Technical Assistance Consultant’s Report

Project Number: TA 4351-PRC November, 2005

People’s Republic of China: Policy Reform in Road Transport

Prepared by

CPCS Transcom CPCS Transcom

CPCS Transcom CPCS TRANSCOM in association with

and China Academy of Transportation Sciences

For the Ministry of Communications

CURRENCY EQUIVALENTS (as of 14 November 2005) Currency Unit – Yuan (CNY) CNY1.00 = $0.1234 $1.00 = CNY 8.10495

ABBREVIATIONS

3PL – third-party logistics (service provider) AAMVA – American Association of Motor Vehicle Administrators ADB – Asian Development Bank APPR – Action Plan for Policy Reform ASP – application software platform ATAC – Australian Transport Advisory Council ATC – Australian Transport Council BOT – build-operate-transfer CAAC – Civil Aviation Authority of China CATS – China Academy of Transportation Sciences CB – Communications Bureau CCMTA – Canadian Council of Motor Transport Administrators CCRS – Chinese Computer Reservation System CCTA – China Communications and Transportation Association COE – collective-owned enterprise COF – Certificate of Fitness CPC – Certificate of Professional Competence CPCS – CPCS Transcom Ltd CPSM – City Public Service Management CRTA – China Road Transport Association CVSA – Commercial Vehicle Safety Alliance DFID – Department for International Development DOT – Department of Transportation DST – double-stacked train ECMT – European Conference of Ministers of Transport EDI – electronic data interchange EIU – Economist Intelligence Unit EPA – Environmental Protection Administration EPB – Environmental Protection Bureau EPD – Environmental Protection Department ESAL – Equivalent Standard Axle Load EU – European Union FDI – Foreign Direct Investment FHWA – Federal Highway Administration FMCSA – Federal Motor Carrier Safety Administration GDP – Gross Domestic Product GMS – Greater Sub-region GVW – gross vehicle weight hrs – hours HSRI – Highway Science Research Institute ICAD – Industry and Commerce Administration Department IFTA – International Fuel Tax Agreement IRP – International Registration Plan ISO – International Standards Organization IT – information technology JV – joint venture kg – kilogram km – kilometer LCV – long combination vehicle LTL – less-than-truckload m – meter MCom – Ministry of Commerce MCon – Ministry of Construction MIS – Management Information System MOC – Ministry of Communications MOFTEC – Ministry of Foreign Trade and Economic Cooperation MOR – Ministry of Railways MOT – Ministry of Transport MOU – Memorandum of Understanding MPS – Ministry of Public Security NAFTA – North American Free Trade Agreement NBS – National Bureau of Statistics NDRC – National Development and Reform Commission NGO – non-government organization NHTSA – National Highway Traffic Safety Administration NLISC – National Logistics Information Standard Committee NLTS – National Logistics Technology Standard Committee NRTC – National Road Transport Commission NSC – National Safety Code NTC – National Transport Commission NTHS – National Trunk Highway System OBA – Office of Burden Alleviation p.a. – per annum PCD – Provincial Communications Department PDRC – Provincial Development and Reform Commission PFTECD – Provincial Foreign Trade and Economic Cooperation Department PICD – Provincial Industry and Commerce Department pm – person-months PPC – Provincial Planning Commission PRC – People’s Republic of China PSB – Public Security Bureau PSD – Public Security Department R&D – research and development RTO – Road Transport Ordinance SC – State Council SCOT – Standing Committee on Transport SDPC – State Development Planning Commission (now NDRC) SOE – state-owned enterprise SOP – standard operating procedure SPB – State Postal Bureau STL – Society of Transportation and Logistics t – tonne TA – technical assistance TAB – Transport Administration Bureau

TAC – Transportation Association of Canada TEU – twenty-foot equivalent unit TfL – Transport for London TL – truckload TLI-AP – The Logistics Institute-Asia Pacific TMS – transportation management system TOR – terms of reference TPRI – Transport Planning Research Institute TRB – Transportation Research Board UITP – International Union of Public Transport UK – United Kingdom US – United States vehs/day – vehicles per day VWD – vehicle weight and dimensions WB – World Bank WDS – Western Development Strategy WIM – weigh-in-motion WMS – warehouse management system WTO – World Trade Organization

NOTE

In this report, "$" refers to US dollars.

CONTENTS Page

I. INTRODUCTION AND BACKGROUND 1 A. Introduction 1 B. Background and Objectives 1 C. Approach 4 D. Road 6 E. Policy and Regulatory Framework 13 F. Sector Performance and Policy and Regulatory Issues 22 G. Alternative Regulatory Approaches 31

II. FREIGHT TRANSPORT 47 A. The Changing Role of Road Freight Transport 47 B. Issues in Road Freight Transport 60 C. Reform Options in Road Freight Transport 81

III. PASSENGER TRANSPORT 88 A. Issues in Road Passenger Transport 88 B. Reform Options in Road Passenger Transport 118

IV. A STRATEGY FOR REFORM 122 A. A New Approach to Road Transport Regulation 122 B. Action Plan 129

APPENDIXES 1. ADB ROAD SECTOR POLICY REFORM PLAN 145 2. VEHICLE INSPECTION AND MAINTENANCE REQUIREMENTS 147 3. TRUCK COSTS 149 4. BUS SERVICE LICENSING PROCEDURES 155 5. BUS SERVICE STANDARDS 158 6. OUTLINE TASKS FOR ROAD COST RECOVERY STUDY 161 7. OUTLINE TASKS FOR VWD AND SAFETY STANDARDS STUDY 163 8. OUTLINE TASKS FOR VEHICLE SAFETY COMPLIANCE PROJECT 165 9. ACTION PLAN WORKSHOP 168

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I. INTRODUCTION AND BACKGROUND

A. Introduction

1. This project, carried out for the Ministry of Communications (MOC), was to result in an agreed framework and action plan for reforming the policies and regulations governing road transport in the People’s Republic of China (PRC)1. In the context of China’s World Trade Organization (WTO) commitments – lowering tariffs, opening up markets, encouraging competition and integrating its economy with the world’s – it arose from concerns that the efficiency and quality of the PRC’s road transport system, though much improved in recent years, might still fall short of the needs of users and the level required to support the country’s rapid economic growth and transformation.

B. Background and Objectives

2. China has seen unparalleled economic and social change since it began its reforms in the early 1980s. Spurred by a relaxation of investment controls, deregulation of many markets, easing of restrictions on private enterprise and a progressive withdrawal of the state sector from commerce, and supported by substantial investments in physical and social infrastructure, the economy has boomed: growth has exceeded eight percent p.a. for most of the last 20 years, with corresponding increases in the value and volume of external trade and foreign direct investment (FDI). In only the last year, between 2003 and 2004, transport demand in passenger-kms has grown by 18.1 percent and freight tonne-kms by 28.9 percent2. China’s share of world trade grew from 5.7 percent in 2003 to 6.9 percent at the end of 2004. 3. An efficient transport system is crucial to further growth. At the end of the 1980s users suffered from a limited, poorly-maintained road network, old and inefficient equipment, unreliable services, an emphasis on bulk movements of low-value commodities, lack of competition between providers and low standards of safety, productivity and customer service. Each mode – road, rail, inland waterway, air, coastal and maritime – was managed independently of the others. Policies and investments focused on achieving higher output with little recognition of the changing needs of the economy. Some deregulation had started in road transport, with state-owned enterprises (SOEs) permitted to offer services outside their main business areas and private operators allowed to transport state goods, but an efficient, competitive road transport system had yet to develop and services remained dominated by the relatively inefficient state sector. 4. In 1993, with ADB assistance, the Government commissioned a review of road transport3. It recommended separating the Government’s monitoring, regulatory and execution functions; an umbrella transport law to help integrate all modes; improved inter-ministry cooperation in tackling road safety; improvements at provincial and local government levels (better information systems, better monitoring of SOE performance 4 , partial relaxation of passenger fare controls, deregulation of freight tariffs, consistent licensing for inter-provincial operators, removal of barriers to out-of-province operators, easier market entry to the trucking industry and a new licensing system for freight forwarders); for freight transport SOEs, greater

1 Work on the project started at the end of February 2005 and was carried out over 20 weeks. 2 Source: MOC. 3 NEA Transport Research and Training in association with MVA Asia Limited, Efficiency Improvements in the Road Transport Sector, MOC and ADB, December 1994. 4 In this report, SOEs include enterprises owned by all levels of government, whether national, provincial or local.

2 management and operational autonomy, a re-equipment program, a more customer-oriented focus and inter-carrier agreements to improve back-haul load factors; a national training strategy implemented through industry associations; and pilot projects to reform SOE management and deal with labor redundancy issues. 5. A World Bank study examined road freight transport shortly afterwards5. It concluded that the industry was ill-placed to serve the rapidly-growing, market-oriented manufacturing and service sectors. Its prescriptions included: refocusing MOC on facilitating competitive markets; internalizing the costs of pollution, accidents and congestion through user charges; establishing basic rules for fair competition and translating them into clear regulatory guidelines; accelerating the growth of private trucking while corporatizing and privatizing SOEs to create a competitive market with a level playing-field6; opening up the industry to modern trucking technologies and management methods; fostering intermediaries (consolidators, freight forwarders and agents); encouraging the development of multimodal, door-to-door services; developing professional associations and other stakeholder groups; and linking road transport policy reforms with those of other sectors, recognizing that road transport is an integral part of a larger supply chain. Instead of imposing controls through licenses and prescribed tariffs, a simple, transparent system of economic regulation was recommended, allowing businesses to register without prior approval from transport authorities and freeing operators to set their own tariffs, but prohibiting anti-competitive practices and developing location-specific solutions to environmental and congestion problems. 6. A great many of these proposals have been implemented. A competitive private sector is now active in much of road freight transport; freight rates are no longer controlled; passenger fares can be set locally within MOC guidelines; many SOEs have been converted into joint- stock companies7 and many own-account operations have been hived off and made to compete in the market. Market-driven reforms continue under MOC’s long-term vision for 2020 and its 2001-2010 Planning Compendium for Road Transport Development, boosted by China’s WTO accession in December 2001. 7. Before embarking on its 2001-2010 strategy, MOC issued a consultative document, Ideas on Road Transport Reorganization, which outlined the following restructuring aims: • restructuring the SOEs – separating management and operations from ownership and administration, seeking economies of scale by restructuring major enterprises while leaving smaller ones to fend for themselves. Priority was to be on consolidation to improve market concentration, reducing the large numbers of small, poorly-managed companies, and longer- term planning to balance commercial interests with those of labor8. • capacity restructuring – modernizing vehicle technologies and improving operating efficiency while raising safety and environmental standards, and achieving a better balance between demand and capacity in all regions and levels of administration.

5 World Bank, China: Strategies for Road Freight Development, 1995. 6 This would also require unifying taxation, eliminating discrimination in procurement, ending subsidies, diversifying SOE ownership and separating it from management, delegating more responsibility to managers, strengthening financial, management and operational skills, and better corporate planning. 7 A joint-stock limited company is intended to be independent of its sponsoring government department. It must have at least five shareholders, one of whom may be the Government, and a separate supervisory board. Its board has authority on all key decisions; the Government acts like a normal shareholder but may not dictate or intervene in management decisions. 8 With a large pool of unregistered migrant labor and acknowledged under-employment, the Government is concerned about the impact of SOE layoffs on social stability. Any strategy for rationalization must be accompanied by measures to cushion the negative impacts on employees.

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• operational restructuring – developing, for freight, an integrated logistics system and, for passengers, a coordinated network of frequent, demand-responsive, high-quality and safe services; ensuring that access to transport is available to all villages; improving the quality of services to tourists; and strengthening supporting services including vehicle maintenance and repair. • transport system restructuring – enhancing the competitiveness of road transport in a multimodal system; improving service integration through terminals and interchanges; improving productivity through better use of modern information technology (IT) and market-based reform of traditional forms of transport organization. 8. MOC’s plan for 2010 reflects these aims while acknowledging many remaining constraints on the sector’s ability to respond to changing demand: lack of flexibility; high costs, low productivity and other inefficiencies; a poorly-coordinated policy/planning framework and shortcomings in legislation, implementation and enforcement; missing links in the trunk road network; low-quality management, over-manning and poor use of IT and other technologies; a poorly-developed system of terminals and interchanges; lack of equipment standardization; pervasive overloading of trucks, causing accelerated road damage; and poor safety standards. MOC has adopted an eight-point strategy within a set of overall policy goals that emphasize strengthening the sector’s ability to respond to changing and growing demands, improved integration and coordination of regulations at all levels of government, reducing the incidence of truck overloading and illegal operations and establishing a fair, competitive market in the supply of transport services: • road transport market – consolidating the road transport industry, improving the regulatory framework, establishing transparent rules governing management and operations, and accelerating the change of ownership from SOEs to joint-stock companies • road passenger transport – improving the quality and speed of passenger services, rationalizing route structures, improving accessibility in rural areas and providing better conditions for passengers • road freight transport – raising the quality and speed of freight services, reducing overloading, raising vehicle standards (with greater use of containers and larger, multi-axle trucks) and fostering the development of integrated logistics service providers • road terminals – improving the planning, location and management of passenger and freight terminals, and opening up opportunities to private investors • road transport safety – strengthening safety management through market-entry licensing, tighter controls over movements of dangerous cargoes, monitoring enterprise safety standards more effectively, and upgrading standards of driver training, vehicle repair and road safety engineering • road pricing – establishing a more appropriate balance between tolls and other fees as the basis for infrastructure cost recovery • technology – increasing the take-up of IT and other technologies, improving the efficiency of energy use and reducing pollution • management – developing more effective ways of integrating policy formulation, regulation, planning, operations and enforcement. 4

9. Further support for policy reform comes from the National Development and Reform Commission (NDRC). Its logistics strategy for 2001-20209 reviews emerging trends in logistics and supply-chain management and provides policy guidelines for responding to the challenges of globalization, the demands of international and domestic markets, increased supply-chain competition and the need for greater intermodal transport efficiency. These guidelines focus on: • developing logistics infrastructure, including integrated logistics parks, freight-forwarding centers, warehousing etc, to improve supply-chain efficiency • greater use and integration of information systems, to link markets and lower transaction costs • improving the interface between transport modes to lower transfer costs and allow each mode to play its optimal role in the distribution chain • improving understanding of market requirements among Chinese logistics enterprises • strengthening management methods among service-providers • encouraging competition, through simplified market entry and licensing requirements and appropriate taxation policies • encouraging the use of modern vehicle and equipment technologies, raising productivity, standardizing equipment and increasing R&D on technological options • strengthening the skills of logistics staff through training and certification • raising the level of international cooperation in the development of integrated logistics solutions. 10. With these strategies as background, the aim of the project was to help the Government improve the performance of road freight and passenger transport through further policy reforms. Its main output was to be a realistic action plan for sector policy reform. This was to be based on a review of the policy and regulatory framework governing the industry, an examination of the factors affecting efficiency and identification of measures to improve it, and a review of the lessons learned from other countries. 11. The Government is well aware of most of the problems facing the sector. As indicated above, it has identified and included appropriate reforms in its 2001-2010 strategy. This project’s task was not simply to repeat the oft-cited benefits of deregulation and free markets; these the Government already knows. Rather, it was to identify those aspects of road transport policy and regulation that are not yet fully effective in meeting the goals of efficiency and demand-responsiveness and to map out a path – the Action Plan for Policy Reform (APPR) set out in Chapter IV – for achieving the needed changes in a way that maximizes benefits to the economy while also taking into account, and helping to ease, the adjustments that will be necessary, some of which (such as those impacting on SOE employees) might otherwise risk social instability.

C. Approach

12. The approach is illustrated in Figure 1. Critical issues were identified from information on the structure and performance of the sector, policies and plans for its development, and the institutional and regulatory framework governing it. These were discussed with stakeholders at a workshop in April 2005 before a program of field interviews was carried out. These explored the

9 NDRC, Logistics Development Strategy 2001-2020, 2003.

5 impact of policy and regulatory measures on the efficiency and demand-responsiveness of selected road freight and passenger services in three provinces: , Gansu and Heilongjiang (Figure 2). Shortcomings in the application and effectiveness of policies and regulations were discussed and compared with approaches taken elsewhere in the world. Reform options were identified for these shortcomings, using overseas initiatives where appropriate, and their likely impacts assessed. These were discussed at a workshop held in in September 2005. The APPR is based on the results of this process. Figure 1: Approach

Assemble Information on Assemble Information on Assemble Information on Sector Characteristics & Institutional & Regulatory Sector Policies & Plans Performance Framework

Identify Critical Issues & Prepare Work Plan

Discuss Issues & Work Plan with Stakeholders Discuss Operations with Selected Service- Providers Discuss Policy & Case Studies in Selected Regulatory Issues with Provinces Provincial Agencies Discuss Logistics Arrangements with Selected Customer/s Identify Shortcomings & Policy/Regulatory Options

Review International Evaluate the Impacts of Review Performance Regulatory Experience & Policy/Regulatory Options Benchmarks Achieved in Benchmarks & Prepare Action Plan China

Discuss Results of Evaluation & Action Plan Proposals

Finalize Action Plan for Policy Reform

13. Originally the intention had been to include Guangdong among the sample provinces, representing conditions in the more developed eastern region of the country. But with the ADB planning a roads project in Heilongjiang, the northern province was substituted instead. Later, after the draft Final Report was submitted in early August, this deficiency was overcome by visiting Guangdong to interview transport officials and selected transport operators. While not as comprehensive as the surveys in Yunnan, Gansu and Heilongjiang, this served to confirm impressions from other sources. 6

Figure 2: Case Study Provinces

Yunnan Gansu Heilongjiang

D. Road Transport in China

1. The National Transport System

14. By the end of 2004, China’s transport network comprised some 1.87 million kms of public roads (of which 34,300 kms were expressways), 73,000 kms of railway lines, 124,000 kms of navigable inland waterways and 175,000 kms of domestic air routes; there were also over 3,500 river and coastal . Ports, shipping and inland water transport are all the responsibility of MOC, as are roads and road transport, though much of this responsibility is delegated to provincial and lower-level administrations (see para. 32); railway and air transport infrastructure and services and city bus services come under separate ministries. 15. With the economy growing by over 8-9 percent p.a., aggregate transport demand has risen rapidly, by an average of 6.6 and 7.6 percent p.a. between 1994 and 2004 in terms of passenger-kms and tonne-kms recorded respectively10. Air transport demand has grown the fastest, but from a low base. Of the other more established modes, road transport demand has grown the fastest in terms of passenger-kms (Figure 3) but its growth in tonne-kms was exceeded by inland water transport (Figure 4). Between 1994 and 2004, road transport’s share of passengers grew from 87.3 percent to 91.9 percent, and of passenger-kms from 49.1 to 53.6 percent. Over the same period, road freight’s share of tonnes carried dropped slightly, from 75.8 to 73.0 percent, and of tonne-kms from 13.5 to 11.3 percent, largely due a recent jump in the traffic carried by inland waterways, but its share will probably increase in future: rising incomes and consumer demand and the economy’s diversification away from heavy industries, which favor inland waterway and rail transport, will likely bring an increase in road transport’s share.

10 Transport demand is sampled regularly by the National Bureau of Statistics (NBS), but coverage of the informal sector is probably incomplete. The demand for road transport and its share of the total may be higher than officially recorded.

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Figure 3: Growth in Passenger Traffic, 1990-2004 (1990=100) Passengers Passenger-Kms 300 400

350 250

300 200 250 Railway Railway 150 200 Road Road Waterway Waterway 150 Index (1990=100) 100 Index (1990=100) 100

50 50

0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Figure 4: Growth in Goods Traffic, 1990-2004 (1990=100) Tonnes Tonne-Kms 250 400

350 200 300

250 150 Railway Railway Road Road 200 Waterway Waterway 100 Pipeline Pipeline 150 Index (1990=100) Index (1990=100)

100 50 50

0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Figure 5: Mode Shares, Passenger Traffic, 2004 Passengers Passenger-Kms

Aviation 0.7% Aviation Railway Waterway Waterway 10.9% 6.3% 1.1% 0.4% Railway 35.0%

Road Road 53.6% 91.9%

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Figure 6: Mode Shares, Goods Traffic, 2004 Tonnes Tonne-Kms

Aviation Pipeline Pipeline 0.0% 1.4% Aviation Waterway Railway 0.1% 1.2% Railway 11.0% 14.6% 27.8%

Waterway Road 11.3% Road 59.7% 73.0%

2. Road Infrastructure

16. Roads are classified by administrative responsibility – as national, provincial/municipal, county, township and access roads (the last being within the boundaries of mining, industrial, agricultural, tourism, military and areas) – and by design standard and pavement strength. Of the 1.87 mln kms of roads in 2004, 1.52 mln kms were classified, with expressways, Class I highways and roads of Classes II, III and IV making up 2, 2, 12, 18 and 47 percent of the total respectively, and unclassified roads the remaining 19 percent (Figure 7). Generally expressways carry traffic in the range of 25,000-55,000 vehicles per day (vehs/day), Class I roads 10,000-30,000 vehs/day, Class II roads 5,000-15,000 vehs/day, Class III 2,000-6,000 vehs/day, and Class IV less than 2,000 vehs/day. Figure 7: Road Network by Administrative and Technical Class, 2004 Administrative Class Technical Class

Expressway Access Class I National 34,288 33,522 Class II 88,424 129,815 Provincial Unclassified 2% 231,715 5% 2% 7% 227,871 354,835 12% 12% 19%

Class III Township 335,347 18% 945,180 County 50% 479,372 Class IV 26% 880,954 47%

17. Although the density of the network, at 1.46 kms per 1,000 population in 2004, is lower than in other Asian countries, it has been increasing rapidly. Since 1990, the Government has built a total of 775,000 kms of new highways (expressways and roads of classes I to IV). Most of the present expressway network of 34,288 kms was built in only the last 10 years. This massive expansion and upgrading of road infrastructure has contributed substantially to the economy’s transformation and has played a major role in efforts to develop the west under the Western

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Development Strategy (WDS), redressing the economic imbalance with the Eastern Seaboard11. By substantially reducing journey times and costs for inter-provincial passenger and freight journeys, it has helped integrate western-region production and consumption centers with the rest of the economy and the outside world.

3. Road Financing

18. Road expenditures are financed from national, municipal, provincial and local government budgets, user charges and fees, foreign investments and loans (including loans from international aid agencies) and domestic bank borrowing. Figure 8 summarizes the contributions made by the various sources in 200412. Figure 8: Sources of Funds for Road Infrastructure Expenditure, 2004

State Bonds Other 3% Vehicle 14% Purchase Tax 10% Local Government Sources 30%

Domestic Loans 41% Foreign Capital 2%

19. Tolls are an important source of finance for expressways – and a significant direct cost faced by long-distance transport operators (see para. 267). The Highway Law allows tolls on highways built using loans or funds provided by enterprises, economic organizations or individuals, but not on wholly government-funded highways unless toll rights have been assigned to such organizations. The regulations governing tolls are set out in MOC’s Regulations on the Collection of Vehicle Tolls for High-Grade Highways and Large Highway Bridges and Tunnels Constructed with Loans (effective February 1988) and Regulations Concerning the Establishment of Toll Stations Along Highways (effective June 1994). Tolls can be used to service debt and recover operating expenses. According to the Highway Law, rates must be set by reference to an appropriate return on funds invested, the rates charged on other toll roads, users’ ability to pay, the benefits of the tolled road to users, and traffic flows. In practice, toll setting is a compromise between financial and economic aims made by the municipal or provincial agencies responsible. The often-criticized result is a patchwork of independent, though inter-connected, toll-roads, each charging at different rates and amounting, for most long-distance journeys, to a substantial outlay for the trip13.

