Jumbled affiliates working with China’s huge railway network generate big profits and, auditors say, bad business.
By Zhang Na, Caijing Magazine 5 November 2008
China’s state-run railway system has degenerated into a financial mess over the past three decades as local departments, in search of higher profits, eagerly pursued various sideline enterprises outside the core rolling stock.
These affiliates, ranging from warehousing and logistics to catering and tourism, have enjoyed strong growth thanks to their relationship with the rail system’s government umbrella, the Ministry of Railways. Profits from affiliates and the main transportation business are nearly equal.
But the National Audit Office in August found most affiliates of 17 railway bureaus and three transportation companies under the Ministry of Railways violated the government’s business rules, costing some 5.38 billion yuan.
For example, the auditors ruled, many affiliates use advantageous ties to the railway system to quash competition. And some railway officials take home extra paychecks by accepting nominal positions with affiliated enterprises.
Industry insiders think the audit uncovered only a fraction of the problematic finances. One source said most affiliates are inefficient. Railways vice Minister Peng Kaizhou admitted that one-fourth of the system’s affiliates lost a combined 1.01 billion yuan in 2005.
“The amount of money involved in illicit practices reported by the auditors may be conservative,” one expert told Caijing. “The real situation should be more serious.”
Complex Relations
Railway workers have long been dissatisfied with their heavy workloads and low wages, according to industry insiders. But sidelines opened doors to financial gains.
Initially, a source told Caijing, railway rules said only local bureaus could establish affiliated enterprises. But later the practice was allowed across the board, extending even to low-level railway departments and stations.
Most enterprises blur property rights and maintain complicated relations with railway departments. Assets and personnel are jumbled.
“Subsidiary companies were set up by railway departments or stations, which appointed management personnel,” a source at an affiliate in Chengdu told Caijing. “How can their relations be clear?”
The source also said the railway’s “core business has occupied our vehicles and computers. Since they appoint us, how can we say no?”
“They’ve always asked for money from affiliated companies,” the source added. “But no one knows where the money went.”
Meanwhile, affiliates have taken advantage of their close ties to railway departments. For instance, catering services enjoy monopolies aboard trains and in railway stations, despite customer complaints about poor quality and high prices.
Cradle for Corruption
Messy management and high profit potential fostered a cradle for corruption at affiliated businesses. The source in Chengdu said corruption is easy to find “in three parts of the railway system: affiliated businesses, construction projects and procurement.”
Some crooks get caught. For example, the former director of the Urumqi Railway Bureau, Song Dexi, was accused of bribery and detained this year by the Communist Party’s disciplinary agency. The charges stemmed from Song’s relations with the Jinlun Construction Co. Ltd., an affiliate of the Hami Railway Department.
Since the 1990s, Jinlun used its connections to win most major contracts for projects on the Urumqi and Hami rail systems. In 2005 the Hami Railway Department was dissolved, Song and Jinlun’s managers pocketed some 100 million yuan when the department’s assets were sold, investigators said.
A 2005 audit discovered a financial black hole at the Beiya Group, an affiliate of the Harbin Railway Bureau. Several officials were involved, including Li Shutian, then-director of the Beijing Railway Bureau. Li was known for aggressive efforts to form affiliates and make money for railway departments. But an industry expert said Li’s success relied on monopolies.
“Li used his power to get loans and assurances for affiliated companies,” said an official at the Beijing Railway Bureau. The value of those financial sweeteners has yet to be clarified.
Ignored Orders
Officially, railway authorities have tried for years to unravel the knotty situation. But their success rate has been low.
In 2000, the Ministry of Railways urged local bureaus to spin off the assets, finances and personnel of affiliated business. Three years later, the ministry issued restrictions for railway stations doing business with affiliates, ordering them to integrate small and large businesses.
Rong Zhaohe, a professor at Beijing Jiaotong University, told Caijing that Railway Minister Liu Zhijun has pushed for spinning off affiliates since he took the job in 2003. Liu’s efforts have faced various obstacles, but his effort started bearing fruit in 2006. For example, Rong’s study of the Wuhan Railway Bureau found relations between core and affiliated businesses had been clarified.
“The situation was similar in other railway bureaus, and the audit of 2007 was expected to show better results,” said Rong.
The Chengdu source said the ministry required spin-offs to be completed by the end of 2007. By then, all transactions between railway bureaus and affiliates were to follow customary business practices. Affiliates were encouraged to restructure.
The task was completed at the Chengdu bureau in December 2007, the source said. “Other bureaus should be were completed as well.”
Nevertheless, industry insiders think local bureau-affiliate relations remain fundamentally unchanged under China’s monopolized railway system.
Due to government price controls, the Chengdu source said, the railway’s core transportation business has long been a money loser. But railway departments have counted on affiliates to offset losses.
For example, the source said, about one-third of the revenue from the Chengdu system comes from affiliates. The situation is similar at other bureaus across the country.
The Chengdu bureau’s affiliates were expected to generate 10 billion yuan in revenues and 100 million yuan in profits this year. By 2012, revenues of 24 billion yuan and profits of 1 billion yuan were expected. Moreover, they bureau planned to transfer 16,000 staff members from core businesses to affiliates.
Profit potential has encouraged the railway system to rapidly expand affiliated business.
According to the ministry, affiliate assets totaled 89.2 billion yuan in 2007, and they earned 3 billion yuan on revenues of 130 billion yuan. That same year, the core railway business generated 330.8 billion yuan revenue.
