market to transform basic services through processing, integration and innovation.

Reforms in China's railways have opened up two important opportunities.

The first is the separation of government functions from business management. The former Railways Ministry has been integrated into the Ministry of Transport, giving a new management structure. If reforms continue on market principles, and encourage mergers and acquisitions between transport and logistics companies, regulatory obstacles in the administrative system will be broken.

Second, rapid development of the Internet and mobile Internet will profoundly change China's economic structure and promote new transport and logistics needs. It will also provide technical support for the integration and enhancement of transport and logistics.

In contrast, China Railways Corporation has stood apart from the market, and, being a monopoly, is devoid of free-enterprise acumen. It is not necessarily willing to upgrade its services to integrate with other modes of transport to form a new service.

This is the opportunity for private capital to enter the railways sector, and one of the dividends of that will be reform.

The future is promising if those in charge can be more innovative and forward-looking with reform, treating private capital as an active market innovator rather than as a cash cow. By further encouraging private capital to take part in railway investment, operation and management, China's railway will continue to grow in strength and make a greater contribution to China's economic transformation.

The author is a member of the Guangzhou Unirule Regional Development Research Center.

(China Daily European Weekly 07/18/2014 page9)