WTO-Policy Reform Support to Ministry of Railways (Financed by the ADB)
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T echnical Assistance Consultant’s Report ______________________________________________________________________________________________________ Project Number: TA: PRC 4325 May 2007 People’s Republic of China WTO-Policy Reform Support to Ministry of Railways (Financed by the ADB) Prepared by TERA International Group (TERA) Virginia, U.S.A. For Ministry of Railways This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. ASIAN DEVELOPMENT BANK AND GOVERNMENT OF THE PEOPLE’S REPUBLIC OF CHINA MINISTRY OF RAILWAYS TA PRC 4325: WTO-POLICY REFORM SUPPORT TO MINISTRY OF RAILWAYS MAIN FINAL REPORT This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. All the views expressed herein may not be incorporated into the proposed project’s design. Prepared By: TERA INTERNATIONAL GROUP (TERA) 107 E. HOLLY AVENUE, SUITE 12 STERLING, VIRGINIA 20164, U.S.A. TELEPHONE: ++1-703-406-4400 FACSIMILE: ++1-703-406-1550 April 16, 2007 TERA INTERNATIONAL GROUP, INC. TA PRC 4325: WTO-POLICY SUPPORT TO MOR CURRENCY EQUIVALENTS (as of 24 April 2007) Currency Unit – CNY (yuan) CNY1.00 = $0.12928 $1.00 = CNY 7.7349 The exchange rate of the yuan is determined under a floating exchange rate system. In this report, the rate used is the rate prevailing at the above date. ABBREVIATIONS AAR American Association of Railroads ADB Asian Development Bank BNSF Burlington Northern & Santa Fe Railway Co BR British Rail BRB British Railways Board CN Canadian National Railway Company CPI Consumer Price Index CPR Canadian Pacific Railway CR Chinese Railways CRCTC China Railway Container Transport Company DB AG Deutsche Bahn AG DECOs Diversified Economy Companies EA Executing Agency EC European Commission EU European Union FCTIC Foreign Capital Import and Technology Center FRA Federal Railway Administration FYP Five-Year Plan GATS General Agreement on Trade in Service JNR Japanese National Railway JVs joint ventures MFN most favored nation MOF Ministry of Finance MOFTEC Ministry of Trade and Economic Cooperation MOR Ministry of Railways NDRC National Development and Reform Commission ORR Office of Rail Regulation PKM passenger kilometers PRC People’s Republic of China PSOs public service obligations RCF Railway Construction Fund SNCF Société Nationale des Chemins de fer Français TA Technical assistance TERA TERA International Group, Inc. TKM ton kilometers TU Traffic Units UIC the Union Internationale des Chemis de Fer UP Union Pacific Railroad Co. WTO World Trade Organization NOTES (i) The fiscal year (FY) of the Government and its agencies ends on 31 December. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2005 ends on 31 December 2005. (ii) In this report, “$” refers to US dollars. TERA INTERNATIONAL GROUP, INC. - i - TA PRC 4325: WTO-POLICY SUPPORT TO MOR TABLE OF CONTENTS EXECUTIVE SUMMARY ……………………………………………………………………………………. i CHAPTER 1: BACKGROUND OF THE STUDY ................................................................................I 1.1 COMPARISON OF CHINESE RAILWAYS WITH FOREIGN RAILWAYS.......................1 1.2 MAJOR CHALLENGES FACING MOR..........................................................................6 CHAPTER 2: REALISTIC SIGNIFICANCE OF CHINA’S COMMITMENT TO WTO .......................12 2.1 COMMITMENT MADE BY CHINA ON ACCESSION TO WTO ....................................12 2.2 OTHER COUNTRIES’ COMMITMENT TO WTO .........................................................14 2.3 CHANGES WTO COMMITMENT WILL BRING VIS-A-VIS CURRENT STATUS ........15 2.4 RESISTANCE TO IMPLEMENT SUBSTANTIVE WTO COMMITMENT ......................15 2.5 REALISTIC SIGNIFICANCE OF WTO COMMITMENTS TO THE RAILWAY SECTOR ......................................................................................................................16 CHAPTER 3: RAILWAY’S PROBLEMS AND DEVELOPMENT TRENDS IN THE WORLD ...........18 3.1 PROBLEMS FACED BY MOST RAILWAY SYSTEMS.................................................18 3.2 DEVELOPMENTS FOR COMMERCIALIZING RAILWAYS .........................................21 3.3 COMPETITIVE STATUS OF RAILWAYS IN THE PRC ................................................23 3.4 CRITERIA FOR NEW RAILWAYS AND NEW RAILWAY ENTERPRISES ...................25 CHAPTER 4: MAJOR CHALLENGES FACED BY CR....................................................................27 4.1 CAPACITY CONSTRAINTS ON CR ............................................................................27 4.2 PRESSURE FOR DEVELOPMENT.............................................................................28 4.3 DIFFICULTY FOR GOVERNMENT TO FULFILL ITS OBLIGATIONS .........................30 