11 Set out in State Council Circular on Policies and Measures for the Development of the Western Region, October 26, 2000. The Western Region includes the provinces of , , Yunnan, Shanxi, Gansu and Qinghai, Chongqing Municipality and Autonomous Region, Ningxia Hui Autonomous Region, Uygur Autonomous Region, Inner Mongolia Autonomous Region and Zhuang Autonomous Region. 12 Source: MOC. 13 The Heilongjiang Dragon Transportation Group reports that it pays over Yuan 0.5 per bus-km on road tolls, or about 8 percent of its variable costs. A survey of eight freight operators in 2004 found that tolls amounted to 20-40 percent of variable costs (source: Jim Dai, Yuepeng Li, Xiutian Liu, Yang Wang, Nancy Wong, Chen Zhou, 2004 10

20. In addition to tolls, there are two other road user charges: • a road maintenance fee, levied by highway authorities on the revenues of passenger transport enterprises and vehicles’ registered load capacity • a vehicle purchase fee, levied at the rate of 10 percent of the retail price of vehicles; revenues from this are used mainly to finance the National Trunk Highway System (NTHS), with priority given to roads in the western region. 21. In October 1999 an amendment to the Highway Law provided for a new system of user taxation. A fuel tax was to be introduced and, starting January 2001, a vehicle purchase tax, replacing the vehicle purchase fee. But implementation of the fuel tax was, and continues to be, delayed because of the high international price of oil. The result is that the structure of user taxation does not correspond with the costs imposed by road users: there is no component of tax levied on the basis of vehicle-kms of road use, and the vehicle purchase fee is not structured according to laden axle loads, the best measure of road damaging potential. Other countries have been better able to match users’ tax contributions with the road damage and other external costs they impose by applying a combination of fuel tax (related to road use) and annual vehicle fee (usually reflecting potential pavement damaging-power in Equivalent Standard Axle Loads, or ESALs14) structured so that it reflects the relative cost contribution of each vehicle type. 22. According to MOC’s draft development plan for 2006-2010, total road investment needs over the next five years are likely to be some Yuan 1,830 billion (US$ 221 billion), of which Yuan 846 billion is for expressways. Available revenues are predicted at Yuan 840 billion from user taxes and Yuan 50 billion from toll collections, leaving a gap of Yuan 940 billion to be funded from national or regional (municipal, provincial, county or township) government budgets, loans or private sources. The Government has tried to encourage private financing, but so far investors have been unwilling to take on the risks of build-operate-transfer (BOT) projects. Some provincial and lower-level governments also find it difficult to fund non-expressway expenditures, particularly local roads in poor areas. Provincial governments generally provide some grants to counties and townships to help finance their road expenditures, but an increasing proportion of their own road budgets is being used to meet the national priority for expressway and highway construction.

4. The Vehicle Fleet

23. In 2004, China’s vehicle fleet amounted to 26.9 mln vehicles, excluding military vehicles. Of these, 17.4 mln were passenger vehicles, 8.9 mln freight vehicles and 0.6 million others (Figure 9). The total increased by 3.1 million in 2004, with the share of trucks, at 33 percent, down from 41 per-cent six years earlier. Despite the rapid growth in the fleet, there are still only about 2.1 vehicles (trucks, cars or buses) per 100 persons. 24. The privately-owned fleet has grown by more than 20 times in the last ten years, and will likely continue growing rapidly with rising incomes. This will cause an increase the volume of road traffic, possibly outpacing capacity and worsening traffic congestion and air quality in or near urban areas. In both urban and rural areas, traffic flow is also hindered by bicycles and other slow-moving non-motorized vehicles, though these are a declining percentage of the total.

China Road Transportation Enterprise Survey Report, The Logistics Institute - Asia Pacific (TLI-AP), , February, 2005). Some operators have been able to negotiate discount rates with toll-road enterprises. 14 A measure of the damage caused to a pavement by a vehicle axle relative to that done by an 8.16-tonne standard axle.

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Figure 9: Growth and Composition of the Vehicle Fleet, 1998-2004

30

25

20 Other 15 Freight Passenger 10 Vehicles (million)

5

0 1998 2004

5. The Road Transport Industry

25. The road freight transport industry is made up of state-owned transport enterprises, joint- venture (JV) firms, private companies, industrial groups offering services to supplement their main activities (own-account operators) and smaller private owner-operators. Freight forwarders play a role in consolidating shipments and negotiating rates, but they are less well-established than in Europe and North America. Entry to the trucking industry is relatively easy (para. 87), helping to ensure considerable – sometimes intense – competition in all but specialized markets. Since 1984, privately-owned trucks have been allowed to carry goods for state-owned factories and cooperatives. As a result, they have enjoyed growth in market share at the expense of state-owned companies, many of which are now being privatized themselves or placed at arm’s length from the industries that own them, usually in the form of joint-stock companies. MOC is encouraging the private sector to augment the capacity of the road transport industry and has chosen several enterprises as pilots to implement consolidation and restructuring reforms under a demonstration project. In several provinces the authorities are also trying to consolidate provincial enterprises in preparation for greater competition under WTO rules. Even without these initiatives, the opening of the trading economy has begun to lead to some consolidation among transport groups and the development of national networks of alliances, some with foreign participation, that are starting to offer integrated logistics solutions to their customers – see para. 204. 26. Bus services are extensive and frequent, even on relatively minor routes. The typical range of services includes long-distance 40-45 seat express bus services based usually in provincial centers and operating on inter-provincial/inter-city trunk routes, medium-distance 18- 30-seat buses based in county/township centers, and smaller local 6-8-seat microbus/van services linking villages to township centers – a range of choices differentiated well by quality and price. The inter-city services are usually offered by provincial- or municipal-owned trans- port enterprises but there are growing numbers of private operators, most of which start with only a few vehicles but tend to be more focused on customer service to attract passengers. The range and availability of services tends of course to decline with distance away from the county and township centers, but where demand exists there are usually services available to accommodate it. There is some flexibility in setting fares: under a 1998 joint MOC/SDPC15

15 State Development Planning Commission, now replaced by the National Development and Reform Commission (NDRC). 12 regulation road transport tariffs can be set within ±20 percent of advisory tariffs issued by MOC, although in practice the degree of freedom allowed to operators to vary their fares differs from province to province.

6. Vehicle Assembly and Manufacturing

27. China’s vehicle assembly and manufacturing industry has improved rapidly in quality and efficiency, and is capable of producing trucks and buses as good as any found in developed countries, often with the assistance of foreign JV partners. WTO membership should further stimulate competition and investment, raise standards, lower costs and increase the range of vehicles available. By replacing older, less efficient vehicles, modernization and expansion of the fleet also has the effect of raising vehicle efficiency and safety, reducing fuel consumption and vehicle emissions, and bringing in designs and technologies better suited to the needs of the market. Newly-built vehicles are of very good quality. Despite a system of vehicle inspection and testing designed to get unsafe vehicles off the road, however, a proportion of older, slower vehicles still cause a disproportionate share of traffic delay, air pollution and noise. With rapid growth in the fleet and a strengthening of roadworthiness testing procedures, however, this proportion will fall.

7. Road Safety

28. According to official statistics, there were 667,507 road accidents in 200316, with 104,372 deaths (a 4.6 percent decrease from the level of 2002, after a long period of increase), 494,174 injuries and direct economic losses of over Yuan 3.4 bln. Had unrecorded accidents been included, the number of deaths might have been 150,000 or more p.a. At 438 recorded deaths per 100,000 vehicles in 2003, China’s accident rate is already very high indeed by international standards17. 29. The records of bus and truck operators interviewed by the project show little consistency in accident rates. Most appear to record only the most serious, but many accidents might go unrecorded as a result of the common practice of contracting out services to drivers (para. 364). One bus operator reported a worsening of accident severity with the opening of expressways due to the higher speeds. 30. There are strict requirements regarding the maintenance of road vehicles, and safety inspections (para. 103). In addition, drivers nominated in applications for new buses or bus routes must have at least three years of accident-free driving; similar conditions apply to trucks. There are also conditions relating to drivers’ safety records in the categorization of bus operators. From observation, bus and truck driving standards appear to be reasonably good but some dangerous practices can still be seen: lane-changing on expressways, dangerous overtaking on single-carriageway roads, and aggressive driving generally. 31. Most traffic accidents occur because drivers, motorcyclists, cyclists and pedestrians are unaware of the risks and ignore safety regulations. Standards of driver education and testing, and the quality of road safety education in schools, appear to be below western standards; drivers tend to be taught and tested on the mechanics of driving and the rules of the road, rather than on safety awareness and defensive driving techniques. The development of a high- standard expressway network might help reduce the rate (though not the severity) of accidents

16 Statistics for 2004 are not yet available. 17 Comparable figures for other countries in deaths per 100,000 vehicles are 15.3 for Australia, 20.6 for Denmark, 23.5 for France, 13.2 for Japan, 78.2 for the Republic of Korea, 54.0 for Turkey, 12.1 for the UK and 19.3 for the USA (source: ADB).

13 by transferring long-distance traffic to modern roads with safe design features, but changes in driver behavior are also needed. Under a road safety master-plan, several lending agencies, including the ADB, are supporting programs to help raise safety education standards and public awareness and strengthen the capacity of the Ministry of Public Security (MPS) in traffic safety planning and enforcement.

E. Policy and Regulatory Framework

1. Institutional Arrangements

32. Responsibility for road administration, which includes road transport regulation and management as well as road infrastructure development and maintenance, was decentralized under the 1997 Highway Law. Provincial Communications Departments (PCDs) 18 are responsible to their People’s Committee’s for road-related functions at the provincial level. Subject to MOC’s national policies and guidelines, and to other laws governing road administration and safety (see below), they regulate the road transport industry by licensing transport operators, trucks, buses, drivers and inter-city bus services through their Transport Administration Bureaux (TAB) 19. PCDs also plan, develop and maintain the highway networks in municipalities and provinces, with the Provincial Planning Commission (PPC) approving plans and most larger projects. For lower-level networks responsibilities lie with county and township Communications Bureaux (CBs). The PCDs receive funds from the central government only for large projects of national significance. MOC gives guidance and technical support through national policies, regulations and design and construction standards. 33. MOC is responsible for national-level policies and plans for the roads sub-sector (and for maritime and inland waterways sub-sectors as well). Its basic organizational structure is shown in Figure 10. A typical PCD structure (from Yunnan) is shown in Figure 11, though not all PCDs are the same. 34. Municipal and provincial road management operations are funded from municipal and provincial government budgets, user fees and tolls, loans and bonds. For major road projects MOC grants are used to supplement self-raised funds and domestic and international loans. Expressways are expected to cover operating and maintenance costs and debt service charges from toll revenues. Reliance on domestic debt has been increasing, used to finance both expressways and other road projects and repaid from toll revenues. 35. County and township administrations also receive a proportion of their road funding from the national government, via provincial governments, but national government funds are rarely available for developing village and other local roads (i.e. roads below the county/township level), though some provincial funding is available from time to time. 36. Road safety is the responsibility of the MPS, which administers the 2003 Road Traffic Safety Law; it does so at municipal/provincial and lower levels through Public Security Departments (PSDs) and Public Security Bureaux (PSBs) respectively. Apart from enforcing safety-related traffic regulations, the PSDs and PSBs are also responsible for licensing drivers and vehicles, including driver testing and vehicle inspections. 37. Monitoring vehicle emissions and noise is the responsibility of Environmental Protection Departments (EPDs) at municipal/provincial levels and Environmental Protection Bureaux (EPBs) at county/township levels. Like the PCDs and CBs, their roadside operations – stopping vehicles to test noise and emissions levels – require the presence of PSB officers.

18 There are equivalent Communications Departments in municipalities and Autonomous Regions. 19 City bus services are the responsibility of the regional agencies of the Ministry of Construction (MCon). 14

Figure 10: MOC Structure

Minister

Vice- Vice- Vice- Vice- Vice- Chief Engineer Minister Minister Minister Minister Minister Chief Engineer (Roads) (Waterways)

Science & International Pub. Security Coordination Highway Instit’l Reform Waterway Party Administr’n Personnel Finance Audit Discipline Retirees Education Cooperation (MOC) & Planning Administr’n Legal Affairs Administr’n Committee

Coord’n Coord’n Coord’n Coord’n Office Office Admin. Coord’n Office Office Coord’n Coord’n Coord’n Gen. Office

Admin - Coord’n & Highway Industry Taiwan Highway Interview information Reg’l Office Office 1 Organiz’n Audit Office 1 Finance Officials Planning Constr’n Reform Affairs Finance Admin - Large Internat’l Highway Design & Propa- Waterway Retired Research Office 2 Legal Coord’n Office 2 Leaders Projects Orgns Planning Managm’t ganda Finance Minister

Admin – Waterway Eng’ng & Economic Domestic Project Party Secretariat Technical Office 3 Discipline Office 3 Tech Ldrs Planning Technology Coord’n Shipping Finance Committee Educn. & Highway Propa- Internat’l Labour Retiree Information Salaries investment Training Managem’t ganda Shipping Union Stage

Org & Statistics & Transport Contract Comsom. Health Documents Support Information Policy Admin. C’ttee Care Rd Transp. Sea/IWT Property Managem’t Routes

Vehicle Eng’ng & Secrecy Managem’t Technology Ports Admin. Admin.

Waterway Mapping Constrn.

Copying

Marine Rescue & Quality Finance Service Center Shipping Bureau Salvage Supervision

Office Admin.

Vehicle Services Fleet

Engneering

15

38. City bus services are not the responsibility of MOC, though all others are. They come under the Ministry of Construction (MCon) and its corresponding regional departments. They have been omitted from this study, but several of its policy and other recommendations could also be considered applicable to them. Figure 11: Typical PCD Structure

Provincial Communications Department

City/Township Highway Administration Policy & Regulation Transport Bureaux Bureau

County Transport Road Transport Personnel Traffic Public Security Bureaux Administration Bureau

Comprehensive Waterway Transport Discipline Planning Administration Bureau

Transport Taxation & Party Committee Construction Toll Admin. Bureau

Local Road Comsomol Committee Finance Administration Bureau

Local Maritime Affairs Wages Science & Education Bureau

Transport Mang’t/ Engineering External Affairs Security Supervision Stations

Information/ Retirement Cadre Publications

Service Center Taxation

Beijing Liaison Office Safety Standards

2. Policies and Plans

39. The Government sets out its vision for the country’s development through five-year plans. The current plan, the 10th, covers the period 2001-2005. The 11th (2006-2010) is under preparation. It will differ from earlier plans by incorporating broad development guidelines rather than specific targets. Each 5-year plan/program is framed by a longer-term development strategy. In the case of the transport sector (excluding air and railway transport), MOC’s strategy for 2001-2010 gives priority to: improving transport capacity and efficiency; meeting the requirements for transport infrastructure; rationalizing and consolidating the structure of road transport enterprises20; promoting modern transport and information technologies; improving the regulatory framework governing road transport; establishing a high-quality trunk road network; and integrating road transport more effectively with other transport modes and enhancing its role in helping to achieve economic and social development goals.

20 MOC’s aim is to develop market leaders that can compete with, or are attractive to, foreign companies following opening of markets under WTO rules.

16

40. The 10th 5-year plan envisaged – and indeed has already seen – a major expansion in road infrastructure, including: • a backbone network of national highways and major roads – the National Trunk Highway System (NTHS) – comprising five north-south and seven east-west expressway corridors, with three north-south and two east-west expressways largely completed by the end of the 10th plan period • eight new highways in the western region to improve the structure and reach of the NTHS as part of the WDS. 41. The basic objectives are to link most cities with population of 500,000 with expressways, develop secondary roads to serve the poor and promote rural centers, and use improved roads to support regional cooperation with neighboring countries in the southwest, northeast and northwest. New roads are seen as a key component of the Government’s strategy to broaden access to markets and services, facilitating economic growth and reducing poverty. 42. The WDS, to develop the poorer western part of the country, is a key theme of the 10th plan and will likely continue to be a priority for the 11th. Its aim is to reduce disparities between the west and the more developed coastal region. Road development is given high priority as an effective means of promoting economic growth and reducing poverty. In addition, for the roads sub-sector, the WDS aims to link the western region with central and eastern regions, provide access to trade outlets for the west at eastern and southern seaports, and promote regional cooperation with the neighboring countries. Figure 12: National Highway Development Plan

17

43. The priorities for the coming 11th plan period have not been finalized, but it is clear that the capacity and efficiency of the country’s transport system and the development of logistics in support of trade will feature prominently, as well as a further acceleration of road, railway, port and airport infrastructure development. 44. The Government has engaged with international lending agencies, including the ADB, in a policy dialogue on the roads sub-sector since the early 1990s. The main areas of activity under the ADB Road Sector Policy Reform Plan include: mobilizing private sector resources for highway development; establishing an appropriate legal framework; improving highway, bridge and tunnel design standards; road safety; road pricing policies; commercialization and corporatization of expressways; and strengthening institutional capacity. The status and achievements to date are summarized in Appendix 1.

3. Legal Framework

a. The 2004 Road Transport Ordinance

45. Together with the Highway Law and the Road Traffic Safety Law, discussed in para. 47, the Road Transport Ordinance (RTO) is the key piece of legislation governing road transport. It came into force in July 2004. Its stated aims are to establish order in road transport markets, safeguard public safety and people’s rights, and promote the development of a healthy market for road transport services. 46. Its main provisions are as follows: • it enshrines the principle of fair competition between service providers, and prohibits restricted or monopolized road transport markets • it gives authority to MOC, representing the State Council (SC), for overall administration of road transport, but delegates this authority to road transport administrations at county government level or higher • it sets out the conditions required for the issue of road freight and road passenger transport operators’ permits, vehicle operating permits and, for passenger services, bus route permits • for both passenger and freight transport, it sets limits to drivers’ working hours; requires the maximum legal capacity or load to be marked on vehicles; requires vehicles to be maintained to specified technical standards; requires operators to have plans for dealing with accidents, natural disasters or emergencies; limits the numbers of passengers, freight loads, and lengths, widths and heights of vehicles, to authorized maxima; requires operators to carry liability insurance; and specifies that infringements will be punished according to the Road Traffic Safety Law by the traffic authorities of public security agencies (PSDs and PSBs) • it sets out conditions for the management and operation of road transport (passenger and freight) terminals21, motor vehicle repair services and training services for motor vehicle drivers • it sets out conditions for international (cross-border) transport operations • it specifies arrangements for supervision and enforcement of the regulations governing road transport administration, and sets out fines and penalties for infringement

21 Further conditions for the establishment and management of freight terminals are set out in a new regulation on Road Freight Transport and Management of Terminals signed in June 2005 and coming into effect on August 1st 2005. 18

• among other supplementary matters, it permits foreign investment in road transport and related road transport businesses, and authorizes road transport authorities to recover the cost of issuing permits.

b. The Road Traffic Safety Law

47. The Road Traffic Safety Law governs most aspects of road traffic safety, implemented through responsibilities delegated by MPS to the PSDs and PSBs. It specifies: • rules for the operation of vehicles on public highways (the Highway Code)

• traffic signs, road markings and signals (GB 5768－99), based largely on the UN Manual of Traffic Control Devices • permissible traffic speeds • the responsibilities of pedestrians on the road • procedures to follow in the event of traffic accidents • the compulsory wearing of seat belts • the security of truck loads • enforcement arrangements and penalties for violation. 48. Regulations issued under the Road Traffic Safety Law include: Road Traffic Management Regulations; and Detailed Implementation Rules of Road Traffic Safety Law (SC Decree 405). Municipalities and provinces also draft their own regulations for implementing the law.

c. Other Laws and Regulations

i. Registration of Vehicles

49. The PSBs are responsible for vehicle registration, inspections, drivers’ licenses, traffic management and transport safety. The procedures for vehicle registration are set out in Specifications for Motorized Vehicle Registration (MPS Decree 56/Jan 2001). All motor vehicles must be registered at the Vehicle Management Agencies of the PSB Traffic Management Divisions before they can be operated on public roads. Application must be supported by owner’s ID, evidence of ownership and proof of motor vehicle inspection (see below) 22. A registration certificate, number-plate and permit to use the vehicle is issued, renewable annually. The registered owner is held responsible for all aspects of the vehicle’s operation on the roads.

22 The documentation required for first-time registration is, however, complex. The owner must produce a vehicle purchase invoice, listing the owner’s name, the vehicle brand and model, the engine and chassis numbers and other vehicle identification codes. If the vehicle is imported, a translated copy of the foreign invoice must be supplied, together with a Goods Inspection and Testing Certificate, a Certificate of Goods Imported, a Certificate of Fines and Confiscation of Motorized Vehicle (if appropriate) and a Vehicle Type Approval Notice. If purchased domestically, the documents must include a standard Vehicle Certificate. The owner’s identification must include, if an enterprise or economic entity, the original and a copy of its Institutional Organization Coding Certificate; if a domestic resident, the original and a copy of his/her Identification Card. If the vehicle is to be entrusted to another person, a Permanent Residence Registration Certificate of the vehicle owner must also be supplied. The applicant must also supply a copy of the Tax Payment Certificate or Tax Exemption Certificate for the vehicle purchase tax.

