In the last decade, China has developed the world’s largest high-speed rail network. The question now facing China Railways Corporation (CRC), is how to finance its continued development. The recent World Bank report, titled Attracting Capital for Railway Development in China, provides some insight into this, with case studies about how companies in China and railways in seven other countries have attracted capital and made capital budgeting decisions to support their strategic development.
“We are responding to China Railway Corporation’s interest to explore new capital sources, and suggesting different financing channels as a way to leverage the value of its assets and introduce market-based business models to the sector,” said Martha Lawrence, World Bank’s Senior Railway Specialist and a co-author of the report.
Based on CRC’s financial needs and opportunities, the report studies five categories of relevant cases about how to attract investments and diversify financing sources. The 15 cases are from China, France, India, Japan, Poland, Russia, United Kingdom and United States and cover portfolio management, financial leasing, equity flotation, public-private partnership (PPP), and leveraging real estate and land assets. The features of each mechanism and the keys for successful implementation are illustrated.
The study suggests that CRC can (a) expand its financial sources through organizing and managing its subsidiary entities to maximize their value and generation of cash flows; (b) effectively apply PPP concepts through land value capture and integrated land development; (c) capture its right-of-way value through telecommunications services; (d) raise new equity through IPO of profitable and well governed subsidiary entities; and (e) leverage financing from the railway’s large fixed asset base.
The report concludes that railways worldwide have been able to employ a wide range of mechanisms to attract investment capital to the sector. A common requirement for the investor is that the investment is profitable and the profit is commensurate with the risks undertaken. CRC may consider the cost, benefits and risks of each mechanism and employs the ones that are suited to its needs.