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Profitable Affiliates Sidetrack Rail System
Jumbled affiliates working with China’s huge railway network generate big profits and, auditors say, bad business.
By Zhang Na, Caijing Magazine
5 November 2008
China’s state-run railway system has degenerated into a financial mess over the past three decades as local departments, in search of higher profits, eagerly pursued various sideline enterprises outside the core rolling stock.
These affiliates, ranging from warehousing and logistics to catering and tourism, have enjoyed strong growth thanks to their relationship with the rail system’s government umbrella, the Ministry of Railways. Profits from affiliates and the main transportation business are nearly equal.
But the National Audit Office in August found most affiliates of 17 railway bureaus and three transportation companies under the Ministry of Railways violated the government’s business rules, costing some 5.38 billion yuan.
For example, the auditors ruled, many affiliates use advantageous ties to the railway system to quash competition. And some railway officials take home extra paychecks by accepting nominal positions with affiliated enterprises.
Industry insiders think the audit uncovered only a fraction of the problematic finances. One source said most affiliates are inefficient. Railways vice Minister Peng Kaizhou admitted that one-fourth of the system’s affiliates lost a combined 1.01 billion yuan in 2005.
“The amount of money involved in illicit practices reported by the auditors may be conservative,” one expert told Caijing. “The real situation should be more serious.”
Complex Relations
Railway workers have long been dissatisfied with their heavy workloads and low wages, according to industry insiders. But sidelines opened doors to financial gains.
Initially, a source told Caijing, railway rules said only local bureaus could establish affiliated enterprises. But later the practice was allowed across the board, extending even to low-level railway departments and stations.
Most enterprises blur property rights and maintain complicated relations with railway departments. Assets and personnel are jumbled.
“Subsidiary companies were set up by railway departments or stations, which appointed management personnel,” a source at an affiliate in Chengdu told Caijing. “How can their relations be clear?”
The source also said the railway’s “core business has occupied our vehicles and computers. Since they appoint us, how can we say no?”
“They’ve always asked for money from affiliated companies,” the source added. “But no one knows where the money went.”
Meanwhile, affiliates have taken advantage of their close ties to railway departments. For instance, catering services enjoy monopolies aboard trains and in railway stations, despite customer complaints about poor quality and high prices.
Cradle for Corruption
Messy management and high profit potential fostered a cradle for corruption at affiliated businesses. The source in Chengdu said corruption is easy to find “in three parts of the railway system: affiliated businesses, construction projects and procurement.”
Some crooks get caught. For example, the former director of the Urumqi Railway Bureau, Song Dexi, was accused of bribery and detained this year by the Communist Party’s disciplinary agency. The charges stemmed from Song’s relations with the Jinlun Construction Co. Ltd., an affiliate of the Hami Railway Department.
Since the 1990s, Jinlun used its connections to win most major contracts for projects on the Urumqi and Hami rail systems. In 2005 the Hami Railway Department was dissolved, Song and Jinlun’s managers pocketed some 100 million yuan when the department’s assets were sold, investigators said.
A 2005 audit discovered a financial black hole at the Beiya Group, an affiliate of the Harbin Railway Bureau. Several officials were involved, including Li Shutian, then-director of the Beijing Railway Bureau. Li was known for aggressive efforts to form affiliates and make money for railway departments. But an industry expert said Li’s success relied on monopolies.
“Li used his power to get loans and assurances for affiliated companies,” said an official at the Beijing Railway Bureau. The value of those financial sweeteners has yet to be clarified.
Ignored Orders
Officially, railway authorities have tried for years to unravel the knotty situation. But their success rate has been low.
In 2000, the Ministry of Railways urged local bureaus to spin off the assets, finances and personnel of affiliated business. Three years later, the ministry issued restrictions for railway stations doing business with affiliates, ordering them to integrate small and large businesses.
Rong Zhaohe, a professor at Beijing Jiaotong University, told Caijing that Railway Minister Liu Zhijun has pushed for spinning off affiliates since he took the job in 2003. Liu’s efforts have faced various obstacles, but his effort started bearing fruit in 2006. For example, Rong’s study of the Wuhan Railway Bureau found relations between core and affiliated businesses had been clarified.
“The situation was similar in other railway bureaus, and the audit of 2007 was expected to show better results,” said Rong.
The Chengdu source said the ministry required spin-offs to be completed by the end of 2007. By then, all transactions between railway bureaus and affiliates were to follow customary business practices. Affiliates were encouraged to restructure.
The task was completed at the Chengdu bureau in December 2007, the source said. “Other bureaus should be were completed as well.”
Nevertheless, industry insiders think local bureau-affiliate relations remain fundamentally unchanged under China’s monopolized railway system.
Due to government price controls, the Chengdu source said, the railway’s core transportation business has long been a money loser. But railway departments have counted on affiliates to offset losses.
For example, the source said, about one-third of the revenue from the Chengdu system comes from affiliates. The situation is similar at other bureaus across the country.
The Chengdu bureau’s affiliates were expected to generate 10 billion yuan in revenues and 100 million yuan in profits this year. By 2012, revenues of 24 billion yuan and profits of 1 billion yuan were expected. Moreover, they bureau planned to transfer 16,000 staff members from core businesses to affiliates.
Profit potential has encouraged the railway system to rapidly expand affiliated business.
According to the ministry, affiliate assets totaled 89.2 billion yuan in 2007, and they earned 3 billion yuan on revenues of 130 billion yuan. That same year, the core railway business generated 330.8 billion yuan revenue.
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