19

50. The registration documents specify what each motor vehicle can be used for, including freight transport and bus passenger transport. It is not possible to register a vehicle for either of these uses without the owner having first obtained a transport operator’s permit. 51. According to Standardizing Fees for Vehicle Plates and Licenses in the State (MPS Letter 131/2004) the standard fees are as follows: • vehicle license plate: for car, Yuan 100 per pair; for motorcycle, Yuan 70 per pair • vehicle operating license: Yuan 15 (provisional license, Yuan 10) • vehicle registration certificate: Yuan 10.

ii. Vehicle Technical Standards and Inspections

52. Vehicles are classified according to Terms and Definitions for Categories of Vehicles and Trailers (GB/T3730.1-2001) and Categories of Vehicles and Trailers (GB/T15089-2001)23. Technical standards are based on Size, Axle-load and Weight Limits of Road Vehicles (GB1589-2004). These are reviewed in Section B.2. 53. Several regulations govern safety and technical inspections of vehicles. These include: Regulation of Technical Management for Vehicles in Transport Industry (MOC Decree 13/1990), Regulation of Maintenance and Management of Road Transport Vehicles (MOC Decree 4/1998), and Regulation of Management of Comprehensive Performance Inspection Station for Transport Vehicles (MOC Decree 29/1991), as well as the more recent Road Transport Ordinance (para. 45 above). 54. Vehicle inspections, conducted annually, cover vehicle safety, engine operation, economy, reliability, noise pollution and vehicle emissions, and the quality of repairs, refittings and alterations. Inspection standards and specifications are in two categories: (i) national standards, including Comprehensive Performance Requirements and Inspection Method for Operation Vehicles (GB18565), Technical Specifications for Vehicle Repair, Inspection and Diagnosis (GB/T18344) and Technical Condition of Safe Operation of Motorized Vehicles (GB7258); and (ii) transport industrial standards, including Technical Classification and Evaluation Requirement for Operation Vehicles (JT/T19-2004) and Technical Specifications for Computerized Control System in Vehicle Inspection Station (JT/T478-2002). 55. Regulations governing the establishment of enterprises providing vehicle maintenance and inspection services are set out in Conditions for Establishing a Vehicle Repair Enterprise (GB/T16739-2004) and Standard Technical Conditions for Vehicle Comprehensive Inspection Stations (GB/T17993-1999).

iii. Driver Standards

56. All drivers must have a driver’s permit. This involves lodging an application form and a physical examination certificate from a municipal/provincial Department of Health or a hospital at township level or above, a valid ID certifying fitness to receive traffic safety education and an Examination Qualification Certificate following training and examination. Applicants must undergo an examination and on-road driving test within 60 days (large bus), 40 days (large truck), 30 days (car) or 20 days (other vehicles) of the date of receipt of learner’s permit. A first- time applicant for a permit to drive a large bus is limited to operating on his fixed route. Fees are charged to cover the costs of initial registration, production of the driver’s license and the

23 Motor statistics issued by the National Bureau of Statistics (NBS) use older definitions from 1994 and 1998 regulations. 20 examination (test of knowledge of traffic regulation, driving test on-site and driving test on the road). 57. In contrast with other countries, the learning process and driving test tend to focus on physical driving skills (steering, control of the vehicle etc) and knowledge of regulations. Less attention seems to be paid to safe or defensive driving skills, courtesy to other road users and capabilities in real traffic conditions.

iv. Passenger Fares and Freight Tariffs

58. There are no restrictions on the tariffs set by freight transport companies. The Government aims to regulate rates through competition between service providers. 59. Bus operators are not free to set fares. MOC issues national fare guidelines, updated usually annually. Based on these, each PCD and CB issues a set of rates to guide fare-setting. For most services, there is an official rate, intended to be an upper limit. Usually there is discounting below this rate to attract custom, but it serves to hold fares to a reasonable level consistent with costs. There are also guideline rates, in the form of upper and lower limits, for specific routes and services where competitive conditions are not yet fully developed, according to the assessment of the PCD/CB. And for remote or mountainous areas or for special conditions (e.g. non-motorized services), the market is left free to establish rates.

v. Environmental Protection

60. Five laws govern environmental matters affecting road transport: Environmental Protection Law, Environmental Impact Assessment Law, Radioactive Pollution Prevention Law, Air Pollution Prevention Law and Environmental Noise Pollution Prevention Law. These are administered by the EPDs and EPBs at municipal/provincial and township/county levels respectively. 61. Monitoring of noise is usually done only in urban areas. The EPD/EPB is required to produce an Annual Environmental Quality Report with a section dealing with traffic noise (traffic is considered one of the main sources of noise in urban areas). At least one roadside noise survey must be carried out annually in conjunction with the TAB, but this is not always done; instead, the EPDs/EPBs tend to carry out inspections when complaints have been received. Monitoring the noise generated by specific vehicles is not usually done. Similarly, although there is a requirement to monitor air quality levels, and many urban areas have permanent monitoring equipment in place, testing the emissions of specific vehicles is rarely carried out. Usually, a vehicle’s emissions are checked when it undergoes its annual safety and technical inspection. 62. A permit to carry dangerous or hazardous goods requires the operator to go through more rigorous procedures and to maintain an accident risk and emergency response plan.

vi. Trade Liberalization and Foreign Participation

63. In addition to the above, road transport is subject to external laws and regulations governing investment, trade, taxation, foreign participation, SOEs, the private sector, competition etc. Most of these do not impact on the sector in ways that affect its relative efficiency, but some do, notably those concerning trade liberalization, foreign investment, competition and the role of SOEs. China joined the WTO in December 2001 following accession agreements with member countries. These committed the Government to a timetable for reducing tariffs and opening up economic sectors to international competition.

21

64. In 2001, as part of this process, MOC and the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) issued a joint regulation (Decree No 9, November 2001) on Foreign Investment in the Road Transport Industry; this, and a subsequent joint regulation of MOC and MCon, sets out the Government’s policy of opening up road transport enterprises, warehousing, road freight stations and terminals and vehicle maintenance/repair services to foreign participation in accordance with the agreed WTO conditions. For road transport (defined to include road passenger and freight transport, cargo handling, storage and other auxiliary services relating to road transport and vehicle maintenance) the key provisions are as follows. 65. Subject to MOC and MOFTEC approval, foreign investors my participate in road transport either through an equity JV with a Chinese company, in the case of passenger transport, or through an equity or contractual JV, or as a 100 percent foreign-owned company, in the case of road freight transport, cargo handling, storage and other services relating to road transport and vehicle maintenance. For road passenger transport, at least one of the main investors must be an enterprise that has engaged in road passenger transport for more than five years in China; the foreign share is limited to 49 percent; 50 percent of the registered capital must be used for infrastructure; and the buses must be of medium or higher standard (see Appendix 5 for bus and service classes). 66. For both passenger and freight, applications must be made to the CB in the county where the enterprise is to be located. Any expansion of scope beyond that specified in the initial permit, or any merger, split, relocation or change in ownership, must also be approved there. The approval process involves review at the county level (maximum 15 days), municipal or provincial level (maximum 15 days) and SC (MOC) level (maximum 30 days) before a project establishment approval document or change approval document can be issued. After MOC/PCD/PB approval, application must also be made to the Provincial (or Municipal) Foreign Trade and Economic Cooperation Department (PFTECD) for a foreign investment enterprise permit. This also involves referral to the SC (MOFTEC) (maximum 45 days) before the license can be issued or rejected. 67. Within 30 days of this approval, the applicant must then apply at the PCD for a road transport operation permit in accordance with the procedures in the Road Transport Ordinance (para. 87); this also includes obtaining a business permit from the Provincial Industry and Commerce Department (PICD). 68. All these permits are lodged with MOC for the record. If the process is not completed within 18 months, the application is terminated. 69. The authorized term of a foreign-invested road transport enterprise is usually limited to 12 years, but this can be extended to 20 years if more than 50 percent of the investment is used for infrastructure. Any license extensions are for a maximum of 20 years each. 70. In December 2002, MOC further stipulated that: • foreign enterprises, companies, individuals and other economic organizations can establish JV road transport companies with Chinese mainland enterprises, companies, individuals and other economic organizations to operate in road transport (passenger and freight), cargo handling, storage, auxiliary services related to road transport and vehicle maintenance, after MOC approval, with the limit on the foreign share of the JV raised to 75 percent • the foreign share can be raised further (i.e. beyond 75 percent) for JVs specializing in container transport, refrigerated transport, multimodel through-transport, express shipping, logistics and distribution, car rental services or comprehensive vehicle performance 22 examinations; or for JVs that build and operate road transport and logistics infrastructure facilities; or those that cooperate with road transport companies in China’s western region • foreign-funded enterprises in China can establish JV road transport companies in China’s west in the form of reinvestment after MOC approval; the foreign side must invest at least 25 percent in the newly established company.

4. Implementation of Regulations

71. It is important to understand that, while MOC issues policy directives intended to govern the road administration and other activities of PCDs, the latter have considerable autonomy in practice. The PCDs are an arm of the municipal/provincial government, and are responsible to their respective People’s Committees. They must act in accordance with central laws and decrees, but they also require municipal/provincial regulations to be issued to give authority to their activities in the region. 72. This need for municipal/provincial implementing regulations gives rise, on occasion, to differences between national policy and local practice. It is possible for local regulations over route licensing or terminal operations, for example, to favor local interests or locally-owned enterprises when national policy would prohibit this. Often this is done in ways that are not always evident. Examples of the situations where these differences arise between MOC policy and the regulatory activities at municipal/provincial and lower-level administrations are given in para. 222.

F. Sector Performance and Policy and Regulatory Issues

1. Sector Performance

a. Measuring Performance

73. There are no simple ways of comparing the performance of China’s road transport with other countries’. Some measures indicate aspects of performance – economy (minimizing the cost of a given transport task), productivity (the efficiency with which resources are used for a particular transport purpose), accessibility (the extent to which services are available to everyone), affordability (the relationship between prices and income), safety (the risk of accidents) and environmental protection (noise, water and air pollution) – but even collectively they do not indicate how well the transport system meets the needs of its users. Unit transport costs are of course a key indicator but levels of service (comfort, speed, reliability of schedules, security, risk of damage or pilfering) are often more important, especially in a modern logistics chain. Units costs alone do not capture these aspects of performance. 74. Many of the factors affecting unit costs and service standards can, however, be influenced by policies and regulations. For both truck and bus services, these include: • the quality of management, affecting marketing, operations, procurement, safety standards, staffing practices and the productivity of staff and equipment, often depending on whether the operator is state- or privately-owned and the degree of competition in the industry • the size of vehicle – larger trucks and buses offer economies of scale; their use can be influenced by better roads, the structure of road user taxes, vehicle import and manufacturing policies and access to capital for fleet replacement or expansion

23

• the age, technology and condition of trucks and buses, which affect availability, speed and consumption rates for fuel, spares and other inputs – these can also be influenced by regulatory controls and market incentives • the quality of service – higher-quality, more reliable, specialized services with added features are more expensive • return load factors, which depend on the pattern of demand but can be influenced by policies and regulations governing service licensing and the structure of routes, the role of transport intermediaries like freight forwarders, the location and operation of terminals and information-sharing on transport market opportunities • restrictions on working hours (influenced by regulation), enforcement procedures (e.g. the frequency of check-points) and the proportion of empty running and idle time, often due to variations in demand but also influenced by policies governing market entry and competition • road conditions – expressways offer better pavements, lower traffic congestion and lower-cost running conditions than lower-class roads, though they also involve tolls • the unit prices of vehicles, spare parts, fuel and labor, all of which vary with tax or subsidy policies and distances from major markets. 75. Vehicle utilization (vehicle-km per year) affects the balance between fixed and variable costs24 and gives an over-all indication of efficiency. Low utilization rates are caused by poor road conditions (e.g. due to poor construction or maintenance standards or traffic congestion), poor condition of vehicles, poor operating practices (e.g. low availability due to repairs, high proportion of waiting, loading and unloading time) or regulatory or security constraints that limit operating hours. Utilization may also be low, however, where customers value and are willing to pay for the greater reliability and flexibility of a customized service, in which case low utilization and high costs are not necessarily indicators of poor performance. So while unit costs are usually the single most important characteristic of freight transport services, customers also attach importance to speed, door-to-door delivery time, avoiding damage and theft, and predictability of delivery time. In the trade-off between service quality and cost, customers in a modern logistics chain often prefer higher-quality services if they help reduce inventory costs and improve delivery reliability. 76. For buses, similar influences apply. Units costs are affected by demand patterns (which determine schedules, also influenced by route licensing controls), the quality of service demanded (seat availability, schedule predictability, comfort, special features) and the degree of competition in the market (also a function of market-entry and route licensing). Like freight customers, bus passengers attach importance to service quality as well as fares, especially travel time (including access and waiting times, which are affected by route density, service frequency and reliability of departure/arrival, and rate of breakdowns) and comfort (type of seating, air-conditioning, video etc, and the facilities at bus stations). 77. Just as for trucks, bus utilization (bus-kms per year) is an indication of overall efficiency. A low rate would indicate the influence of poor roads, unreliable buses or inefficient scheduling. But low utilization might not necessarily indicate inefficiency: often patterns of passenger demand are uneven, and low utilization results to some extent from the need to provide peak- period capacity.

24 Fixed costs are those components of total cost that do not vary with vehicle-kms. They include staff costs, depreciation, interest charges and overheads. Variable costs do vary with vehicle-kms and include the costs of fuel, oil, tires and spare parts. 24

78. It is only through interviews with transport companies, shippers, freight forwarders and passengers, as well as analysis of operating records, that a true picture can emerge of the quality and performance of road freight and passenger operations. Much of the information presented in later chapters, therefore, is based on a series of interviews in the sample provinces of Yunnan, Gansu and Heilongjiang. While this approach is not comprehensive – a project of this sort cannot possibly cover all types of operation – by examining a selection of transport operations it was hoped to identify the factors currently influencing the industry’s efficiency and demand-responsiveness and the regulatory constraints that need to be removed to enable it to respond to the challenges outlined earlier.

b. Freight Transport

79. Earlier studies (see paras. 4 and 5) noted inefficiencies and high costs in China’s road freight transport system and identified many of the causes25. Since then, much has changed, and many of the factors inhibiting efficiency have been removed. Freight transport operators are largely free to compete for business, whether with SOEs, JVs or private companies. Entry to the road freight market is largely unrestricted, even for foreign investors. Access to capital is somewhat easier. Restrictions on tariffs have been removed. SOE and other customers are becoming less willing to protect local transport businesses or retain inefficient own-account operations if it means accepting lower service standards and higher overall logistics costs. Regulators are more aware of the benefits of competition (though some local protectionist measures still appear to be applied). The range of vehicle technologies from overseas and domestic manufacturers is very much improved and better geared to the needs of the market. The road network is of vastly better quality, more extensive and better inter-connected. Links with railways and ports are better, though only a few truly integrated intermodal services exist. Freight centers help consolidate loads. Freight forwarders and other intermediaries help bring together customers and suppliers and support those operators who provide the best service. Vehicle and driver safety standards have improved with growth in the fleet, replacement of older, unsafe vehicles, better education and strengthened enforcement of safety regulations. 80. But most importantly, the industry has begun to adjust – by necessity – to customer pressure in a more open, competitive, dynamic and diversified market. Rapidly-rising demand for consumer goods, processed foods and manufactured products, and producers’ and distributors’ need to get goods to markets quickly, reliably and with minimal losses have forced the logistics industry – and, through it, the transport industry – to be more competitive and to pay more attention to what the customer wants. For their part, customers are more willing to pay for better-quality service, recognizing that the benefits of lower inventories, lower warehousing costs and a quicker market response are greater than the additional costs of higher-quality transport services.

25 These included: restrictions on market entry and competition (mostly through efforts to protect local enterprises or guarantee them market share); a predominance of SOEs among for-hire transport companies and own-account operators; inappropriate ownership and management structures and poor commercial management skills among SOEs; difficulties in raising capital for fleet investment and expansion; inappropriate vehicle sizes and technologies; poor vehicle maintenance; low vehicle and labor productivity; high non-wage staff overheads (SOEs tended to pay all-up wage costs 25-35% higher than the private sector) and difficulties in shedding inefficient or redundant staff; outdated and inefficient cargo-handling methods and warehousing; lack of attention to customers’ needs (and customers that were not sensitive to quality and cost pressures); limited use of IT; lack of coordination of services between transport modes; poor standards of road construction and maintenance; poor highway, vehicle and driver safety standards; ineffective enforcement of traffic regulations; and the many legacies of an economy that depended largely on heavy industry and gave priority to low-cost raw material inputs and bulk commodity movements. China’s unit transport costs were significantly higher than other, more market-driven countries, even though China’s unit labor costs were – and still are – much lower.

25

81. These changes are occurring mostly at the “top” end of the market, where high-speed, inter-regional services over integrated national networks are demanded by major brands. But their impacts are increasingly being felt at the lower end of the market too, as sub-contractors compete to provide better feeder and supporting services, smaller firms attempt to upgrade and consolidate in competition, and customers in fields unrelated to consumer markets start demanding better service. In response to the needs of the top end, services at the lower end are broadening, firms are becoming more specialized, handling methods are improving, vehicle technologies are being chosen that perform better, IT and freight tracking systems are being used, and more of a premium is being placed on service quality and longer-term customer relations. 82. How does China measure up in these areas against the performance of other, competing countries? It is certainly catching up, but conventional measures of performance are not always useful in showing how far it has to go. This is because customers want more than just minimum-cost services. The same factors that drive industry re-forms and efficiency in North America, Europe and Australia are doing so in China: a sharper focus on customers’ needs; long-term planning within long-standing relationships; partnering with customers and suppliers; continuous improvement; performance measurement and guarantees; and integrated IT. 83. Asia lags behind North America and Europe in adopting this model of distribution. Figure 13 shows one set of estimates of the proportion of logistics costs in total revenue for a range of types of commodity; in all cases, Asia’s logistics costs are higher. Elsewhere, it has been claimed that overall logistics costs in China (transport, warehousing, administration and inventory) could account for 30-40 percent of the total cost of manufactured goods26, compared with 5-20 percent for the US, and that in some areas transport costs may be 50 percent higher than in the US. Yet whatever the precise figures the trend will be downwards: in Europe logistics’ share of revenues fell from 14.3 percent in 1987 to 10.1 percent in 1992 and 9.1 percent by 1997 and is lower again now; leading firms were 35 percent lower than these. Transport is a significant logistics cost component, but most transport improvements allow significant reductions in other costs, especially inventory, administration and warehousing. In addition, higher-quality logistics services would help reduce the cost of damage from China’s estimated 5 percent damage rate to the 1 percent or less experienced in developed economies.

26 The Hong Kong Trade Development Council has estimated that logistics in China account for 40% of general production costs and take up 90% of the production cycle time. In some sectors, e.g. food, logistics costs can be 50-60% of total revenue. 26

Figure 13: Logistics Costs as a Share of Total Revenue, Europe and Asia, 200127

16.0

14.0

12.0

10.0

Europe 8.0 Asia

6.0 % of Total Revenues Total of %

4.0

2.0

0.0 Textiles Automotive Chemicals Fast-moving Electronics Average consumer goods

84. With road transport management, technology and efficiency being driven more by external trade and market pressures than by technical regulation, an important question is: to what extent is regulatory reform necessary to achieve further gains in efficiency? The answer must lie in an analysis of the difficulties still being faced by the larger foreign, JV and domestic firms when expanding and optimizing their operations, and the adjustments that still have to be made by other domestic firms when competing, providing support services or catering for other markets in mining, agricultural, forestry or other less time-critical products. In both cases, from earlier surveys and reported discussions with service-providers, the constraints would appear to include: • remaining restrictions on the ability of importers and traders to establish distribution agencies and networks, and hence on the role and scope of logistics service providers • unnecessarily costly or cumbersome restrictions on the establishment and licensing of logistics service providers, particularly when expanding network coverage to other provinces and negotiating alliances with operators in regional and local centers, as well as informal restrictions on transport between provinces28 • informal restrictions on the freedom of SOE customers – whether shippers or purchasers – to utilize foreign-owned or JV transport services, including pressure from local governments, as owners, to give preference to local companies • difficulties experienced by government-owned transport services in restructuring their ownership and management and in positioning themselves for competition, including difficulties in shedding staff, recruiting new commercial skills and changing their business model

27 Source: Gibson, Ken, Analyzing the Trends: Predicting the Future of Logistics in Asia, presentation to Toward the Final Frontier: Logistics and the Efficient Supply Chain, September 2001. 28 These are reported to include non-standard licensing practices by the TABs and the Administration Bureaux of Industry and Commerce; restrictions on city access to outside companies, and fines if they are violated; conditions imposed on company representative office rentals; non-standard/additional administration fees and bond requirements.

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• restrictions on access to efficient transport and handling technologies, and limitations on access to capital for expansion or fleet replacement, particularly on the part of private companies • a failure to use pricing, cost-recovery, taxation and subsidy policies to promote efficiency – e.g. by using taxation policy to penalize older vehicles and encourage the use of multi-axle vehicles that do comparatively less road damage per tonne of payload • the present policy of recovering expressway operating and financing costs from tolls (exacerbated by fragmented network ownership) which often amount to 20-40 percent of transport costs and hinder trade by discouraging drivers from using expressways in preference to alternative non-tolled routes • unnecessary controls over the location, design and use of freight centers and other transfer points, restrictions on truck access to ports and terminals on congested networks, and other inefficiencies in intermodal transfer arrangements • shortages of staff trained in new management, marketing, IT and customer-relations skills • shortcomings in enforcement of safety-related regulations, including procedures for vehicle inspection, restrictions on vehicle overloading and arrangements for the carriage of dangerous cargoes.

c. Passenger Transport

85. In some ways, the changes that have affected passenger (bus) transport services are similar to those for freight: a relaxation of market entry, greater price and quality competition, access to more suitable vehicles and greater freedom to set prices and quality standards have led to significant improvements in the availability, quality and efficiency of services – as has the rising incomes of passengers. Though controls over routes still exist, in most respects they are not exercised in a way that would prevent appropriate services – i.e. with the right combination of capacity, frequency, price and comfort – from being offered if the demand were there. And service quality continues to rise while there is competition: long-distance operators, for example, are having to offer more and better service features like air-conditioning, in-vehicle toilets, video TV and refreshments. The safety and environmental features of vehicles also continue to improve as more modern designs are brought into service. In many respects, the existing regulatory framework is serving the public well. Competition is putting pressure on operators to improve their services and adjust to customers’ needs. And competition will increase in the future as low-cost air transport and railway services start to become attractive alternatives29. 86. Are there areas where the regulatory framework for passenger transport needs adjustment or strengthening? Two: licensing restrictions, including the categorization of operators and routes, and the conditions attached to route operations through terminals, discussed below, leave little room for innovation and limit opportunities for improving bus and driver productivity. Others? The regulatory framework is often criticized for lack of services in rural areas where demand is thin. It is indeed true that services are of lower quality and less frequent in these areas, but the system of licensing is such than any entrepreneur is free to offer services if he perceives enough potential demand to exist. What critics often want is services in areas where they would be unprofitable. If this is what governments want, then they should pay subsidies to enable operators to recover their costs.

29 In Indonesia, for example, long-distance bus services are under considerable pressure from, and are having to upgrade their services in response to, low-cost air services in a deregulated air transport market. 28

2. Issues Common to Freight and Passenger Transport

a. Licensing Procedures and Criteria

87. According to the RTO, applicants for freight or passenger transport operating permits should possess suitable vehicles that have passed the relevant inspections, employ qualified drivers and have suitable safety management systems. A qualified driver has a valid driving license, is less than 60 years old, has no serious traffic accident record in the previous three years, and has passed tests on the laws and regulations governing freight or passenger transport (as appropriate), vehicle repair and first aid. For truck drivers, this includes goods loading and storage. Applicants for regular bus routes should have specific plans for those routes and the stations to be used. A separate application is required for each route. 88. All freight transport operators are encouraged to secure and enclose their loads for safety and environmental protection. Applicants for hazardous goods transport should also possess five or more specialized vehicles and facilities exclusively for hazardous goods transport, employ drivers, loaders and escorts holding specialized qualifications, and have communication facilities installed on their vehicles. They should have procedures to prevent ignition, explosion, radiation or leakage of hazardous goods. Escorts must accompany hazardous goods being transported, and the goods must be clearly marked as hazardous. Consignors have an obligation to notify the freight operator of the name, properties and treatment measures in case of emergency, and package and mark the goods clearly. 89. Applicants must also meet any registration or licensing arrangements applicable to their form of industrial or commercial organization, such as registration of a business with the Industry and Commerce Administration Department (ICAD). 90. Permits for operations within or between counties are issued by county road transport authorities; for inter-provincial/municipal operations, they are issued by the road transport authorities in the province or municipality of domicile after consultation with the other provinces or municipalities involved. 91. Road transport authorities, when considering passenger transport applications, are expected to take into account the demand/supply situation in the market, and the public’s convenience. If there are three or more applicants for the same route, the authorities may decide on the basis of public bidding. Road transport authorities should regularly release information on the demand/supply situation in the passenger transport market. 92. If granted, a permit to provide a regular bus service on any route will expire after 4-8 years, when the operator should reapply if he wishes to continue providing the service. 30 days’ notice must be given if an operator wants to terminate the service. 93. Licenses for freight transport operations involving hazardous goods are issued at provincial or municipal level. 94. An applicant for an international (cross-border) road transport permit must have a normal road transport permit and three or more years’ experience in domestic road transport with no record of serious traffic accidents. Permits are issued by municipal or provincial road transport authorities. Chinese operators of international services must identify their vehicle as Chinese; vehicles from other countries must also show their nationality. Foreign operators are restricted to routes designated by MOC, and may not operate services with both origin and destination in China. With the approval of the SC, they may establish permanent representative offices in China, but these may not engage in business operations. International transport operations may be governed by international agreements.