4.4 CONDITIONS FOR PRIVATE CAPITAL TO INVEST IN RAILWAYS ...........................30 4.5 CONDITIONS AND MODALITIES OF PRIVATE INVESTMENT IN RAILWAYS ..........34 CHAPTER 5: OPPORTUNITIES AND CHALLENGES BROUGHT BY ACCESSION TO WTO......37 5.1 ATTRACTING INVESTMENT, TECHNOLOGY, MANAGEMENT AND INSTITUTIONAL CONCEPTS......................................................................................38 5.2 SPEEDING UP RAILWAY DEVELOPMENT THROUGH RAILWAY REFORM ............39 5.3 RAILWAY SECTOR RESTRUCTURING AND COMPETITION ...................................40 5.4 SIGNIFICANT CHANGES NECESSARY FOR CR SUCCESS....................................42 CHAPTER 6: PROBLEMS TO BE RESEARCHED AND RESOLVED ............................................44 6.1 SEPARATION OF GOVERNMENT AND ENTERPRISE FUNCTIONS........................44 6.2 SEPARATION OF INFRASTRUCTURE FROM OPERATIONS...................................46 6.3 MONOPOLY OPERATION ...........................................................................................48 6.4 TARIFF REFORM ........................................................................................................49 6.5 PUBLIC SERVICE OBLIGATIONS...............................................................................50 6.6 OPENING OF RAILWAY SECTOR - WORLD EXPERIENCE......................................51 CHAPTER 7: OVERVIEW OF RECOMMENDATIONS ON ADJUSTING CHINA’S RAILWAY POLICIES..................................................................................................................53 7.1 COMMERCIALIZE THE ENTERPRISE .......................................................................53 7.2 SEPARATION OF REGULATION.................................................................................54 TERA INTERNATIONAL GROUP, INC. - ii - TA PRC 4325: WTO-POLICY SUPPORT TO MOR EXECUTIVE SUMMARY 1. INTRODUCTION 1. This report summarizes the activities and outputs of an Asian Development Bank (ADB) Technical Assistance (TA) Project (TA 4325-PRC) provided to China’s Ministry of Railways (MOR) with the objectives of (i) assisting the MOR to review the potential impacts of China’s accession to the World Trade Organization (WTO) on the railway sector; (ii) assess MOR's preparedness to address these impacts; and (iii) recommend actions and policy reform support needed to meet these challenges. 2. The TA has been structured to utilize a range of resources both from within China as well as from around the world to provide analysis and commentary on the current status of MOR’s WTO- related reforms and their possible future directions which are aimed at improving the efficiency and performance of the rail sector. While global lessons learned can indicate the successes and pitfalls of reforms initiated in other countries, each WTO member has unique characteristics, and China is no exception. 3. China is a large country in which the rail sector plays a key role in carrying a considerable share of both freight and passengers, and no other large country can make this claim. Given rail’s significance in China, rapidly introducing initiatives that have succeeded in smaller countries or in countries in which rail predominately carries either freight or passengers, implies creating an unnecessarily high level of risk to long-term successful performance. 4. Addressing issues in a timely manner is always important. But it is more important to “get it right” in terms of identifying what needs to be done to improve efficiencies and laying out a realistic strategy to implement these measures: the benefits of reform should be substantial but the cost of instituting actions that are inappropriate or do not fully reflect the unique role of the rail sector in China could be immense. 5. This report summarizes lessons learned from other countries attempting rail sector reforms. The report also addresses what reforms MOR needs to implement as well as the impediments to implementation. Finally, the report charts a course for MOR to consider as it develops appropriate mechanisms to improve rail sector efficiencies. The TA’s Final Report consists of two volumes: (i) Main Report; and (ii) Supplementary Final Report. The Main Report is structured in five sections including: ¾ Section 1 is the Introduction. ¾ Section 2 discusses the WTO and the General Agreement on Trade in Services (GATS), China’s membership in the WTO, and the specific commitments and general obligations under the WTO Agreement. ¾ Section 3 addresses the opportunities and challenges for the rail sector arising from WTO membership. ¾ Section 4 details the issues facing the rail sector within the context of MOR’s commitments under the nation’s WTO accession. ¾ Section 5 summarizes