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95. Permits for the operation of road transport stations (terminals), motor vehicle repair services and training services for motor vehicle drivers are issued by road transport authorities at county level. Applicants should possess inspected and qualified premises meeting authorized standards, with the necessary equipment and facilities; employ relevant professional and management staff; and maintain a formal set of instructions for operations and safety management. Among other things, requirements for driver training establishments include model vehicles and necessary space, but there is no requirement that trainees be taught in a real driving environment. 96. Road transport station (terminal) operators should forbid vehicles without permits from entering, conduct safety inspections on vehicles departing, and prevent overloaded vehicles or vehicles without safety inspection certificates from leaving the station/terminal. They should treat users impartially, and should not prevent vehicles from entering without good reason. They should provide safe, convenient and efficient services to passengers and shippers, and maintain the stations in a clean and sanitary condition. 97. Operators of bus stations/terminals should arrange the allocation of departure times to operators; publicize routes, destinations, stops, departure times and ticket prices; control bus arrivals and departures; control the movement of passengers through the station; and ensure orderly boarding and alighting from buses. They should provide facilities to passengers for buying tickets, waiting for vehicles, depositing luggage etc. Freight terminal operators must load, unload, store and take care of goods according to regulations specified by the relevant transport administration authorities (i.e. TABs). 98. The RTO also sets conditions for relinquishing licenses, keeping vehicles clean, protecting passengers from harm, ticketing, and prohibiting dangerous goods on buses; and specifies that compensation by operators for accidents or loss or damage of luggage be made according to prior agreement with the passenger or, in the absence of such agreement, according to rules established for maritime or railway transport. 99. For both passenger and freight transport, the RTO also encourages safety training and compliance with the rules of the road; limits driving hours to a maximum of four hours without a break; requires the maximum legal capacity or load to be marked on vehicles; requires vehicles to be maintained to their approved technical standards; requires operators to have plans for dealing with accidents, natural disasters and emergencies, and to follow the instructions of relevant authorities if accidents or emergencies occur; requires vehicle permits to be kept in the vehicles, and not transferred or rented; limits the number of passenger or freight loads, and lengths, widths and heights of vehicles, to the authorized maxima; requires operators to carry passenger or goods liability insurance; and specifies that infringements will be punished according to the Road Traffic Safety Law by the traffic authorities of public security agencies (PSBs). 100. The RTO specifies arrangements for enforcement and supervision, covering such matters as supervision of lower-level authorities by higher-level authorities, employee skills and training, internal supervision, public supervision of enforcement activities, reporting, procedures for and investigations of complaints, prohibition of illegal or arbitrary toll stations or fines and arbitrary stopping of vehicles, display of enforcement authority, access to information and protection of rights to privacy, removal of overloaded vehicles from the road, and care of detained vehicles 101. It sets out fines and penalties for infringement: for no valid permit, suspension of business, confiscation of illegal profits and a fine of 2-10 times the illegal profit (or Yuan 30,000- 100,000 if these were less than Yuan 20,000); for drivers with invalid permit, a Yuan 200-2,000 fine; for illegal operation of terminal, motor-vehicle repair and driver-training services, 30 suspension of business, confiscation of illegal profits and a fine of 2-10 times the illegal profit (or Yuan 20,000-50,000 if these were less than Yuan 10,000); for unlawful transfer or rent of road transport operating permit, suspension of illegal operations, confiscation of permits and illegal profits, and a fine of Yuan 2,000-10,000; for failing to provide liability insurance cover, compulsory purchase within a given period or, if this is refused, revocation of operating permit; for not keeping permits in the vehicle, a warning or fine of Yuan 20-200; immediate rectification or, for serious cases, revocation of permit for stopping at unauthorized passenger terminals, running on unauthorized routes or in unauthorized shifts, changing vehicles without authorization, terminating services without notice, or failing to secure freight; for failing to maintain vehicles or have them inspected, rectification and a fine of Yuan 1,000-5,000; for refitting vehicles without authorization, rectification and a fine of Yuan 5,000-20,000; for terminal operators who allow vehicles that are without permit, overloaded or without safety inspection, or who reject vehicles without sound reason, rectification and a fine of Yuan 10,000-30,000; for arbitrarily changing the functions of terminals or routes, origins/destinations, stops, departure times or ticket prices, rectification and a fine of Yuan 3,000; various penalties for infringement of regulations governing motor-vehicle repair and driver-training operations; for infringement of regulations governing international road transport operations, suspension of operations, confiscation of illegal profits, and a fine of 2-10 times illegal profits (or, if profits are less than Yuan 10,000, a fine of Yuan 30,000-60,000); civil or criminal prosecution (depending on severity) for infringement of regulations by employees of road transport authorities, including failure to issue permits correctly or within the time prescribed, engaging in road transport operations or related business, failure to investigate illegal acts, restricting or inspecting vehicles not in accordance with regulations, detaining vehicle or transport operating permits not in accordance with regulations, and seeking or accepting bribes 102. Among other supplementary matters, the RTO permits foreign businessmen to invest in road transport and related businesses through JV, joint-stock company or 100 percent foreign- owned company provided that this accords with all related laws, administrative ordinances or other national regulations; and it authorizes road transport authorities to recover the cost of issuing permits, with charges determined jointly by the relevant municipal/provincial financial departments, pricing authorities and road transport authorities.

b. Safety and Environmental Issues

103. Each province has its own Safety Management of Road Transport regulation in accordance with the RTO and Road Traffic Safety Law. An important element of safety regulation for commercial road vehicles is the Regulation on Comprehensive Inspection and Maintenance of Vehicles. This specifies three categories of safety maintenance: routine inspection, and first- and second-level maintenance. 104. Routine inspection comprises the basic checks carried out by the driver before departure, including checking fuel, oil and water levels and topping up as required, checking that tires, lights, brakes and other equipment are in good condition and functioning correctly, and ensuring that the vehicle is clean. The driver is also responsible for ensuring that the vehicle remains in a safe condition while in operation. These checks may be carried out in the vehicle inspection facilities provided at most bus terminals. At freight terminals, there is some inconsistency in the provision of facilities for checking vehicle condition, including weighing apparatus to check for overloading. 105. In addition to the checks carried out in routine inspections, first-level maintenance comprises a more thorough inspection of vehicle condition, and must be carried out by an authorized workshop. Normally these are at the larger bus terminals in the case of passenger

31 transport. Requirements vary from province to province. In Gansu, first-level maintenance must be carried out every 3,000 kms. A certificate is issued as proof that the vehicle has undergone this maintenance, and the terminal operators should not permit a vehicle to leave the terminal without a valid certificate. 106. Second-level maintenance must also be carried out by an authorized workshop. In addition to items included at the first level, the focus is on inspection of safety-critical parts such as steering components, braking system and chassis parts subject to wear and tear, removal of tires for checking, and repositioning them on the vehicle, checking engine and exhaust emissions and adjustment as necessary. 107. Every vehicle must undergo a comprehensive safety inspection each year at an inspection station authorized and supervised by the relevant road administration. A number of these inspection stations are now operated by private-sector enterprises. 108. The vehicle maintenance and inspection requirements are summarized in Appendix 2. 109. In addition to the annual inspection, most PCDs require buses to be subjected to a similar, but not identical, comprehensive inspection before the Spring Festival, a time of peak demand. This is carried out at a commercial vehicle repair workshop. On the recommendation of SC’s Office of Burden Alleviation (OBA), the Spring Festival inspection is no longer required if the annual inspection has been carried out within the previous three months. 110. As noted in para. 60 the laws on environment protection which affect the operation of road vehicles are the Law on Prevention and Control of Atmospheric Pollution; Law on Prevention and Control of Noise Pollution and Law on Prevention and Control of Radiation Pollution. Enforcement of the Law on Atmospheric Pollution is handicapped by the lack of a proper monitoring scheme, and depends on the vehicle inspection process. For vehicle inspection, the regulations and standards in force in each province are based on National Standard 7258-2004, Technical Requirements for Vehicle Operation Safety; the enforcement authorities include the Bureau of Quality Technical Supervision and the Transport Management section of the PSB. For monitoring noise pollution, each province focuses on the cities and has a set of fixed monitoring stations. EPB and PSB transport management authorities conduct roadside inspections at least once a year. 111. The relevance of the Law on Prevention and Control of Radiation Pollution to transport affects freight transport in the context of the carriage of hazardous cargoes.

G. Alternative Regulatory Approaches

1. Regulatory Aims and Principles

112. China’s approach to regulating road passenger transport is one of close government supervision of most aspects of operation. As we shall see in Section III, the current degree of control tends to inhibit responsiveness to changes in demand, stifle innovation and efficiency on the part of operators, and require a complex and expensive bureaucratic system to implement it. The main objectives of regulation are, broadly, to achieve adequate service provision without excessive capacity, at an acceptable standard of safety. The existing approach focuses on specifying the form organizations should take and the procedures they should follow to provide services of an acceptable standard, without always stating what those standards are. The ideal regulatory framework is one that creates the environment in which an efficient industry can develop in line with government policy with the minimum of government intervention. 113. While freight transport is not controlled to the same extent, the regulations dealing with vehicle maintenance and safety are applicable to both passenger and freight transport. 32

114. A change in emphasis, to set and enforce specific standards where necessary, but to make transport operators responsible for taking whatever measures are necessary to achieve those standards, would eliminate the need for much of the present regulation. It would give operators more freedom to make their own decisions and enable the industry to become more responsive to changing circumstances. It would reduce the administrative burden, releasing resources to enable enforcement to be strengthened – while the degree of regulation could be reduced, the remaining regulations could be much more effectively enforced than they are at present. 115. The definition of standards is critical. The most important are safety standards, which in practical terms can be specified only in terms of vehicle standards on the road (as opposed to maintenance standards), driving standards and compliance with regulations. 116. Vehicle standards should be specified in quantifiable terms, such as minimum tire tread depth, maximum wheel alignment tolerances, minimum braking efficiency etc. All of these can be measured at routine or random inspections. In addition, certain vehicle components must be in working order, including all safety-related items such as external lights, horn, windscreen washers and wipers. For buses, interior condition may be specified in terms of floor and seat condition, interior lighting, serviceability of ventilation equipment; the degree of subjectivity in assessing such items as floor or seat condition must be kept to a minimum. Other quantifiable safety parameters include vehicle loads: this is mainly applicable to freight transport but to a lesser extent, in terms of licensed passenger capacities, applies to buses also. Certain quantifiable non-safety parameters should also be specified, including environmental factors such as exhaust emission and noise levels. 117. Compliance with these standards can be monitored by regular routine inspections conducted by the enforcement agencies, supplemented by random checks at the roadside or in terminals. 118. Driving standards are more difficult to specify in quantifiable terms, and in practice must be based on compliance with all traffic regulations, particularly speed limits, and other regulations such as those governing drivers’ working hours. Of particular relevance is the standard of driving required for the issue of a permit to a new driver. At present this is low in China, by international standards, and a raising of standards in this area for all drivers, including private car and truck drivers, would improve the level of safety for all road users. 119. Compliance with traffic regulations can be monitored by roadside observation by the enforcement agencies. 120. All the above regulations and standards should be clearly specified in national regulations governing vehicle construction and use. Ideally, for consistency, they should be applied nationally, with no variations between municipalities and provinces. These regulations would cover all aspects of vehicle construction and use, including maximum vehicle dimensions and weights, requirements for insurance, etc. 121. The regulations should not be so rigid that they stipulate particular types of vehicle for particular types of service. Provided that safety requirements are met, operators should be able to decide the types of vehicle to use, and a competent operator would use the most suitable for the circumstances. For example, although technically illegal, informal passenger transport operators provide a valuable service, often with unconventional vehicles, at fares determined by market forces, in remote rural areas where there are no formal bus services; the types of vehicles used may not comply with existing regulations, but they are often suitable for the purpose. The legislation should provide for such informal transport modes, with appropriate provisions in respect of safety and insurance.

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122. Also important is the level of professional competence of the transport operators. The poor quality of service provided by some of the smaller operators in China is partly due to a lack of basic knowledge of the market or the industry. This can be addressed by requiring all operators to acquire and demonstrate this knowledge: for example, in the UK, all bus operators require a Certificate of Professional Competence (CPC), issued on successful completion of an examination in relevant topics. Such an examination may be graded for different sizes of operator. 123. The other primary aim of the present regulatory system governing passenger transport – namely, to ensure the provision of adequate bus services in all parts of the country – does not require direct government intervention. Where there is demand, transport operators will provide a service, and in a free market supply will tend to equate to demand, at economic fares for each standard of service. The market will encourage best practices within the industry, encourage private capital into the industry, and encourage innovation. 124. Problems experienced in other countries where transport regulation has been left to market forces have been due almost entirely to a failure to enforce basic standards of safety and, to a lesser extent, standards of management competence. The market has been flooded with incompetent and irresponsible operators, with little knowledge of the market, who do not comply with safety standards or traffic regulations. Proper enforcement of safety and management regulations would eliminate such operators and ensure the survival and growth of the more professional operators.

2. Leveling the Playing-Field

125. The categorization of bus operators, when it is applied, gives advantages to the larger operators, particularly in terms of the routes which may be operated. This was intended to encourage the consolidation of smaller operators into larger organizations – a policy applying also to freight transport enterprises – by offering the incentive of being permitted to operate longer-distance services, but it puts many operators at a disadvantage compared with the large SOEs or former SOEs. 126. Not all operators are treated equally. The Heilongjiang Dragon Passenger Transportation Group, for example, enjoys reduced road tolls and a relaxation of requirements for categorization as a Class I operator; this was to encourage the amalgamation of smaller operators to form this company in 1996. Several SOEs are granted other concessions, such as authority to use buses on more than one route, which are not given to other operators. Despite a requirement to treat all operators with impartiality, some terminal operators that also operate buses give preference to their own vehicles. In road freight transport, other areas of discrimination apply: for example, in preferential access to freight terminals and plazas, in the decisions made by SOE customers on their choice of (often state-owned) transport operator, and in the government policies directed at building strong groups capable of competing effectively with, or becoming JV targets for, foreign companies entering the market. 127. All regulations should apply equally to all operators. A change of emphasis from quantity to quality licensing would eliminate those special circumstances where certain regulations have been waived for selected operators. If a situation should arise locally where a rule is relaxed for any reason, this should apply to all operators involved. On the other hand, an operator which is able, for example, to negotiate favorable toll rates on a purely commercial basis, such as a discount for high volume, should be permitted to do so: what should not be permitted is inconsistent treatment of operators by the regulatory authorities. 34

3. Industry Structure and the Role of Competition

a. Structure of the Road Transport Industries

128. The structure of the bus and trucking industries, in terms of the number of enterprises of various sizes and the types of service provided by each, will influence the quality and efficiency of the services provided. Smaller enterprises (1-20 buses or a few trucks) are generally more efficient in areas where demand is low or dispersed, such as in remote rural areas; large enterprises (500 buses/trucks or more) can normally provide better services on routes and in areas where demand is high. Medium- to large-sized operators are generally most effective on long-distance services: again on intensive routes larger operators are normally more efficient, and smaller operators tend to be more efficient on routes with lower demand. 129. The passenger and freight transport systems must cater for highly diversified demand patterns, with millions of individual movements each day; for buses this applies particularly to large urban areas. Not only is the geographic distribution of movements highly complex, but the variations in demand between different times of the day, different days of the week and in different seasons are substantial. 130. For bus services, a system which meets all these requirements must be carefully planned, based on detailed information on passenger movements. Without detailed information and planning, transport operators would not be able to allocate their resources in the optimal manner; passenger transport services would tend to be concentrated on routes with the greatest demand, while those with low demand would receive poor service. This is particularly true where the passenger transport industry is dominated by small operators who have little knowledge of the overall market, and who therefore gravitate towards routes that are obviously busy. Market forces alone will not resolve this, as has been proved in countries throughout the world. 131. Large bus operators with fleets big enough to provide a network of routes are likely to have the capability and resources to gather the necessary information to plan services that are closely matched to demand, and to continuously monitor and adjust them as required. They are more capable of providing regular schedules, which may be varied in tune with demand at different times, and coordinated networks of routes over an area; potential economies of scale, such as the use of larger depots and workshop facilities, may be exploited. Where services are provided by many small operators, such planning must be carried out by another organization, and there must be a regulatory system which ensures that services are operated in accordance with these plans. 132. MOC’s categorization of passenger transport enterprises was designed to encourage the formation of operators of appropriate size for different types of operation. However, this has proved unnecessarily rigid and in practice a number of exceptions have had to be made to meet local requirements. 133. The structure of the industry – this also applies to road freight transport – has also been influenced by the way in which existing and former SOEs are structured as groups or conglomerates, with separate subsidiary companies for each activity, such as freight transport operation, passenger transport operation, vehicle maintenance, terminals and other activities less directly related to the transport operation. But other forms of structure may sometimes be more appropriate. For example, an organization specializing in vehicle maintenance, with the best workshop equipment available, highly-skilled staff and the scale necessary to justify a high degree of specialization in terms of equipment and skills, may provide a better quality of service than several smaller, less specialized facilities belonging to several different groups. Such an

35 organization may have one or two large workshops in only one city, or may develop into a larger group, but still specializing only in vehicle maintenance, with workshops in several cities. It may service passenger and freight operators, including both urban and long-distance operators. 134. Most large enterprises operate both passenger and freight transport services. While there is a certain amount of commonality in the maintenance of buses and trucks, there are major differences on the operational side, and therefore it may be logical in many cases for enterprises to concentrate on one or the other. The freight subsidiaries of several large operators based in different provinces could possibly combine to form a large national freight transport operator providing a network of trunk and distribution services, much better placed than a number of separate operators to meet the growing demand for well organized, high- quality logistics operations. Similarly, long-distance bus-operating subsidiaries in different provinces might combine to provide a national network of long-distance bus routes. It should also be possible for a single enterprise to become involved in the operation of both urban and long-distance bus services and services for tourists. 135. A group may specialize in the operation of bus terminals, or in the operation of buses, using terminal and workshop facilities provided by completely separate organizations. There may be some companies which engage in two or more activities: it is often appropriate for a workshop and a terminal to be on the same site, in which case it may be appropriate for both to be part of the same group. In certain circumstances, a single company both operating and maintaining its own vehicles may be appropriate. This may be particularly applicable for a smaller company, but many large companies may prefer to keep their maintenance in-house, and under their direct control. 136. There is also no logical reason why only the largest companies may operate the longest routes. A small company, provided that it has adequate provision for maintenance and the capability to provide back-up vehicles in the event of a breakdown or accident (which may involve co-operating with other operators, small or large, along the route), could provide a service that is equally or more efficient and reliable than one provided by a much larger operator. This is often so in the case of specialized services, such as particularly high-quality long-distance services, refrigerated freight services or the transport of over-sized or dangerous loads.

b. The Role of Competition

137. Competition between operators should be encouraged. The experience of other countries has shown that this will result in improved services within the appropriate regulatory framework. Entry to the market should not be unduly restricted, but it is undesirable to have too many small bus operators competing on the same route. Experience in other countries suggests that in large urban areas some form of franchising (with competition for the market but not in the market) is normally more effective, while on long distance services with high levels of demand, two or three operators on most routes, operating in competition, will result in good quality services, running to schedules reasonably in tune with demand. Such limited competition is sufficient to give the operators the incentive to operate efficiently, provided that there are measures to prevent undesirable anti-competitive collusion. 138. In a situation where a large operator would be preferable, but where there are many small operators, the small operators should be encouraged to merge to form larger operating units; this may be done in various ways, such as the formation of co-operatives or operators’ associations, or through merger of small enterprises to form larger ones. Alternatively, a large operator may be encouraged to purchase the smaller operators. Individual owner-operators should still be permitted to enter the industry. Such encouragement should not be compulsory 36 through legislation, but the process may be assisted by permitting operators’ associations to hold operating permits on behalf of their members. 139. Bus operators should be allowed to decide their own routes. It would not therefore be practical to attempt to limit the number of operators on any particular route, or to limit capacity on any route, as is done in China at present – a new operator could simply introduce a variation of a route which is not run by any other operator. 140. An important feature of transport regulation in western countries is legislation designed to promote competition, and to prevent operators from engaging in practices which restrict competition. The objective is to protect consumers from exploitation by monopolies or cartels, through such tactics as restricting the supply of a product or service, so that it can be sold at a higher price than would otherwise be the case, and preventing other suppliers from entering the market through various means. 141. Such practices are clearly undesirable, but there is a danger that prevention of monopoly behavior – rather than protection of consumers’ interests – becomes an end in itself, and sometimes legislation aimed at promoting competition can act against the public interest. In the case of public transport, where several different operators provide services on the same route, it is normally in the interests of passengers for the operators to co-ordinate their timetables to provide a regular frequency, rather than for all their buses to run at irregular intervals or in bunches, competing for passengers at every stop, as often occurs where operators are prohibited from coordinating their services. This means that while there may be higher capacity in terms of seat-kms, much of the capacity is wasted, and the effective service capacity is lower than it would be if a regular frequency were provided with fewer buses. 142. Agreements between operators as to which serves particular areas or routes, to operate to coordinated timetables providing regular frequencies, to charge consistent fares, or to accept one another’s return tickets, can result in better services, often at lower cost to the user. Since a cohesive network of services may be best provided by a single operator, there is often genuine merit, where several operators serve a common area, in their agreeing to divide it so that each part of the area is served exclusively by one operator. Similarly, a coordinated service provided by two operators based at opposite ends of a route is more beneficial to all concerned than one where the two are forced to compete, running an irregular frequency. 143. However, in some countries such co-operation is not permitted under anti-trust legislation. Following deregulation of bus services in the UK in 1985, many such agreements between bus operators ceased to be exempt from Restrictive Trade Practice legislation, and were discontinued. Any anti-trust legislation which may adversely affect the provision of public transport services in such a way should be amended to give exemption to transport operators where this is necessary.

4. International Lessons for China: Freight Transport

a. Europe

144. The European Union (EU) coordinates regulatory policy governing transport in its 25 member states; it also has special agreements on common policy with Switzerland, Norway and other countries. Also important in setting regulatory policies is the European Conference of Ministers of Transport (ECMT), which represents the 25 EU members plus 18 others and seven associate member countries 30 ; its aim is to help develop an integrated transport system throughout an enlarged Europe and to help build a bridge between the EU and the rest of

30 Associate members include the US, Canada and Australia

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Europe. It seeks to harmonize member countries’ approaches to international agreements and regulations governing freight and cross-border transport, infrastructure cost recovery, protection of the environment from transport impacts, road traffic safety, transport-related crime, security, new technologies and other matters. 145. Key items of ECMT resolution and EU regulation include the following: • ECMT Resolution No 2000/11, on rules governing international freight transport by road (covering market access, liberalization of certain restricted categories of transport, permit and authorization regimes, social and fiscal provisions, and arrangements for mutual assistance in implementation) • EEC No 3118/93, on cabotage rights for truck operators • Council Directive 96/26/EC, allowing mutual recognition of truck and bus driver qualifications • EEC No 881/92 and 484/2002, allowing road transport operators licensed in one EU country to operate in others • EC No 1172/98, on the collection of data from trucking companies • Directive 96/96/EC, requiring trucks and buses to have an annual roadworthiness test • Directive 2000/30/EC, giving authority to enforcement officers to check trucks and buses at the roadside and establishing criteria for removing them from service • EEC No 3820/85, limiting hours of work for drivers of trucks with gross vehicle weight (GVW) of 3.5 tonnes or more and buses carrying more than nine passengers – updated by Directive 2002/15/EC for implementation in March, 2005 • EEC No 3821/98, requiring transport operators to install recording devices to monitor drivers’ driving time (speed and distance) • EC No 484/2002, on conditions for drivers from non-EU states • EEC No 93/704, concerning the establishment of a database on collisions • Directive 96/53/EC (as amended by Directive 2002/7/EC), setting out permissible weights and dimensions for trucks over 3.5 tonnes and buses with more than 9 seats • Directive 91/439/EEC (as subsequently amended), establishing a model for drivers’ licenses, common license categories and minimum ages for drivers of various categories • Directive 94/55/EC (as amended), on the transport of dangerous goods by road • Directive 1999/62/EC, covering vehicle taxes and user charges for goods vehicles of 12 tonnes GVW or more31. 146. The EU policy emphasis in the early 1990s was to achieve a single market in road freight, road passenger transport and inland waterways transport. By 2000, this was felt to have been achieved and the emphasis changed to improving social conditions and enhancing technology and safety while taking into account environmental concerns. For the future, the main priorities are seen as “directing” transport markets, developing policies on road-user charges (in the belief that current charges do not reflect the cost of externalities) and addressing the transport causes of environmental deterioration. “Directing” transport markets is aimed

31 Although individual member states are responsible for levying these taxes and charges, this Directive sets broad principles to be followed, including minimum levels for the taxes. 38 mainly at slowing growth in road and air traffic and promoting the use of more environmentally- friendly alternatives like rail transport – “regulated competition between modes” 32 . Existing European policies also recognize a failure to develop and implement effective road-safety regulations. 147. In a comparison of regulatory policy with other countries, Europe’s approach can be characterized as more proactive and interventionist than equivalent regulations in the US, Canada or Australia. Competition is regulated, rather than facilitated. Policy is also more concerned with social and environmental issues than in the US, Canada and Australia, perhaps reflecting the greater degree of traffic congestion and density of development. EU policies and regulations place emphasis on safety, but the approach and progress are held back by the need to reach agreement across a wide variety of jurisdictions: Europe has only recently adopted procedures to ensure that truck drivers hold only one driving license; it is still trying to implement common vehicle inspection and on-road enforcement standards; and it has not yet developed the kind of safety-rating and licensing mechanism for transport operators that is a key feature of safety regulation in North America (see below).

b. United States

148. The development and implementation of road transport policies and regulations in the US involve, among others: the Federal Motor Carrier Safety Administration (FMCSA), concerned with commercial vehicle safety regulations, the Federal Highway Administration (FHWA), concerned with highways and the national Highway Trust Fund33, and the National Highway Traffic Safety Administration (NHTSA), concerned with safety performance standards for motor vehicles and motor vehicle equipment 34 , all coming under the Department of Transportation (DOT); the US Immigration and Naturalization Service and US Customs and Border Protection, under the Department of Homeland Security, concerned with cross-border transport issues; and the Environmental Protection Agency, which sets fuel standards and emission limits for truck and bus engines. 149. Several other public-sector agencies also participate in the policy/regulation debate: the American Association of Motor Vehicle Administrators (AAMVA), which develops model programs in motor vehicle administration, police traffic services and highway safety (its membership includes all US states and Canadian provinces); the Transportation Research Board (TRB), a branch of the National Academy of Sciences that acts as a clearing-house for research and reports to Congress recommending changes to transport policy or regulations; the Commercial Vehicle Safety Alliance (CVSA), an organization that proposes policies and practices governing commercial vehicle maintenance and inspection; and the International Registration Plan (IRP), to which all US, Canadian and Mexican states and provinces belong, which handles the pro-rating of vehicle registration taxes among all jurisdictions. 150. Transport policy and regulation in the US are also influenced by state governments and their agencies. All states have Departments of Transportation, responsible for road transport polices and regulations, enforcement agencies (state police, special truck/bus inspection officers), and licensing, taxation and environmental agencies (for example, the California Air

32 European Commission White Paper, European Transport Policy for 2010: Time to Decide, 2001. 33 The FHWA is primarily a highway agency; it allocates money from the Highway Trust Fund to the states for highway building. But its responsibilities also include regulations governing vehicle weight and dimensions (VWD) limits. Its VWD regulations are an important influence over the structure and characteristics of truck fleets in the US, Canada and Mexico. 34 The NHTSA sets vehicle standards; for trucks and buses, this includes such important things as brake standards, rear-guard standards on trailers, etc.

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Resources Board). Many state policies are initially developed in cooperation with other states and the federal government through the joint agencies listed above. 151. In addition, in relation to taxation, there is the International Fuel Tax Agreement (IFTA), an agreement between US and Canadian jurisdictions for the uniform collection and distribution of fuel tax revenues. Under this agreement, jurisdictions continue to set their own tax rates according to local and state highway construction and maintenance needs, but notify others of the tax rates to collect. 152. The federal government has jurisdictional responsibility for trucks and buses operating in interstate commerce. Because many states are relatively small (at least compared to Canada or Australia), many (perhaps most) commercial trucks and buses in the US fall under federal jurisdiction. Since deregulation in the 1980s, the focus of truck regulatory policy has been on safety matters, resulting in the creation of a separate administration in 2000 within the DOT, the FMCSA. FMCSA safety regulations apply to operators of trucks with a gross weight of 10,001 pounds or more and to buses that carry 15 or more (including the driver) if these vehicles are used in interstate commerce. The regulations for which the FMCSA is responsible include: • Federal Motor Carrier Safety Regulations – the FMCSA develops and enforces the most important safety regulations governing most aspects of vehicle condition and driver and carrier performance • Hazardous Materials Regulations – i.e. the carriage of dangerous goods • Commercial Driver's License Program – the FMCSA develops, monitors and ensures compliance with the commercial driver licensing standards for drivers, carriers and states • Motor Carrier Safety Identification and Information Systems – the FMCSA maintains and disseminates to industry and the public information on the safety performance of carriers which can be used by the states to target unsafe operators • New Entrant Safety Assurance Process – the FMCSA ensures that motor carriers entering the business know about federal laws and comply with safety regulations • Motor Carrier Safety Assistance Program – this is a federal grant program providing states with financial assistance to hire staff and implement strategies to enforce safety and hazardous material regulations • Performance and Registration Information Systems Management – this is a federal-state partnership that makes safe performance a requirement for obtaining and keeping commercial vehicle registration. 153. While US land transport regulations are under strong federal government leadership, lower levels of government also play a role in policy development. All the key agencies that deliver programs (AAMVA, etc), prepare policy suggestions or research transport matters for the federal government include state representatives in their membership. Also, in the preparation of new policy or regulatory initiatives, the federal government always consults with lower-tier governments, and both levels of government, federal and state, undertake extensive consultation with industry (carriers, shippers etc). 154. The states are mainly responsible for traffic safety policy and administration of the roadway system. They determine licensing guidelines, speed limits, drink/driving laws, highway design and maintenance standards, and enforcement of rules governing driving behavior. Although federal regulations on truck size and weight are of most importance, state regulations governing intrastate trucks are also important: in many cases, states allow trucks longer or 40 heavier than the federal limits, sometimes only on state roads and sometimes on state and interstate (federally-funded) roads. 155. A further influence on road transport policies and regulations is the 1995 North America Free Trade Agreement (NAFTA). NAFTA requires the US, Canada and Mexico to harmonize their transport regulations. All three participate in a forum (the Land Transportation Standards Sub-Committee) to do this, though it has had mixed success so far. 156. Lastly, the development of policies and regulations in the US is always done in the context of a great deal of research: studies undertaken by federal and state agencies, research by the academic community, research by agencies like the General Accounting Office, and studies carried out by the TRB as mandated by Congress. 157. In comparing the US regulatory approach with other countries’, the following is of note. To a greater extent than Europe, Canada or Australia, the regulatory structure depends on initiatives by the “senior” agencies at the federal level of government. Notwithstanding this, the process of deciding policies and regulations receives inputs from a wide range of involved parties both within and outside government. And the US has developed strong and sophisticated safety regulations, based on the initiatives of specialist agencies and on the link between the safety performance (and compliance with safety regulations) of operators and the right to operate a commercial vehicle.

c. Canada

158. The following agencies are involved in developing and implementing road transport policy and regulation in Canada: • Transport Canada, which administers the Motor Vehicle Transport Act (which delegates aspects of control over extra-provincial transport operators to the provinces) 35 , the Motor Vehicle Safety Act (which gives the federal government authority to regulate vehicle standards), and the Transportation of Dangerous Goods Act • the Council of Ministers Responsible for Transportation and Highway Safety, which considers major policy issues before new legislation is passed or new regulations are promulgated under existing legislation • the Council of Deputy Ministers Responsible for Transportation and Highway Safety – this body of senior officials serves under the Council of Ministers; in addition to a general responsibility for transport policy and regulation and the technical advice it gives to ministers, it is responsible for the joint federal, provincial and industry task force handling all aspects of vehicle weights and dimensions (VWD) • the Canadian Council of Motor Transport Administrators (CCMTA), a group of federal and provincial officials responsible for aspects of road transport regulation including vehicle licensing, driver licensing and safety regulations; it is similar to the AAMVA in the US • the Transportation Association of Canada (TAC), consisting of government and non- government members working in various committees to develop transport policy, mostly to do with roads (design standards, traffic) but also road/traffic safety, environmental matters and (sometimes) road taxation

35 Under this act, the federal government regulates drivers’ hours of work and a new requirement that licensed road transport operators have a safety fitness certificate. Typically, provinces adopt parallel regulations so that the regulation of extra-provincial and intra-provincial road transport operators is uniform. The federal government also influences land transport regulations through its responsibility for cross-border movements.

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• the Commercial Vehicle Safety Alliance (CVSA), a joint consultative organization involving all 13 provinces and territories as well as all US states and Mexico • the International Registration Plan (IRP), mentioned earlier in relation to the US • Customs and Immigration, the federal department controlling cabotage (Canada and the US have harmonized rules) • a number of other federal departments, including Environment Canada, which sets emission limits for truck engines and the related standards for diesel fuel • provincial agencies – each province has its own structure for developing and administering road transport policy and regulations; most are also represented on the Council of Ministers, the Council of Deputy Ministers, the CCMTA, TAC, CVSA and IRP as described above. 159. It is the provinces in Canada, however, that are responsible for implementing and enforcing most truck and bus regulations determined by the federal government. The Canadian constitution gives the federal government responsibility for extra-provincial matters – including, for example, the operations of any transport company that has services extending beyond a provincial/territorial border. But since 1954 this federal responsibility has been delegated to the provinces under the Motor Vehicle Transport Act. This is not without conditions, however: the provinces must have in place a system for issuing safety fitness certificates to extra-provincial motor carriers; without such a certificate, a motor carrier cannot operate. Except for things such as new vehicle standards, emission controls and international transport, regulatory responsibility for almost all other matters in Canada rests with the provinces. 160. In terms of economic regulation – controls on market access and rates – road freight transport in Canada has been de-regulated for some time. There have been attempts at deregulating the road passenger transport industry across Canada but, to date, they have not been successful: bus transport is regulated to varying degrees within each province. 161. Even though the road freight transport market is deregulated, operators (this applies to buses too) must obtain an “operating authority”36. Under federal law, the safety fitness certificate can be considered equivalent to the operating authority. It confers the right to operate a commercial vehicle, whether truck or bus, subject to a satisfactory safety record. 162. Other important features of road transport regulations in Canada are: • VWD regulations – each province used to develop its own regulations (the federal government has no jurisdiction in this area), but in 1988 the provinces agreed to adopt minimum standards applicable to all main roads in Canada; there is also a permanent task force that keeps these regulations under constant review • National Safety Code (NSC) – as the trucking industry was deregulated, starting in the 1970s, there was a major effort to revise and strengthen safety regulations. The result was the adoption by all provinces of a NSC in 1987. This now consists of 15 standards covering everything from driver licensing, carrier profiles maintained for enforcement purposes by the provinces, maintenance and inspection requirements and standards, procedures for compliance audits of carriers, hours of service standards and the process by which motor carriers are given a safety rating. In this case (unlike VWD) the federal government played a key role in developing the NSC, but implementation for the most part is still a provincial responsibility.

36 The term varies between provinces. In some provinces, the idea of making an operating authority the same as a vehicle registration is being considered. 42

163. Special inquiries on matters of policy or regulation are often used in Canada. These typically hold hearings, conduct research and produce reports with recommendations that governments can implement or not as they see fit. An example is the Canada Transportation Act Review Panel which made a wide range of recommendations on transport policy in 200137. 164. In terms of comparisons with other countries, the key features of the Canadian model are: • multi-jurisdictional agencies – more so than in most countries, the system in Canada depends on cooperation among jurisdictions on policies, regulations, standards, procedures etc; the political body (Council of Ministers) and its civil-servant equivalent (Council of Deputy Ministers) give all governments (federal, provincial, territorial) an equal voice in developing policy • inter-jurisdictional agreements – much of Canadian road transport regulation has been developed through agreements (MOUs) among jurisdictions, such as for VWD limits and the safety regulations in the NSC • federal role – the federal role in road transport in Canada is relatively weak, compared with the US; it also has only a limited role in highway construction, management and funding. A long-standing debate has been on whether or not the federal government should take a leading role in road transport regulation to achieve greater uniformity across the country; some, citing the US DOT and FMCSA as examples, claim it would be easier to have just one government to deal with; others argue for a consensus model among provinces that agrees minimum standards but allows for regional differences • harmonization among NAFTA countries – much of Canada’s road transport regulation has been harmonized with the US and Mexico under NAFTA, through joint development with the US (e.g. load security, drivers’ working hours), mutual recognition of markings (e.g. hazardous materials) or coordination on joint committees like AAMVA, IRP, CVSA and others • safety fitness – the experience with trucking deregulation has convinced Canada that, in an unregulated market, there must be a means of getting unsafe operators off the roads; the mechanism chosen is the safety fitness certificate and an elaborate procedure used to monitor the safety fitness of individual operators.

d. Australia

165. Australia develops national road transport policy and regulation through the Australian Transport Council (ATC) 38 (previously the Australian Transport Advisory Council, or ATAC), a political body supported by a Standing Committee on Transport (SCOT) and with research- based advice provided by a National Transport Commission (NTC). 166. Powers over road transport are exercised by the states, not the national (Commonwealth) government. Before 1991 efforts to co-ordinate road transport regulation among the states were made by the ATAC, but the process was advisory and relied on implementation by the states. By the early 1990s, the division of powers under Australia’s federal system was seen as impeding economic efficiency – there were significant differences between states over matters like VWD standards, permissible driving hours and road cost

37 Canada Transport Act Review Panel, 2001, Vision and Balance 38 Members of the ATC represent the Australian federal government, the Australian states and territories, and New Zealand and Papua New Guinea.

43 recovery from users39. As a result the National Road Transport Commission (NRTC), the fore- runner of the NTC, was established in 1993. This had broad regulatory responsibility over heavy vehicles (trucks and buses with gross mass over 4.5 tonnes) and a specific responsibility to develop policies on taxes for these vehicles. 167. The NRTC developed policies governing, among others, hours-of-work rules for drivers, VWD limits, new vehicle standards, in-use vehicle standards (i.e. vehicle conditions when on the road), traffic codes, the carriage of dangerous goods, compliance and enforcement issues, and vehicle taxation. Originally it was intended that legislation would be drafted by the Commission, enacted by the Commonwealth on behalf of the Australian Capital Territory, then used in the states as a template for their own laws. In 2002 Australia conducted a review of the NRTC and as a result established the NTC in 2004, covering all intermodal surface transport, not just road transport. 168. The NRTC had proved effective in jointly developing vehicle noise and emission standards with environmental regulators; it provided a forum for effective exchange of ideas and information between road authorities, and between road authorities and agencies with related responsibilities. By 2002 it had completed much of its initial agenda and had begun to develop more innovative approaches to the regulation of road transport by drawing on developments in other regulatory spheres (e.g. performance-based standards, compliance and enforcement, alignment of road transport and occupational health and safety). This suggests a useful role for an agency freed from line responsibilities and able to concentrate on broader policy issues, with outputs in the form of model legislation. In road transport, it carries responsibilities for safety reforms (national road rules, vehicle standards, truck and bus driving hours, arrangements for transport of dangerous goods and driver licensing arrangements); efficiency reforms (uniform mass limits, uniform national heavy vehicle charges, national standards for restricted access vehicles and a national registration scheme); reforms focused on compliance (chain-of- responsibility legislation, vehicle accreditation systems and outcome-focused sanctions, penalties and enforcement rules); and environment reforms (tighter vehicle emission standards, cleaner fuel standards with lower sulfur content and lower noise standards). 169. Like Canada, Australia makes use of formal inquiries – studies commissioned by government into aspects of policy or regulation. Recommendations do not necessarily result in policy or regulatory change but over the longer term they influence policy thinking. 170. In summary, the key features of the Australian approach to transport policy and regulation are as follows: • Because of the division of powers between federal and state governments, joint bodies have been established to help harmonize policies and regulations; in the NTC, Australia has established an agency that makes policy recommendations and draft legislation that is passed on to the political level (ATC) where there is a legislative requirement that the advice is subject to a vote • Australia has gone further than most in combining multiple aspects of road transport regulation and road user taxation (user charges) within one agency (the NTC) • Australia has combined policy formulation and regulation for road transport with rail (and intermodal) transport within one agency (the NTC) • Australia has also found that it has to strengthen its safety-related regulations in a deregulated market. Some of the most recent changes, such as the chain-of-responsibility

39 See Moore B and McIntyre K, Road Transport Reform in a Federal System – A Reflection on Ten Years in the Process, 25th Australian Transport Research Forum, Canberra, 2002.. 44 concept in the 2004 Road Transport Reform (Compliance and Enforcement) Bill, and the concept of a national accreditation system (which allows for safety auditing of individual companies), mirror some of the concepts seen in the US and Canada under their safety-rating mechanisms.

e. Lessons for China

171. What might China learn from these overseas approaches? • the role of markets: The EU, North America and Australia have all found that competition is the best means of ensuring an efficient transport system, though the EU continues to impose controls in pursuit of social and environmental goals; all recognize the need to set user charges to recover costs, including the cost of externalities (pollution, noise, congestion etc). China could consider relaxing its controls over transport markets and prices, particularly for passenger services. • safety regulations: All have found that as truck and bus markets are liberalized there is a increased need for stronger safety regulation and enforcement. China needs both to strengthen its safety and environmental enforcement mechanisms and to develop a system of economic incentives that will reduce the benefits of non-compliance. • environmental protection: All have found it necessary to develop environmental-impact regulations specifically for the road transport industry (mainly governing emissions and the transport of hazardous materials). China has insufficient linkage between its environmental standards and the performance of vehicles on the road. • safety ratings: The US, Canada and Australia have found that, in addition to safety regulations requiring or prohibiting certain behavior (e.g. maintaining log books or preventing speeding), it is necessary to have a mechanism to assess the safety fitness of carriers; they have tied the right to register and operate a commercial truck or bus with a satisfactory safety (performance) rating. There is much China can learn from this approach; most importantly, it places responsibility for safety performance primarily on the operator. • research support for policy decision-making: All four regions make extensive use of research in the policy-making process, whether done within government, by independent agencies or by industry bodies. MOC’s decision-making would benefit from a broader policy research basis, rather than relying on supporting studies commissioned only from its own research institutes. • links between regulatory areas: Practices differ between regions, but there is often an attempt to bring together related concerns – e.g. agencies concerned with taxation, building roads, enforcing laws, protecting the environment etc – when developing policy or regulation. In Australia’s case these are brought together, for the most part, in a single agency, the NTC. In others, representatives from different agencies are brought together when issues are investigated. MOC should consider establishing inter-ministerial committees to address areas of common concern, and should develop ways to work more effectively with agencies like NDRC.

5. International Lessons for China: Passenger Transport

172. The requirements for a regulatory system for road passenger transport in China are broadly similar to those for freight transport as far as quality regulation is concerned, but there are significant differences with regard to quantity regulation. To a large extent market forces will ensure that the supply of freight transport tends to equate to demand. But market forces alone do not result in a passenger transport system which effectively meets demand: this has been

45 proved, particularly in urban areas, in countries throughout the world, both developed and developing. 173. Various regulatory systems have been adopted in different parts of the world, and at different times. There has been a general tendency worldwide to reduce the level of government intervention in the provision of passenger transport, but some systems have been more successful than others. Lessons can be learned from their experience. 174. In many respects China is unique, however, and its requirements for a passenger transport system might require a unique regulatory model. In terms of population and geographic size, it is one of the biggest countries in the world. It has the fastest-growing economy; it has a highly developed administrative system; and the pace of change is far greater than in most other countries. The transport system must be capable not only of meeting current requirements, but of adapting continuously to changes in them. In particular, while it has many of the features of developed western countries, a significant difference in the transport context is the much lower level of car ownership. For several decades, demand for transport by bus has been declining in North America, Europe and Australia as car ownership has increased; as a result, many bus services in those countries are not financially viable, and are subsidized, often to a considerable extent. Although car ownership in China is increasing at a very rapid rate, the number of cars per head of population is much lower than in the western countries. Demand for bus services is high, and is likely to increase with increasing economic activity. Salaries and wages are such that, given the high level of demand, most passengers are able to pay fares which cover the full costs of operation, so that the requirement for subsidized services is low or negligible, except possibly in the more remote rural areas, and the operation of bus services is potentially more attractive commercially than in most western countries.

a. South-East Asian Countries

175. Countries comparable with China are the larger countries in Southeast Asia, such as Indonesia, the Philippines, and , where demand is high and incomes sufficient to make economic bus fares affordable, particularly on long-distance services. In the Indian sub- continent, where incomes are lower, many bus services are subsidized, or of poor standard, and often both. In most African countries, incomes are so low that few bus services are commercially viable, and the number of conventional buses has been declining. Several African countries provide examples of the serious consequences of inappropriate regulatory systems, including the elimination of conventional operators of large buses and their replacement with inappropriate small vehicles run by informal operators. 176. The regulatory systems in the southeast Asian countries are broadly similar in most respects, with some differences of detail. Bus services are generally subject to route licensing procedures; routes and fares are normally set by the regulatory authorities; and buses are usually restricted to operating on the route for which they are licensed – all as in China. Bus stations and terminals are also subject to varying degrees of regulation. In terms of the level of service provided, however, there is in practice little or no regulation: there is usually no effective limit on the number of vehicles permitted to operate on any route; nor is there any effective means of ensuring that services are provided on routes with relatively low demand, even if these could support economically viable services. Bus operators tend to apply for licenses to operate on the routes they think are the most profitable, usually based on inadequate information, resulting in excess supply on those routes and inadequate or non-existent services elsewhere. The system commonly used whereby buses do not follow schedules but wait at terminals until they are full means that even if there is an excess of vehicles on a route there may still be insufficient capacity in terms of the service provided, since at any one time a high 46 proportion of buses stand idle at the terminals. Where services follow schedules, these are usually determined by the regulatory authorities and do not allow bus operators to utilize their vehicles efficiently. 177. For urban services, particularly in the larger cities, various forms of franchising have been adopted but, for various reasons, including ineffective administration on the part of the authorities, these do not achieve the best results in most cases.

b. Europe, North America and Australia

178. Although there are major differences in circumstances between China and western countries, as mentioned above, there are several lessons which may be learned from these countries in terms of the regulation of road passenger transport. Some are negative. There has been a move towards deregulation in most industrial sectors in western countries, and bus systems are deregulated in the sense that a bus operator, provided he meets specified standards of safety and competence, may operate on any route he wishes and charge whatever fares he wishes. 179. There are exceptions, particularly in large urban areas and rural areas, where services are usually subsidized and operated under various forms of contract or franchise arrangement. In several cities in the UK there is a mix of subsidized services, which as contracted services are in effect regulated, and commercially viable ones, which are not subject to regulation. Inter- urban and long-distance bus services, which are capable of being operated on a commercial basis, are virtually unregulated in all western countries. 180. London is a typical example of the way urban bus services are regulated. All services, whether or not they are profitable, are operated under a franchise or contract system. The authority (Transport for London, or TfL) determines routes and schedules, and each route is contracted (typically for a period of five years) to one operator, allocated on the basis of a bidding procedure. Outside London, all bus services which can operate commercially are subject only to quality regulation, but otherwise have been fully deregulated since 1986. 181. Although bus operators in the UK are free to decide on which routes they operate, and their schedules and fares, they must register full details of all their services with the licensing authority and must give a minimum of eight weeks’ notice of any planned changes: this provides a degree of stability. 182. Some lessons can be learned from the deregulation of bus services in the UK during the 1980s. There was a common tendency for additional buses to be deployed by newcomers on profitable routes which were already adequately served, competing with the incumbent operator. This resulted in increased total vehicle-kms, but a smaller, sometimes negligible, proportionate increase in passenger-kms. The profits of the incumbent operator were reduced, while those of the newcomer, whose buses had been transferred from less profitable routes, were increased, but usually by a smaller amount than the reduction in profits for the incumbent. In most cases the overall result was a net disbenefit for both bus operators and users. 183. This situation led to a number of cases where existing operators were driven to insolvency by those engaging in such predatory tactics as swamping routes with buses, deliberate obstruction of buses at stops, the provision of services at unsustainable fares or even free of charge until the existing operator was forced to withdraw, and incentives for staff to transfer from the incumbent to the predator. Although such activities were subsequently ruled illegal by the Office of Fair Trading, the damage in most cases was already done, and the penalties imposed on the new operator were virtually ineffective.

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184. Deregulation in the UK led initially to instability and fragmentation of route networks, and the withdrawal of services at unprofitable times or on unprofitable routes, particularly in rural areas, and significant variations in service quality. On the positive side, it led to innovation, new types of service, increased levels of service on busy routes, and better-quality services on some40.

c. Models appropriate to China

185. None of the regulatory systems for bus passenger transport in western countries or other Asian countries has been fully successful in achieving their main aim of providing efficient and affordable public transport services in all areas; none would be appropriate for adoption in China. There are however lessons to be learned, and there are elements of the various systems which may be adapted to meet China’s particular requirements. The regulatory changes that result from these are discussed in Section III.

II. FREIGHT TRANSPORT

A. The Changing Role of Road Freight Transport

186. Globalization – the flow of goods, services, funds and information across national boundaries and the resulting integration of the world’s economies – is changing the role of road freight transport everywhere, including China. It is increasingly viewed as an integral part of their overall supply chain. Although supply-chain management goes beyond the scope of this present project, growing competition in more open markets is increasing the demand for better-quality, more efficient and more reliable logistics services. This, in turn, is putting pressure on road transport to meet new requirements for reliability, timeliness, speed and security. This pressure will intensify in China as it moves towards becoming the world’s primary location for outsourced manufacturing, producing more and more of the products that feed into time- and cost-sensitive consumer and industrial markets in Japan, Europe, North America and Australasia. While the impact of this on more mundane road transport tasks within China itself – like local deliveries or domestic transport of agricultural or industrial products, bulk goods or building materials – may not yet be fully evident, these customer pressures will almost certainly percolate down to them too, as they have in other countries. This also has implications for the future role of transport regulation, discussed in this chapter.

1. WTO and Other Trade Commitments

187. Under its WTO accession agreements, China committed to opening up its distribution and logistics markets to foreign participation (Table 1). Already foreign companies are allowed to distribute imported products and hold majority shares in logistics JVs. By 2006, all restrictions on logistics and ancillary services will be removed; foreign companies will be able to set up wholly-owned subsidiaries covering most supply-chain functions. This will raise competition, hasten industry consolidation and improve service quality. Already domestic companies, some with foreign assistance, are consolidating and developing a more market-driven, customer- focused approach in preparation for this competition and in response to new business opportunities. This, probably more than any other factor, will help reduce inefficiencies in the road freight industry, upgrade equipment, raise quality and security, improve commercial management and strengthen workforce skills.

40 Iles, R, Public Transport in Developing Countries, Elsevier, Oxford 2005. 48

Table 1: China’s WTO Commitments in Transport

Category of Transport Commitment Service Maritime Transport Domestic: Foreign suppliers of international maritime freight or passenger shipping (except cabotage services) may establish JV shipping companies to operate under the Chinese flag, with a maximum foreign investment of 49% of the total registered capital of the JV. The board of directors and general manager must be appointed by the Chinese side. Cross-border: The cross-border supply of liner shipping and bulk, tramp and other international shipping (including passenger services) by a foreign supplier is not subject to market access restrictions and is accorded national treatment. Auxiliary Maritime Services Domestic: Foreign suppliers of maritime cargo-handling services, customs-clearance services for maritime transport and container station and depot services may form JVs with foreign majority ownership permitted. Foreign suppliers of maritime agency services may form JVs with a maximum foreign investment of 49%. Cross-border: China reserves the right to place market access and national treatment restrictions on the cross-border supply of maritime cargo-handling services, customs- clearance services for maritime transport and container station and depot services due to lack of technical feasibility. The cross-border supply of maritime agency services is not subject to market access restrictions and will be accorded national treatment Air Transport Domestic: Foreign suppliers may establish JVs for the provision of aircraft repair and maintenance services in which the Chinese side holds controlling shares or is in a dominant position. The issuance of licenses to these JVs can be subject to economic needs tests. These JVs are obliged to undertake business in the international market. China reserves the right to place market access and national treatment restrictions on foreign suppliers of computer reservation system services Cross-border: After signing agreements with Chinese aviation enterprises and the Chinese Computer Reservation System (CCRS), foreign computer reservation system suppliers may provide services to Chinese aviation enterprises and agents by connecting with the CCRS. Foreign computer reservation system suppliers may provide services to representative offices and sales offices established in the cities in China that foreign aviation enterprises serve in accordance with bilateral aviation agreements. Direct access to and use of foreign computer reservation systems by Chinese aviation enterprises and agents of foreign aviation enterprises are subject to approval of the General Administration of Civil Aviation of China (CAAC). Rail and Road Transport Domestic: Foreign service suppliers may provide freight transport by rail or road through JVs with a maximum foreign investment of 49%. Foreign majority ownership of rail transport enterprises will be permitted by December 11, 2004. By December 11, 2007, wholly-owned foreign subsidiaries will be permitted. Foreign majority ownership of road transport enterprises will be permitted within one year after accession (i.e. by December, 2002). By December 11, 2004, wholly foreign-owned subsidiaries may be established. Cross-border: The cross-border supply of these freight transport services by a foreign supplier is not subject to market access restrictions and is accorded national treatment.

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Category of Transport Commitment Service Storage, Warehousing, and Domestic: Freight-Forwarding Services Foreign service suppliers may provide storage and warehousing services through JVs with a maximum foreign investment of 49%. Foreign majority ownership will be allowed within one year after accession (i.e. by December, 2002). Within three years after accession (i.e. by December, 2004), wholly foreign-owned subsidiaries will be permitted and any remaining market access restrictions will be removed. Foreign freight-forwarding agencies with at least three consecutive years of experience may set up a JV in China, with a maximum foreign investment of 50%. Foreign majority ownership will be permitted within one year after accession (i.e. by December, 2002). By December 11, 2005, wholly foreign-owned subsidiaries may be established. Minimum capital required for a freight-forwarding JV shall be at least $1 million. By December 11, 2005, national treatment will be accorded with respect to minimum capital requirements. Freight-forwarding JVs may establish branches after operating in China for one year. An additional $120,000 must be added to the original registered capital of the JV for the establishment of each branch. By December 11, 2003, this additional capital requirement will be implemented on a national treatment basis. A foreign-freight forwarding JV may set up a second JV after the first one has operated for five years. By December 11, 2003, this requirement will be reduced to two years. Freight-forwarding JVs may operate for no more than 20 years. Cross-border: China reserves the right to place market access and national treatment restrictions on the cross-border supply of foreign storage and warehousing services. The cross-border supply of foreign freight-forwarding agency services is not subject to market access restrictions and is accorded national treatment. Other commitments: Acquired Rights of Foreign The conditions of ownership, operation and scope of activities for an existing foreign service supplier, as set out in the supplier’s contract or shareholders’ agreement Service Suppliers or in a licence establishing or authorizing the supplier’s operation or supply of services, will not be made more restrictive than they were on December 11, 2001. Maritime Transport Services The following services will be available to international maritime transport suppliers on reasonable and non-discriminatory terms and conditions: pilotage; towing and tug assistance; provisioning, fuelling and watering; garbage collection and ballast waste disposal; Port Captain’s services; navigation aids; shore-based operational services, including communications, water and electrical supplies; emergency repair facilities; and anchorage, berth and berthing services. Internal Waterways Transport Only international shipping in ports open to foreign vessels is permitted Services Source: US Dept of Commerce - http://www.mac.doc.gov/China/Docs/industryfactsheets/transportation.html

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188. The Government understands the importance of these trends. Modernization of logistics is a top-three priority in the 10th five-year plan and will almost certainly be for the 11th too. National and provincial governments are investing in infrastructure and logistics hubs to help develop more efficient, integrated services. Under a pilot program started in 2003, MOC is trying to help consolidate the industry and build market leaders as competitors to foreign market entrants or targets for foreign JV participation. Manufacturers and traders are increasingly out- sourcing logistics tasks in order to focus on their core competencies. Their interest in one-stop service is encouraging the integration of supply-chain functions. SOEs and local logistics and transport enterprises will need to adjust to competition and pressure for better service quality and lower costs from consumers, customers and shippers, most of which are unlikely to develop their own distribution networks. 189. Independent, third-party logistics (3PL) service providers will also respond to distribution markets that are expected to grow by more than 30 percent p.a. They will be keen to invest in modern logistics networks, including warehouses, packaging plants, intermodal transshipment facilities, freight consolidation centers etc. Many players (including traditional logistics SOEs, new private companies, own-account operators turning to logistics and foreign service providers) are already doing this. It won’t be long before their share of the logistics market will rise from 2 percent in 2001 to levels closer to those seen in the US (8 percent) and Europe (10 percent). The market is too large to ignore: in 2004, at Yuan 5.39 trillion (US$ 651.7 billion), retail sales were up 13.3 percent over the previous year; transactions of production input materials amounted to Yuan 11.4 trillion (US$ 1.37 trillion), up by 19 percent; and foreign trade exceeded US$ 1 trillion, up by 35.7 percent41. According to NDRC, China spent a combined Yuan 2.9 trillion (US$ 350 billion) on logistics services in 2004, 16.6 percent up on 2003. The industry’s added value was Yuan 846 billion (US$ 102 billion), up 8.4 percent on 2003.

2. The Benefits of Improved Logistics

190. Improved logistics – reductions in the cost (including delays) and improvements in the quality of the supply chain, including the road transport component – benefit economies by42: • directly lowering the prices paid by consumers and raising the prices received by producers • reducing inventory costs, by making it less necessary for customers to hold spare stock against the possibility of a failure of on-time delivery43; these savings are facilitated if good information is available from logistics service-providers on the status of deliveries • increasing consumers’ choice and widening the range of producers’ sources of supply, and bringing more markets within producers’ reach • hastening the shift from a reliance on agriculture and exploitation of natural resources towards sophisticated manufacturing, retail consumption and service trades44

41 Source: Ministry of Commerce. 42 From: Trade and Logistics in East Asia - A Development Agenda, Carruthers R, Bajpai JN, Hummels D, EASTR Working Paper No 3, Transport Sector Unit, Infrastructure Department, East Asia & Pacific Region, World Bank, June 2003. 43 The reference above quotes a finding that inventory holdings in manufacturing are 2-5 times higher in developing countries than in the US, and estimate that halving inventories could reduce unit production costs by 20 percent. 44 More sophisticated markets require more sophisticated logistics and transport services: transport of bulk goods, for example, is relatively uncomplicated, while consumer goods, electronic products and other high-value and time- sensitive goods like flowers, fruits, fresh food and seafood require careful handling, reliable deliveries, product standardization and tightly-integrated supply chains.

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• dampening price volatility and regional price fluctuations by facilitating supplies from lower-cost regions and shipments from surplus to deficit regions. 191. The potential savings can be very large for China, so companies will compete to achieve them. As Figure 14 shows, for a typical container shipment from Chongqing to the US West Coast, the Chinese land-side and port costs made up more than two thirds of the US$ 3,650 per TEU total cost of shipment in 2002 – and this excludes the cost of capital tied up in the goods throughout the journey, which could amount to a further US$ 500-1,200 per TEU, depending on the value of the contents. Clearly there is considerable scope for reducing costs on the China transport legs. Figure 14: Cost of Container Transport from Chongqing to US West Coast45 (in US$ per TEU)

Land access to final destination (US) 250 7% Port handling (US) 150 4% Maritime transport (China - US) 750 21%

Land access to port Port handling (China) (China) 2,300 200 63% 5%

3. The Changing Role of Road Freight Transport

192. With China playing a growing role in international trade, the efficiency of its logistics is becoming increasingly important. Logistics costs have been quoted as making up 16 percent of overall product costs, compared with less than 4 percent in developed countries46. This is because of large distances between producing and consuming centers; relatively undeveloped and poorly-integrated transport networks (notwithstanding increased spending on highways, ports and railways); regulatory barriers to consolidation 47 ; a legacy of weak commercial management under state ownership; and services still geared towards bulk movements, with limited ability to handle containers or perishable goods requiring special handling and reliable delivery schedules.

45 Source: Trade and Logistics in East Asia - A Development Agenda, Carruthers R, Bajpai JN, Hummels D, EASTR Working Paper No 3, Transport Sector Unit, Infrastructure Department, East Asia & Pacific Region, World Bank, June 2003. 46 Source: Attributed to Morgan Stanley. 47 The licensing system for logistics companies can be complicated and costly, requiring permits at several levels of government; for parcels, the Civil Aviation Administration of China (CAAC) and the State Postal Bureau (SPB) are also involved. Service providers must form a network of alliances with local operators to build a distribution network. Few licenses have been granted for nationwide operations; even these are reported to be subject to protectionist measures by local governments. 52

193. The railways could play a more important role. It ought to be dominant over medium-to- long distances, not just for low-cost, bulk shipments but for all but the most time-sensitive goods. In Europe and North America, it competes effectively with road transport over distances as short as 250-350 kms by running fast, reliable services as near door-to-door as possible, carrying unitized loads, using efficient handling equipment and with rapid connections to road transport for final distribution. Private operators, often using their own rolling-stock on state- owned networks, target customers and customize services to meet their needs, negotiating long-term contracts to recover the needed investment. This happens only to a very limited extent in China, despite a large potential demand for such services. Railway services appear to be only marginally cheaper than road transport over long distances (Table 2) and they fail to capture traffic from road despite lower delivery times (Table 3). Table 2: Comparison of Freight Transport Costs by Mode and Distance (US cents per ton-km)48

Mode > 250 km 250-500 500-750 750-1,000 > 1,000 km km km km Inland waterway 5.0 4.0 3.0 1.8 0.8 Railway 4.6 3.5 3.0 2.5 2.2 Highway 4.5 4.1 3.7 3.3 3.0

Source: World Bank

194. Railway infrastructure is still substandard and services poorly-designed to meet customers’ needs, often because of long-standing commitments to haul bulk shipments for large SOEs in the mining, manufacturing and agricultural sectors. Controlled by the Ministry of Railways (MOR), the railways give priority to passenger traffic and strategic, military and bulk commodities, limiting the availability of space for other users. Management and operational policies are not transparent, and regional railway bureaux often impose their own priorities on shipments. There are some customer-oriented JV services, such as with state-owned COSCO and Sinotrans, and others are being trialed with Maersk, Orient Overseas Container Lines, U- Freight and DHL, but an awareness within railway management of the need for faster, more flexible and demand-responsive services is developing only slowly. Goods handling remains poor, causing damage, delays and other losses. There is no effective wagon or consignment tracking. Information systems, particularly between operating regions, are poor. Extra payments are often demanded and pilferage is common. Bureaucracy, poor scheduling and low-speed lines cause frequent delays49. Often freight wagons have to be booked a month in advance. A minimum 10-tonne requirement applies to many shipment orders. Many railway containers are incompatible with the standard ISO containers used by overseas shippers, and shortages often occur at inland centers where there is an imbalance between inbound and outbound volumes.

48 Estimates are for products transported door-to-door using 500 dwt vessels, 1,000 net ton unit trains or 35 ton semi- trailers. 49 According to the Economist Intelligence Unit, shipments on less congested routes work within a one-week arrival window, whereas for congested lines the arrival window stretches up to four weeks. Some cross-country deliveries can take up to 60 days. For perishable products such as meat, dairy, frozen foods and produce, shipment by rail is simply too slow and unpredictable.

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Table 3: Comparison of Delivery Times, North America and Inland China

Source Destination Distance Delivery Time (km) (hrs) Rail Truck North America Winnipeg New York 2,200 72 72 Montreal New York 600 18 48 China Guiyang, Guizhou 2,300 144 288 Hohhot, Inner Mongolia Tianjin 700 72 144

Source: World Bank

195. China has committed to opening up the railways to foreign JV participation, with 100 percent foreign-owned services allowed by end-2007. But foreign investment will likely happen only slowly. Considerable changes in railway policy, management, infrastructure, operational priorities and tariff-setting will be needed before profitable opportunities on a level intermodal playing-field become apparent. In the meantime the most likely development is an expansion of JV operations to meet the needs of specific markets: point-to-point container movements, parcels, specialized services for specific industries like auto parts etc. This will not significantly challenge the growing importance of road transport in the logistics chain. 196. The shipping sub-sector, both coastal and inland, accounts for more than half of all domestic tonne-kms of freight traffic. Barge costs are low and space readily available but inland water transport is best suited to bulk commodities rather than final products: about two-thirds of barge traffic is bulk, such as coal and grain. Moreover, lack of investment, outdated equipment and obsolete port infrastructure make barging unattractive compared with road and rail. 197. Maritime port infrastructure tends to be inefficient (clearance times vary from three days to a month, mostly caused by documentation, customs and tax procedures), though it is catching up under a major program of investment in berths, handling equipment and storage and a streamlining of procedures. But bottlenecks and handling delays are still common, bureaucracy is a problem50and losses from theft and damage are high. Large enterprises, including COSCO and Sinotrans, dominate this sector. Many, including these two, are also among China’s largest providers of domestic transport services, having established agreements with domestic operators – road transport enterprises, the railways and inland waterway companies in the and deltas – to offer door-to-door services. APL, Maersk, P&O and Sealand have done the same in developing their own intermodal logistics networks linked with warehousing and distribution services. 198. These trends are very important indeed in shaping the future of road freight transport. Attracted by rapid volume growth, all the major international shipping companies already operate in China. They will extend the reach of their intermodal logistics services available to customers. They may do this themselves, or they may tie up with 3PL providers with established local networks; they may also establish JVs with local companies to build container stations and provide depot, warehousing, transshipment and packaging services at strategic locations. Whichever, they will exert a powerful force on the road freight industry to meet rising customer expectations. This will affect not only their JV partners and competitors but also all the providers

50 Shipping companies must obtain permits from Customs, the State Administration of Quality Supervision, Inspection and Quarantine, the State Administration of Foreign Exchange and various other government bodies. 54 of services down through the distribution chain, from farm-to-market services through the transport of raw materials to factories and assembly points to distributors of finished goods to local markets (Figure 15). Figure 15: Typical Consumer Product Supply Chain51

199. Air transport is growing rapidly (see Figure 4 earlier) and foreign JVs have been established with the cargo divisions of China Eastern, and China Southern, but for most goods it is not competitive with road transport. Airfreight is further constrained by low cargo capacity and under-developed airport infrastructure, though the latter is improving rapidly. Even so, DHL, UPS, FedEx, TNT and OCS all have JV parcel operations and some higher- value, time-sensitive goods are carried by air: high-value electronic products and components, cut flowers, processed meats, fresh fruit and vegetables, seafood etc. 200. Foreign participation in airfreight will probably remain restricted: airfreight forwarders must obtain a CAAC sales agency license to handle air cargo, and designated foreign carriers are given a maximum entitlement of only 50 tonnes per week52. Industry consolidation, the Government hopes, will encourage improved services rather than cost-cutting competition. 201. Road transport is the preferred transport mode for distributing most non-bulk goods like consumer and food products and manufactured goods. But several shortcomings have been identified by MOC and industry observers: stringent emissions standards and sophisticated

51 From: Robert J Easton, Supply Chain Management in China: Assessments and Directions, Accenture, (undated). 52 Source: World Bank.

55 technologies are causing truck prices to rise, making it difficult for local companies to upgrade their fleet, particularly when subjected to intense price competition from small, low-quality carriers; truck maintenance is poor; inspections are not adequately carried out; the level of containerization is low, exposing cargo to risk of damage and pilferage; overloading is very common (often 50-100 percent in excess of legal payloads) as operators try to cut costs and minimize the impact of high tolls; and provincial and local authorities sometimes protect local businesses through discriminatory bans on access, reserving shipments for local firms and other restrictions on outsiders. 202. Because of the low level of containerization and the lack of any information exchange on loads, there is a relative shortage of containers in inland provinces. The cost of transporting a container can be up to 30 percent higher than carrying the goods on a flat-bed or closed truck – containers are often filled only one-way, so consignees are charged for both (full) outbound and (empty) inbound journeys. 203. Even so, the expanded expressway network has greatly reduced delivery times, especially on longer-haul routes 53 , and helped increase competition. Non-urban trucking distances are lengthening. Long-distance services are less vulnerable to local government restrictions. Ease of market entry has led to competitive prices and greater incentives to deliver goods more quickly. Farmers can ship directly to distant markets in a shorter time, obtaining higher prices and allowing diversification into higher-value crops like fruit and vegetables. Some transport companies are becoming world-class, striving to meet the needs of customers for efficient, on-time, zero-loss delivery. Others are developing into, or have JV relationships with, 3PL service providers. 204. These integrated logistics service-providers are growing in scale and sophistication. A series of surveys by The Logistics Institute-Asia Pacific (TLI-AP) illustrate this transformation54. Among logistics service providers they found that Chinese and foreign JV firms are all planning for substantial expansion, with electronics products, household appliances and consumer goods targeted for most growth. Most have built extensive domestic networks and offer total logistics solutions in addition to traditional services, though warehousing, refrigeration and inventory management are still in their infancy and the use of IT comparatively limited. Notwithstanding the preference for road transport’s flexibility, many also offer some intermodal services using rail. Most logistics providers outsource road transport through long-term arrangements with local trucking companies, but retain tight control over operations. Growth of domestic logistics companies tends to be constrained by access to resources, including capital; foreign firms list policy restrictions and regulations as their biggest challenges 55 ; and there are common concerns about a shortage of logistics management skills. 205. Among users of logistics services, the TLI-AP surveys found that there is broad agreement on the importance of logistics, and most customers are satisfied with 3PL performance, but some have reservations despite productivity gains. Most use 3PLs for transport but fewer take advantage of warehousing, inventory management and customs clearance services than in North America and Europe. Most manage their own IT solutions and

53 The Shanghai-Guangzhou run can now be done in 36 hours; it used to take 3-5 days. 54 See 2002 China Logistics Provider Survey, January 2003; 2003 China Logistics User Survey, August 2003, and 2004 China Road Transportation Enterprise Survey Report, February 2005. 55 For example, logistics oversight is shared by several agencies, including the State Domestic Trade Bureau (SDTB), State Economic and Trade Commission (SETC) and NDRC. Customs clearance procedures suffer from this overlap in responsibilities. Moreover, foreign trading companies must sell through distributors rather than directly to stores and are forbidden to own distribution channels and logistics infrastructure. A foreign-owned plant can sell goods manufactured in China but cannot sell or distribute imported goods even if they are manufactured by an out-of-country sister plant. 56 are less happy with those of 3PLs. Few find it necessary to avoid outsourcing their logistics because of difficulties shedding staff and assets; many simply believe logistics is too important to outsource. While SOEs and foreign firms plan to increase their outsourcing, many non-SOEs intend to reduce it. And users of domestic 3PL services tend to be more satisfied than users of foreign and JV services; the former appear to have a better understanding of the needs of the market. 206. Among road transport enterprises, most surveyed companies (see Table 4), whether SOE, foreign JV or private, have evolved successfully from trucking companies to full logistics service providers, emphasizing service quality, reliability, network coverage, organization, corporate culture, effective use of IT (including consignment track-and-trace), strategic thinking and a focus on long-term customer relations. Some rely on bank loans but most obtain funds through strategic partners or go public. Many complain about inconsistencies in the Government’s regulatory policies: variations in controls by provincial and local agencies, ineffective enforcement of overloading, safety and emissions controls, a fragmented tolling system and variations in toll rates, and competition from SOEs that often hold protected positions in the market. Road/bridge tolls are claimed to amount to 20-40 percent of total transport costs, directly leading to the widespread overloading of trucks, despite MOC’s attempts to establish uniform pricing56. Other cost components that are higher than in advanced economies57 include higher dead-heading (a greater frequency of empty back-hauls), inefficient loading/unloading methods and higher damages due to poor packaging and lack of unitization. 207. Under WTO agreements, China already allows foreign companies to set up wholly- owned trucking subsidiaries or buy existing trucking firms. But with competition with low-cost operators intense and profit margins thin, it is unlikely that they will enter the sector. More likely, 3PL service providers will try to establish alliances with local road transport enterprises so that they can offer a comprehensive logistics service to their clients – and in doing so they will constitute a major force for change towards improved quality and efficiency. 208. 3PL service providers include traditional Chinese shipping companies (e.g. COSCO, Sinotrans, China Shipping) that have extended the range of services offered to their clients; foreign logistics and shipping companies (DHL, Federal Express, TNT, Schenker, APL, Maersk); the logistics divisions of major industrial groups (Haier Logistics, TCL Logistics); new, emerging local logistics firms (ST Anda, Da Tong, Bao Gong); and domestic and international freight forwarders, representing the consignee for specific portions of the journey 58 . Many shippers are probably unaware of the cost savings achievable though 3PLs, but this will change as enterprises better understand their inventory and logistics costs and as international logistics firms extend their presence in China. Even so, several obstacles remain to be overcome: the lack of coordination between the administrations of the respective transport modes; the lack of understanding of logistics markets at provincial and lower levels where regulatory measures are applied; the tendency for transport authorities to dictate commercial matters like the location, layout and operations of terminals, transshipment hubs and other facilities; the lack of marketing experience among local logistics firms, and an inability to sell the benefits of outsourcing; and a general backwardness in understanding the cost/quality trade-off in the logistics supply chain.

56 MOC tried to unify the toll structure in May 2004, but this led to an increase in overall toll costs. 57 The cost of high-quality services was found to be about 15 percent higher than in the US. 58 International freight forwarders would usually handle documentation and transport for international shipments and sub-contract with domestic freight-forwarders for the domestic leg within China.

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Table 4: Companies Surveyed by TLI-AP in 200459

Company Heilongjiang (un-named) Shanghai Hebei Han Dan Shanghai Beijing ZJS Beijing Qingdao Hai Hua Yu Pudong Communication Jia Ji Express Ltd China Rail Qian Logistics Transportation & Transport- Express Ltd Express Ltd Logistics Group Company ation Group Ltd Headquarters Harbin Qingdao Shanghai Hebei Shanghai Beijing Beijing Qingdao Business Scale A A A B B C C C Classification1 Ownership Type Non-SOE SOE SOE Restructured Non-SOE JV Non-SOE Non-SOE SOE Annual Revenue 8 10 1.2 3.11 8 3.3 5.43 0.6 (Yuan 100 million) Truck Fleet 1,370 5,000 784 2,000 800 1,200 521 188 Warehouse Space (m2) 166,070 38,846 4,000 5,110 137,000 60,000 50,000 20,000 Employees 9,144 10,000 1,423 3,998 6,600 6,600 3,300 500 Depots/Operations Sites 710 91 6 (+6 under 20 500 280 186 10 construction Year Established 1955 1949 1960 1945 1988 1994 1994 1992 1 Determined by MOC based on a comprehensive set of parameters including net assets, vehicles and facilities, business history, human resources, management performance, operating network and revenue. There are five grades: A (highest) – E (lowest). The system does not apply to private operators.

59 The Logistics Institute-Asia Pacific, 2004 China Road Transportation Enterprise Survey Report, February 2005.

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209. Growth in the 3PL and freight forwarding markets will also depend on the ability of service providers to overcome the regulatory barriers that still stand in the way of full service integration: the complex licensing rules that are still applied at provincial and lower levels to inland customs inspection and clearance, documentation, freight forwarding/consolidation, transport, storage and warehousing, intermodal transshipment, end-product distribution, container freight stations, transport depots etc.

4. The Customer’s Viewpoint

210. In 2004, the World Bank surveyed several foreign-invested companies and customers of logistics services to see what factors impeded further development and investment in the western region60 – to find out why they didn’t move inland and what might induce them to do so. The companies interviewed were Agilent Technologies, a manufacturer of measurement equipment; APL (American President Lines), now (with APL Logistics) part of Singapore-based Neptune Orient Lines; Tier One Auto Supplier, a manufacturer of automotive components; Caterpillar Logistics Services Inc Asia-Pacific, part of the Caterpillar group, a manufacturer of heavy construction, mining and earth-moving equipment; Coca-Cola (China) Beverages, a franchising manufacturer of carbonated drinks; Intel, a manufacturer of semiconductor products; Hewlett Packard (HP), a manufacturer of computers and printers; IDS Logistics, which does contract manufacturing, logistics and marketing for retail customers; and Cementhai Distribution, part of the Siam Cement Group, operating in trading, logistics, sales and marketing. 211. Each had a different perspective on, and strategy for, expansion to inland centers, but many perceived obstacles were common to several, if not all: • the technology companies (Agilent, Intel, HP) emphasized lack of supply-chain know- how of domestic transport service-providers; lack of awareness by transport/logistics companies of industry needs (short product life-cycles, just-in-time delivery) 61; slow clearance through ports; overly-restrictive quarantine inspections; local regulatory barriers to establishment of national logistics networks and inconsistent administration of regulations by local governments. They suggested that efforts should focus on upgrading skills in supply-chain management, the formation of logistics industry associations, and stricter supervision by central government of the implementation of national policies at the regional level • the specialized logistics companies and those serving retail or manufacturing customers (APL, Tier One, Coca-Cola, IDS Logistics and Cementhai) quoted poor rail/road infrastructure and linkages, high logistics costs, high inter-provincial truck rates, lack of intermodal services, lack of unitization and standards, lack of awareness of integrated logistics/supply-chain management, no track-and-trace systems to monitor progress, lack of availability of containers, and inefficient customs administration. They suggested there should be closer consultations between customers, service providers and government officials (through a strengthened National Logistics Council), overseas training of government and logistics industry staff, efforts to facilitate double-stacked trains (DSTs) on the railways, better intermodal coordination, better understanding of the commercial potential of the railways, a more consistent approach to licensing between national and regional administrations, better road infrastructure in the west, and better government monitoring of truck rates • the heavy equipment company (Caterpillar) was concerned about the limited range of specialized (heavy equipment) transport service providers, the existence of a barge cartel on

60 Source: World Bank, PowerPoint presentation by Wallack & Carruthers. 61 All HP notebook computers made in Shanghai are scheduled for 5-day delivery, but those manufactured inland take at least 10 days to market.

59 the inland waterways, and poor intermodal linkages. Its suggested solutions included upgrading industry skills through training, government consultations with industry, greater consistency in the licensing of transport service providers, and a better understanding of multimodal transport and the logistics chain.

5. The Changing Role of Regulations

212. The approach to policy formulation and regulation, and the policy aims and principles guiding them, differs between China and most western countries. The Government’s regulatory framework is based on all the right-sounding aims: ensuring sufficient infrastructure capacity, facilitating competitive markets for transport services, meeting the needs of transport users, achieving greater efficiency, using technology effectively, and so on. But a key question is whether it goes about these aims the right way, and whether its approach is effective in achieving the stated aims. Section II.B below considers this in detail, examining in particular why several important policy objectives have not yet been fully achieved, despite Government having recognized the problems and taken steps to overcome them: • the failure to raise traffic safety standards to levels comparable with developed economies • the slow pace towards establishing a level playing-field between state-owned and private providers of transport services, and between road transport and other transport modes • low levels of productivity among SOE freight transport providers, despite having greater operational autonomy and having been exposed to competition from the private sector • the failure to curb the tendency for trucks to be overloaded beyond their permissible load limits • an apparent inability, with notable exceptions, on the part of transport enterprise management to anticipate the needs of a changing market and to position themselves better to offer the required quality and efficiency of service • related to this, the rigidities – lack of innovation and experimentation, and slow rate of change – that characterize many freight transport markets • the tendency for decisions constraining the operations of commercial transport service providers to be made by government agencies without weighing the costs and benefits of their intervention • the endemic over-manning that burdens service providers with additional costs and limits their ability to raise productivity levels • an apparent inconsistency between statements of national policy and their implementation in practice through the regulatory measures of municipal, provincial, county and lower-level agencies. 213. A key lesson, however, is that changing demands on transport services are becoming – without government intervention or direction – a powerful force for change: customers are insisting on more efficient, better-quality services. The transport enterprises that have best avoided many of the shortcomings listed above tend to be those that have broken free of traditional management methods and have developed new, innovative approaches to improved performance. Most often, these have been driven not by the regulatory efforts of government or by direct government support but through the pressures of competitive markets. Markets drive improved efficiency and demand-responsiveness far better than government regulations or guidance. 60

214. This points to a changed role for regulatory authorities: they should, first and foremost, promote and enhance the efficient functioning of competitive markets. In most cases, that means intervening less. But, in doing so, they should ensure that the interests of those who might potentially be adversely affected are protected: the poor; those at risk from road safety shortcomings and environmental deterioration; and those whose livelihood is negatively affected by regulatory reforms. And even in these areas where scope for regulatory control can be perceived, market mechanisms and incentives, including appropriate social pricing policies62, can often be more effective in achieving goals than regulatory controls.

B. Issues in Road Freight Transport

1. Sources of Information

215. Thirteen truck operating enterprises and two freight terminal operators were interviewed in Yunnan, Gansu and Heilongjiang under the project: Table 5. The trucking enterprises were asked to provide information on their facilities, fleets, markets, operations and costs, and to comment on the impacts of government policies and regulations on their performance and prospects. The fleet, operational and cost data are useful in illustrating productivity and efficiency. Table 6 summarizes the information assembled on unit costs63. Direct operating costs, excluding overheads, for the enterprises interviewed were in the range Yuan 3-8 per km, depending on the size of truck. Quoted freight rates ranged from Yuan 0.15 to Yuan 0.25 per tonne-km. 216. Additional information was gathered from earlier studies, journal articles, surveys, statistics and other sources, referenced in the text following. Because the field interviews were constrained to less-developed western provinces and were unable to cover the advanced transport/logistics operations emerging in the more developed eastern region, one source has been particularly important: the series of surveys carried out by TLI-AP referenced in footnote 54 on page 55, particularly the 2004 survey, which obtained information on the service providers listed in Table 4 on page 57. These eight firms, all with ISO quality certification, have a combined fleet of 11,863 trucks, a labor force of 41,565 and 1,803 freight depots and/or operational sites. According to TLI-AP, they represent the emergence of a modern, market- driven road transport industry in China, with a focus on serving customers’ needs and developing nationwide, integrated logistics solutions that mirror the transformation described earlier.

62 Setting prices to reflect all the social costs involved, including accident risk, environmental damage, congestion and road pavement and bridge damage. 63 It is not easy to assess the consistency or accuracy of some of the cost data. Enterprises differed, for example, in their approach to allocating taxes among operations, and their provisions for vehicle depreciation, maintenance and allocation of overheads. There may also be some under-reporting of maintenance costs. The figures for the two-axle truck are not representative of inter-city trucking costs: the vehicles in question were used mainly for small loads over short distances and the resulting cost of Yuan 1.62 per km is more representative of urban delivery operations.

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Table 5: Details of Freight Transport Operators Surveyed in Yunnan, Gansu and Heilongjiang

Enterprise A B C D E F G H I J K L M

Employees Drivers 88 38 105 265 220 58 1822 677 68 8 1006 128 76

Load /unload 10 / / 1 / 10 / 11 18 40 23 64

Technical 4 80 2 15 16 3 60 8 12 4 19 8

Management 12 30 45 40 68 30 33 74 15 52 4 36 8

Finance 5 10 3 11 34 7 11 31 8 3 5 16 7

Other 11 2 / 155 348 73 2022 747 4 32 10 14

Total 130 160 155 487 686 184 3,948 1,548 126 139 1,057 262 105

Warehouse (m2) 17,000 / 5,000 3,300 30,000 4,300 1,500 6,000 11,600 4,000,000 540 36,000 5,500

Parking (m2) 2,000 1,000 15,000 62,352 59,660 73,030 44,000 11,000 7,500 3,000 1,800 28,000 6,500

Fleet <2t 246

2-5t 2 41 62 9 80 27 345 10 4 56 18 4

5-10t 5 20 35 216 41 15 909 12 2 304 8 34

10-25t 46 8 60 28 10 78 26 6 137 126

>25t 51

Sub total 52 69 97 285 200 52 1332 272 28 6 497 152 38

Productivity Ton-km (10^6) 98.4 0.6 50.0 114.0 199.6 22.9 241.9 16.9 - 144.1 225.0 - 46.0

Loaded distance 81.8 80 89.05 87 64.1 52.5 70 49 - 57 91 100 90 (%)

Damage rate (%) <0.5 0 <0.54 <0.3 <0.65 <0.3 - <0.3 - 0 0 0.17 0

Key to enterprises: A - Xin Da Logistics Co Ltd; B - Kunming Nine-Nine Transport Group; C - Yunnan Da Li Transportation Group (freight subsidiary); D - Kunming Steel & Iron Group (freight subsidiary); E - Kunming Transportation Group (freight subsidiary); F - Lanzhou Transportation Group (freight subsidiary); G - Gansu Cheng Da Transport Group; H - Lanzhou Third Transport Company; I - Gansu Sanhetong Logistics Co Ltd; J - Zhong Tie Modern Logistics Co Ltd (Harbin); K - Shuihua Shunda Transport Ltd; L - Zhong Xin Logistics and Storage Ltd; M - Beidahuang Commercial Co Ltd

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Table 6: Average Quoted Truck Costs for Enterprises Providing Cost Data

Number of axles 2 3 4 5 7 Registered weight (tones, or t) 3.9 30 21 35 34 Typical load (t) 3.6 29.0 22.3 35.0 67.5 Truck price (Yuan) 82,000 290,000 277,500 395,000 900,000 Annual travel (km) 35,000 120,000 114,000 60,081 56,500 Loaded travel (% of total km) 50% 60% 99% 76% 50% Insurance cost (Yuan p.a.) 8,000 12,000 15,500 11,617 48,500 Purchase tax (one time) 8,200 29,000 27,750 39,500 90,000 Other taxes (Yuan p.a.) 2,400 25,300 52,518 48,818 20,000 Maintenance cost (Yuan p.a.) 6,000 13,750 52,500 45,765 20,000 Driver wage (Yuan p.a.) 20,400 19,500 33,600 19,800 36,000 Diesel price (Yuan/litre) 4.2 3.6 3.9 3.9 3.8 Fuel consumption (km/litre) 3.52 4.78 2.50 2.20 1.80 Highway tolls (Yuan p.a.) 6,000 100,000 123,500 80,033 - Annual operating costs1 102,220 325,528 517,876 398,209 442,333 Yuan/veh-km 2.921 2.713 4.543 6.628 7.829 Yuan/tonne-km2 1.623 0.156 0.207 0.248 0.232 1 Assuming 20% depreciation rate (truck price + purchase tax) 2 Tonne-kms estimated by multiplying loaded km by typical load

217. In addition, to illustrate factors affecting productivity and unit costs, a simple cost model has been developed, described in Appendix 3. A sample output is shown in Table 764. The model was developed using information collected from field surveys as a base, modified as necessary from information from other sources.

64 It is worth noting that the largest truck shown – seven axles – does not make economic sense under current regulations: it has more axles than necessary to reach the maximum allowed gross vehicle weight (GVW) of 49 tonnes. Payload is actually smaller on this truck than on smaller trucks and operating costs are higher.

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Table 7: Estimated Base-Case Costs, by Truck Type

Truck type Small Rigid Artic, 40' Artic, 40' Artic, 40' Artic, 40' Artic, 40' truck Truck trailer trailer trailer trailer trailer with 20' flat deck Configuration1 11 12 11S1 11S2 12S2 12S3 12S13 Axles 2 3 3 4 5 6 7 Annual distance (km) 72,270 72,270 72,270 72,270 72,270 72,270 72,270 Average load (t) 21.8 26.3 27.0 38.3 46.5 49.5 46.5 Operating cost (Yuan 238,545 285,293 304,186 416,656 490,739 534,879 607,470 p.a.) Total costs (Yuan p.a.) 274,327 328,088 349,814 479,154 564,350 615,111 698,590 Cost/veh-km (Yuan) 3.80 4.54 4.84 6.63 7.81 8.51 9.67 Cost/ton-km (Yuan) 0.249 0.247 0.256 0.248 0.240 0.246 0.297 1 Numbers indicate axles in an axle group; “S” indicates a fifth wheel/king-pin connection between tractor and semitrailer. A 12S2, for example, is a 5-axle tractor/semi-trailer common in North America. Note: 1.5 * legal loads and 25% of driving distances on toll roads are assumed.

2. Market Liberalization

218. There is plenty of evidence from the TLI-AP surveys, and from this project’s surveys in Yunnan, Gansu and Heilongjiang, that the efficiency of road freight transport has improved considerably since the 1980s. In 1983 private trucking companies were first allowed to compete with SOEs; in 1986 the Joint Regulation Governing Road Freight Services opened up the market to anyone wanting to apply for a license. A decade ago, most road freight moved on 2- axle trucks; now, many operators commonly use 3-axle trucks, tractor-semitrailers and specialized vehicles. While not up to European or North American sizes, these represent a large, market-driven leap in economies of scale and productivity. Similarly, new truck terminals and plazas, while less productive than comparable facilities in Western countries, are a considerable improvement on those of a decade ago. 219. The impacts of market liberalization are best seen in trucking rates. Most carriers complain that rates are too low – evidence that a competitive industry is driving prices down, benefiting customers. Road freight rates at the end of 2003 are reportedly lower than a decade earlier65. The emergence of hundreds of new state-owned and private long-distance trucking companies has led to competitive prices and higher incentives to deliver goods more quickly, especially in the busy east-coast region66. According to TLI-AP, transport costs were at their historically lowest level in 2004. 220. The truck fleet is estimated to have grown by an average of 3.9 percent p.a. between 1995 and 2004 – slower than the rate of GDP growth. This implies a significant improvement in productivity, attributable to larger trucks (including a significant switch from 2-axle trucks) and higher utilization rates. The volume of freight carried has grown by an average 5.8 percent p.a., 50 percent faster than growth in the vehicle fleet67.

65 The Economist, Transport in China: Going after the Truckers, June 10, 2004. 66 Christina Wu, China Logistics Profile 2003, USDA Foreign Agricultural Service, GAIN Report, CH3833, 12/18/2003. 67 These figures probably underestimate the increase in truck productivity: typically, freight densities decline as economies modernize. 64

221. Market liberalization seems to be making trucking more efficient, with lower rates and more productive trucks. If the experience with deregulation in Western countries is any guide, the impact of liberalization in China will probably take another decade or so to fully work itself out. Already the trucking and logistics industries are now among the fastest growing in China, and the modern, efficient management and operating practices of the best companies are trickling down to the rest of the market.

3. Government’s Role in Directing the Market

222. Road freight transport has been deregulated, but the state still plays a significant role in directing business. Though officials deny it, logistics service providers claim that implementation of regulations at the provincial level often frustrates seamless, inter-provincial movements68. A 2003 article claimed that inefficiency in interlining is caused to a large degree by local protectionism; that the root cause of many operational inefficiencies is the provincial and local restrictions that limit cross-province freight movements69. A 2004 World Bank survey (para. 210) also noted the issue of local restrictions. 223. According to the US Agricultural Trade Office, transport networks are fragmented, with regulatory barriers preventing industry consolidation and local governments frequently protecting local companies by erecting barriers, including additional licensing requirements, fees and inspections. There was no evidence of this in Yunnan, Gansu and Heilongjiang, but it is often claimed that support for local companies is exercised through discriminatory highway maintenance fees, rents for truck plaza office and parking space, time-of-day restrictions on city access, parking fees and restrictions, and additional charges at toll gates and security checks. 224. Both national and provincial agencies are seeking to promote selected enterprises to consolidate the industry and build competitive champions. While this has the result of improving the services available at the top end of the market, it distorts competition by favoring some players over others, and it leaves lower-level players to benefit only through links with the chosen enterprises or through a trickle-down effect. 225. The American Chamber of Commerce notes that while entry restrictions to the general trucking industry are minimal, licensing arrangements for carriers wanting to offer specialized services are sometimes open to manipulation: “technically, companies fulfilling certain criteria are permitted to obtain dangerous goods licenses but in practice only companies with strong government connections have been able to do so – for example, in 2003 only one company in Shanghai was newly licensed to haul dangerous goods, a company with no prior experience in the business.” 70 Government intervention sometimes works against the interests of favored enterprises, however: one carrier with 39 percent provincial government ownership interviewed in Yunnan noted that it was not free to expand its fleet if the opportunity arose since the provincial administration had imposed a cap on the number of employees it could hire. 226. Provincial and municipal road transport administrations also control the development and operation of terminals. Most have plans calling for new terminals to be built; operators work closely with provincial officials before developing new terminals; provincial and municipal administrations also build freight terminals for use by truck operators. Though land-use planning

68 See, for example, an interview with the President, International Logistics, for APL Logistics, appearing in the May 2004 issue of World Trade. 69 Trunick PA, Logistics Links are Critical in China, Transportation and Distribution, August 2003, quoted in Garland Chow & Charles Guowen Wang, The Transportation and Warehousing Challenge for Multinational Corporations in China, Journal of Transportation Management, Fall 2004. 70 American Chamber of Commerce, 2004 White Paper – Transportation & Logistics.

65 considerations and terminal design standards are also important71, the dominant role of local governments might mean that terminals are not developed optimally from the point of view of road transport users and suppliers. A greater role for the private sector (subject, of course, to controls over land-use, traffic and environmental impacts) could lead to more efficient, market- based solutions.

4. Industry Structure

a. Types of Trucking Companies

227. Three segments on the for-hire trucking industry are evident: a top tier of newly- emerging logistics service providers offering high-quality services, directly or through regional alliances; a middle tier consisting of enterprises that are mostly state-owned and often linked to a particular state industry; and a bottom tier, offering highly-competitive rates and comparatively low service levels and consisting of small, private owner-operators, many using fully- depreciated vehicles. 228. Most of the enterprises surveyed in Yunnan, Gansu and Heilongjiang are middle-tier SOEs undergoing restructuring as joint-stock companies in preparation for competition and in some cases eventual privatization. The process involves separating them from administrative departments and granting management autonomy with opportunities for private-sector participation. Yunnan started these reforms in 2003; transport enterprises in and Simao prefectures have been fully converted to joint-stock status, while other prefectures are following suit. The relationship with provincial/local government changes after restructuring: direct intervention is replaced by a more supervisory and monitoring role. 229. Lanzhou, in Gansu, has prepared guidelines for the reform process72. These encourage small- and medium-sized companies to link with larger enterprises through trusteeship, annexation and sale. For favored larger firms, the guidelines set out the steps to commercialization, corporatization and incorporation. Most state-owned road transport enterprises in Gansu have been privatized, though three large SOEs remain as joint-stock companies: the Lanzhou Transport Group, the Jiugang Group and Transport Division of Changqing Oil Exploration Bureau. 230. There are a great many operators in the bottom tier. Many of the trucks operating for middle-tier firms, too, are subcontracted from lower-tier operators. Most of these are small owner-operators, often family groups, with only one or two trucks. Some haul freight under their own permit but many also work under the authority of a permit issued to a firm in the top or middle tiers. The company allowing them to work under its authority usually charges to recover road maintenance and other fees, overheads, vehicle depreciation and a margin. It acts somewhat in the capacity of a freight broker, taking a margin for bringing transport customer and supplier together. The contractor hauls the load, collects the payment and is responsible for all truck-related costs. 231. With high unemployment in the regions, officials are understandably concerned about the risk of social instability resulting from any attempt to weed out these lower-tier operators through market reforms, taxation or enforcement of safety standards. Their market power is low; many accept rates that must make little provision, if any, for eventual vehicle replacement. They tolerate low occupational health and safety standards. Because of this, the Government’s strategy is to bring them under the wing of larger enterprises as part of a longer-term process of

71 Classification and Construction Requirement for Vehicle Freight Station (Site), JT/T402-1999. 72 Guideline for Reform and Development of Transport Enterprises in Gansu Province, PCD, Lanzhou. 66 consolidation and upgrading. Greater competition on the basis of quality of service is also expected to encourage the better-managed operators to prosper and to pull up industry standards generally.

b. Ownership Characteristics

232. Freight haulage companies are of several kinds: SOEs; collectively-owned enterprises (COEs); privately-owned enterprises; joint-stock companies; JV companies (i.e. partly owned by a foreign interest); and wholly foreign-owned companies73. Table 8 shows the composition in the three provinces surveyed74. Table 8: Breakdown of Freight Transport Enterprises and Fleets in Yunnan, Gansu and Heilongjiang (percent)

Type of Enterprise Enterprises Fleet SOE/COE 4.5 23.9 Joint-stock < 0.1 4.2 JV < 0.1 < 0.1 Private 95.5 71.9

233. Small private owner-operators are in the great majority. There are 222,332 such companies in the three provinces (if Lanzhou can be said to represent Gansu). These operate 208,830 trucks, an average of only 0.94 trucks per company (some owners who still hold a freight operator’s license no longer operate trucks).

c. Number of Firms and Firm Size

234. According to MOC, the number of trucking companies in China is 2.6-2.7 million. There are 8.9 million trucks, of which 5.7 million are owned by for-hire carriers: an average of 2.1-2.2 per firm; figures from Yunnan imply an average of 1.08 per firm in that province. Even allowing for the numbers of owner-operators, most truck fleets in China are quite small. This probably makes it difficult for many companies to upgrade skills and adopt more advanced operating procedures, an argument in favor of MOC’s policy of consolidation. But there are also some very large trucking companies in China. Sinotrans is said to have some 50 subsidiaries and nearly 270 JVs – by any measure, a large trucking operation. The TLI-AP surveys also identified some large firms – see Table 4 on page 57. 235. China is by no means the only country with a high proportion of small owner-operators. In the UK there are some 108,000 trucking companies, about half of which are one-truck operators. With 420,000 trucks, the average fleet size is only 3.9 trucks per firm75. The US trucking industry used to be a regulated semi-cartel, with only a few big companies, but when it was deregulated in the 1980s hundreds of thousands of small firms sprouted (there are now 450,000 trucking firms in America, compared with 10,000 two decades ago), creating intense price competition76.

73 Limits on foreign ownership were raised from 49% to 75% in late 2002 and to 100% in 2004. 74 Data for the whole province of Gansu were not available; the table includes only data for Lanzhou. 75 The Economist, The Haulage Industry: Truculent, September 21, 2000. 76 The Economist, American Trucking: Big Rig’s Lucky Break, June 1, 2000.

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d. Freight Characteristics

236. Information on the structure of the industry by type of freight hauled is more difficult to come by. 2,851 of the 3,081 trucks operated by the enterprises surveyed in Yunnan, Gansu and Heilongjiang were made up as shown in Table 9; the rest were of unknown designation. Table 9: Types of Vehicle Operated by Enterprises Interviewed

Freight Type Fleet Percent Common/mixed 2,273 79.7 Less-than-truckload 187 6.6 Container 163 5.7 Tanker 207 7.3 Refrigerated 21 0.7 2,851 100

237. The sample included no large less-than-truckload (LTL) firms; only 6.6 percent of the fleet was described as such. But several of the enterprises, while mainly hauling inter-city truckload (TL) freight, also had local distribution contracts for LTL freight. They might bring a full inter-city load to their warehouse, then distribute LTL lots from there. Most trucks calling at plazas seemed to handle only TL freight. It is quite likely that only the large logistics service providers have the networks and capabilities (e.g. terminal handling and sorting) to handle LTL freight: four of the large companies in the TLI-AP 2004 survey handled LTL freight. And China Post is a large player in the movement of parcels and other LTL shipments. In regions where there are good parcel-delivery operations, business growth is usually at the expense of LTL trucking companies.

5. Harmonization of Regulations

238. Interviewees in Yunnan, Gansu and Heilongjiang mentioned lack of harmonization of regulations as a problem; so too did the firms surveyed in the TLI-AP 2004 surveys. It was an issue identified by the 1995 World Bank report as well. Inconsistencies of several kinds are mentioned: discrimination in local taxation, tolls and access to facilities; differences in the enforcement of traffic safety rules; and preferential selection of local transport service providers. One example: differences in rates for highway maintenance and transport management fees; these result in some trucking companies choosing to register in low-tax areas while operating in areas where tax levels might be higher. Partly because of this, Heilongjiang requires any truck registered outside but operating within the province for more than a month to apply to the TAB for a special permit, and thence to be subject to Heilongjiang’s taxes and fees. 239. One of the possible reasons for the lack of harmonization, however, may be that provinces differ in progress towards implementing the 2004 RTO.

6. Service and Rate Levels

240. Levels of freight service are improving rapidly but – with the exception of some world- class services to manufacturing, exporting and retailing operations in the eastern seaboard – are still below the standards of the US, Europe, Japan and Australia. Customers report poor 68 handling, lack of liability protection for losses or damage, and slow and variable delivery times77. Intermodal services have been slow to develop: in North America and Europe they are the fastest-growing business segments of many railways, but this does not appear to be happening in China. The 2004 World Bank survey (para. 210) found concerns about lack of unitization and inter-operability, lack of awareness of integrated logistics/supply-chain management, no track- and-trace systems to monitor progress, lack of availability of containers, a limited range of specialized transport services, etc. The American Chamber of Commerce quotes instances of food products spoiled because of poor temperature control, difficult Customs procedures and slow adoption of EDI (electronic data interchange) 78. 241. Even so, there have been considerable advances. As the 2004 TLI-AP surveys noted: “All eight firms have earned ISO quality certifications. Each company has its own service quality criteria and standard operating procedures (SOPs), and has established operations monitoring and quality control procedures. Many firms have developed business metrics such as on-time delivery, percentages of damage customer claim and claim reimbursement, etc. They make service commitments to customers and monitor these commitments by implementing SOPs and workflow information management system. Most firms have back-up procedures for freight take- over, IT based emergency fleet handling and management of freight damage and loss. Compared to their competitors, these firms believe they have better service quality and more competitive value to price ratio. Each firm pays a great deal of attention to what customers value, such as service quality, price, cycle time, on-time delivery, damage rate, and continuous service quality improvement.” 79 One of the eight companies surveyed pays a US$7,000 penalty for every minute’s delay in delivery to Shanghai Volkswagen and Shanghai General Motors plants. 242. The specialized logistics firms surveyed in the 2004 World Bank survey complained of high inter-provincial trucking rates. The eight top-tier firms surveyed in the 2004 TLI-AP survey have rates varying from a low of Yuan 0.25 to a high of Yuan 0.80 per ton-mile, equivalent to Yuan 0.16 to 0.50 per tonne-km, somewhat higher than those commonly charged in Western countries, but not excessively so. In Yunnan, Gansu and Heilongjiang carriers quoted rates in the range of Yuan 0.11-0.48 per tonne-km, i.e. not greatly dissimilar. While this comparison takes no account of differences in shipment size, distance, commodity types etc, it suggests that the better firms are able to offer – through economies of scale and greater productivity – higher levels of service at rates comparable with those of operators in the western region whose productivity, as we shall see below, is relatively low.

7. Truck Productivity

243. A 2003 survey80 of forwarders in China’s interior found that inland transport (mostly by road) accounts for about two-thirds of the total transport costs from producers to overseas markets. With China’s input prices comparatively low, the main contributing factor is the level of productivity achieved. In 2001, electronics and food products were found to cost 40-50 percent

77 See, for example, Mao, Xin hu, He, Meng kui, and Wang, Wen jie, To Build Modern Logistics System with Chinese Feature Based upon Recombination of Available Resources, Shanxi Architecture, 2004, quoted in Garland Chow & Charles Guowen Wang, The Transportation and Warehousing Challenge for Multinational Corporations in China, Journal of Transportation Management, Fall 2004. 78 American Chamber of Commerce, 2004 White Paper – Transportation & Logistics. 79 Jim Dai, Yuepeng Li, Xiutian Liu, Yang Wang, Nancy Wong & Chen Zhou, 2004 China Road Transportation Enterprise Survey Report, TLI-AP, February, 2005. 80 Carruthers R, Bajpai JN & Hummels D, Trade and Logistics: An East Asian Perspective, in Krumm K & Kharas H (ed), East Asia Integrates: A Trade Policy Agenda for Shared Growth, The World Bank, Washington, 2003.

69 more to ship in China than in North America81. Improvements in truck productivity in China could have a significant impact on logistics costs. 244. The average annual loaded kms for the transport companies surveyed in Yunnan, Gansu and Heilongjiang are only 39,609 kms; in North America the comparable figure would be about 150,000 kms, with many firms achieving 200,000-240,000 kms. In Australia the Transport Workers Union, in calculating suggested rates for owner-drivers, uses 200,000 loaded kms per year for its base82. About a third of trucks on highways in China are reported to be operating empty83. One truck plaza visited by the project quoted average delays of 1-3 days in the plaza before loads are obtained. 245. In 2004 China’s 6.28 million for-hire trucks hauled 12.4 billion tonnes of freight and accounted for 748.1 billion tonne-kms of output84: an annual average of 1,975 tonnes and 119,124 tonne-kms per truck. In Yunnan, each truck accounted for 3,158 tonnes of freight and 213,509 tonne-kms in 2004. In Canada, by contrast, the largest for-hire companies handled 278.0 million tonnes of freight and provided 185.0 billion tonne-kms of freight service in 2003 with about 100,000 trucks85: an average of about 2,780 tonnes per truck, one-third higher than in China. But in Canada each truck accounted for about 1.8 million tonne-kms of output, almost 15 times higher than the average from China’s national statistics. The Australian figures are similar: 1.7 million tonne-kms of output for each articulated truck86. Even allowing for differences in vehicle types and the nature of the transport task, it is clear that truck productivity levels in China are much lower than in Western countries, by several orders of magnitude. 246. The most common large truck in Canada and Australia, known as the B-Double, has a payload capacity of about 40 tonnes. It commonly handles 5 million tonne-kms of freight p.a. 87; the most productive can achieve twice this. If the annual utilization of trucks in China could be doubled, freight costs would drop by between 13 and 23 percent, depending on the size of the truck, with the largest reduction being for the largest trucks88.

8. Government Efforts to Strengthen Operator Performance

247. In 2003, under its Modern Logistics Pilot Program, MOC selected eight enterprises to be the focus of efforts to consolidate the industry and develop champions of state participation. They were to be developed into joint-stock companies, prototypes for a new business model capable of competing with foreign firms post-WTO accession or to be attractive targets for JV participation. Two of these were also represented in the 2004 TLI-AP survey. Progress under the program has been slow, however. Goals and strategic plans have been prepared with

81 China Logistics - Spot the Early Bird, Morgan Stanley Equity Research, 2001. 82 Tasman Economics, Sustainable Freight Rates for Owner-Drivers, prepared for the Transport Workers’ Union, 2000. 83 “Almost one-third of the trucks running on the roads are empty as they return from their delivery trips”, said an official from the Highway Department of MOC: Daily, quoted in China Economic Net. November 24, 2004. 84 MOC, 2004 Road and Waterway Transport Development Statistics Report. 85 Statistics Canada, Trucking in Canada, 2003, cat # 53-222 XIB. 86 Department of Transport and Regional Services, Working Paper 60: An Overview Of The Australian Road Freight Transport Industry, 2003. 87 Typically, with an average payload of 40.5 tonnes and annual utilization of 160,000 km with only 10% empty travel. 88 In the costing model, the base case assumes 72,270 km p.a. for all trucks, based on survey data. Doubling this to 144,540 would put China’s truck utilization on a par with the larger inter-city trucks in North America. 70 technical assistance from MOC89, but strengthening the companies’ role in the competitive market-place is expected to take much longer90. 248. There are arguments both for and against this strategy. Achieving industry consolidation through administrative intervention will likely accelerate the process, particularly if (as planned) support is also given to smaller firms wishing to link with or come under the wing of the chosen state champions. But there are risks, too, mostly through the potential market distortions it may introduce: the risk that government assistance discriminates in the selection of logistics service- providers, to the detriment of other more efficient SOEs, JVs or the private sector receiving no such support. 249. The market-place is the best arbiter of competitive performance. In a free market, the best firms will succeed and the poorly-managed will lose market share or be absorbed unless they upgrade their services. Government discrimination in favor of selected state-owned firms will probably inhibit or distort this process. As the TLI-AP surveys have shown, independent firms are capable of developing well-managed, competitive, customer-oriented services of the highest quality without government assistance. Eventually, with open competition, both directly and in the provision of supporting services along the logistics chain, their high service standards will percolate down through the logistics and transport markets. 250. Notwithstanding this, there are several areas where government involvement and assistance has been effective and could usefully be strengthened: • in helping small owner-operators to establish alliances and merge with larger operators, such as in Gansu, where the successful Gansu Cheng Da Transport Group has been formed by the amalgamation of ten smaller companies. In such cases, however, government efforts should concentrate on assisting a process that would inevitably occur – such as with training in management and safety-net assistance to cope with staff redundancies – rather than discriminating in favor of one group of market players over others • in developing and implementing management and occupational training programs in conjunction with industry groups, such as is now done with the China Road Transport Association (CRTA), and by continuing to support academic and occupational courses in transport and logistics in universities and technical institutes • by helping to develop best-practice guidelines and training materials, such as has been done by Gansu TAB on transport company management and by MOC with its training guidelines on the transport and handling of dangerous goods91.

9. Finance

251. Most firms visited in Yunnan, Gansu and Heilongjiang mentioned aspects of finance as a significant problem, but details varied between enterprises. SOEs were concerned about social liabilities, including their obligations to the pensions and other benefits of retirees. Others claimed that their sources of finance were limited, and those that relied on bank loans found that banks considered trucking to be a high-risk activity. In several cases, companies were using short-term loans to finance long-lived assets and were having to refinance periodically.

89 Road Enterprise Plan, Collection of Implementation for Modern Logistics Pilot Study, MOC Highway Administration, March 2004. 90 The Highway Administration has prepared a 5-page interim report on progress, but its contents have not been sighted. 91 Dangerous Goods Transport: Training Materials, MOC, 2001.

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252. Leasing is common practice in Western countries as a source of finance for equipment, but not in China. WTO entry may eventually encourage the development of a competitive equipment leasing industry. In the meantime, several companies in Yunnan, Gansu and Heilongjiang have introduced arrangements whereby drivers take out bank loans to purchase trucks that then work under the operator’s permit of the trucking company. This is quite common throughout China and is used in the road passenger industry as well (para. 364). It does, however, contribute eventually to the large pool of fully-depreciated trucks used by small owner- operators. 253. Surprisingly, the eight large logistics enterprises surveyed by TLI-AP in 2004 rely primarily on bank loans for capital. Some have tried attracting foreign JV participation or private investment from strategic partners, but bank loans remain the most common source. In other countries there are several alternative sources, including equity markets, equipment and other leasing companies and firms specializing in buying receivables and other securities. This broader choice allows capital to flow to companies more freely and the cost of capital to reflect relative risk more accurately than is the case in China.

10. Terminal Operations and Truck Plazas

254. In Yunnan, Gansu and Heilongjiang there are no modern freight/logistics terminals equivalent to those that exist in western countries or along China’s eastern seaboard. Terminals in these provinces make little use of palletization, mostly load/unload manually and otherwise use inefficient loading practices, and tend to leave the tractor attached to the semitrailer rather than disengaging it and using it more efficiently to haul loads. “Shipments are often hand loaded and unloaded, and people loading trucks sometimes lack the training or initiative to pack a truck in an effective and efficient manner. This leads to cargo damage from cargo shifting and movement which is compounded by the lack of pallet standardization, leading to longer truck loading and unloading times, more cargo shifting and less efficiency” 92. Palletization is not common in Chinese warehousing. Older warehouses are not designed for fork-lift equipment and utilization of pallets and other transport aids are also very limited. Moreover, there is no standard pallet size in China, though the European 1,000 mm by 1,200 mm pallet is most widely used. There is no pallet pool for hire. 255. Truck plazas are common, where drivers go to find loads, usually to fill backhauls. There, large numbers of freight brokers advertise available loads using chalk blackboards, taking a margin on quoted rates. One visited, Haohong Logistics Plaza, has 400 brokers’ offices around the plaza. A few use the internet to receive notification of loads. Trucks may spend up to three days in the plaza before they obtain a suitable load. In advanced economies, much of this process would be done electronically: one service provider in Canada posts over 100,000 loads a day on a web-based system. The result is that a trucker usually has his next load arranged long before delivering his current load. There is much scope for improved load planning in China.

11. Information Technology

256. Information technology (IT) is not much in evidence in Yunnan, Gansu and Heilongjiang. No computerized dispatch, maintenance management, communications, monitoring or load- tracking systems were seen. One truck plaza had an electronic display-board that served instead of the more common blackboard. One company had investigated the use of satellite- based tracking systems for its trucks, but had found them too expensive. Firms interviewed in

92 Chow & Wang, Op. Cit., quoting e-mail communications a former field manager of General Motors China. 72 the 2004 World Bank survey also expressed concern with the state of IT systems in China, noting that there are no trace-and-track capabilities. The American Chamber of Commerce, in its 2004 White Paper, points to the difficulty in using EDI in China. 257. The 2004 TLI-AP surveys, however, found a different picture in their sample of eight operators: “All firms realize the importance of IT systems. Most firms have set up in-house IT departments to build hardware infrastructure and develop software. A few firms have outsourced or partnered with professional companies … Some firms have taken advantage of network and IT systems from application software platform (ASP) services. Technologically these firms have commonly deployed TMS (transportation management system) and WMS (warehouse management system). Some have applied Global Positioning System … bar-code technology, warehouse monitoring technology, decision support system, GSM nationwide roaming communication platform and short message technology.”

12. Vehicle Maintenance

258. Truck maintenance standards and procedures are specified by regulation 93 . These require operators to carry out three levels of inspections and maintenance: routine, first level and second level, as described in Appendix 2. Even so, many trucks seen in Yunnan, Gansu and Heilongjiang appeared to be in a poor repair, with bald tires, leaking tanks, rusted components etc. Most were among the small owner-operator fleets. Larger firms seem to maintain higher standards. The Yunnan Kunming Steel Group, for example, has its own repair facilities and employs first-class mechanics. It has established a special technical instruction department, a quality management department, a vehicle repair reporting system and SOPs for repairs. A certificate confirms that repairs have been done properly; vehicles are not allowed to leave the shop without this. All work is signed off by the responsible parties. Vehicles are inspected before each trip. These arrangements are the exception rather than the rule, however – some 70 percent of the truck fleet is owned by owner-operators. According to the MPS, 2.9 percent of all accidents (truck, bus and automobile) are attributed to mechanical failure. 259. An issue raised by this is the way the government tries to ensure vehicle safety standards. MOC emphasizes maintenance standards, and tries to monitor these at places where maintenance is done. Other countries simply specify the safety and other physical and operational standards vehicles are expected to meet on the public roads, and monitor these by roadside checks. MOC’s approach probably derives from its responsibilities for the management of road-related services like maintenance and repairs and the division of responsibilities with public security agencies.

13. Fuel Costs

260. At present prices, fuel accounts for 20-25 percent of the variable costs of operating trucks. This proportion has been increasing with the rise in fuel prices. The effects of rising fuel prices may be mitigated in various ways, but the most significant measure is to maximize loads carried by operating larger trucks wherever possible and by maximizing load factors through efficient scheduling and minimizing journeys on which loads are low. 261. Maintenance standards are also important. The fuel consumption of a poorly-maintained truck is significantly higher than that of a vehicle in good condition, as are the negative environmental impacts.

93 Technical Specifications for Vehicle Repair, Inspection and Diagnosis (GB/T18344) and Vehicle Maintenance Technique Specification (JT/201-95).

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14. Road Cost Recovery

262. Truck (and bus) operators in China are subject to several fees and taxes, some of which vary by province, aimed at recovering the cost of road use: the vehicle purchase tax (a uniform 10 percent throughout China); the highway maintenance fee; highway and bridge tolls; the vehicle registration fee (only Yuan 100 for all trucks); and a vehicle management fee paid to the PCD and varying between provinces. These are in addition to normal business, VAT and income taxes paid by all commercial operations.

a. Highway Maintenance Fee

263. The 1995 World Bank review noted that the structure and level of the road maintenance fee varied between provinces. Some charged based on operators’ revenues, while others levied on the basis of trucks’ registered weights. In Yunnan, Gansu and Heilongjiang, the fee is levied annually at the rate of Yuan 190-200 per tonne of registered weight per month. In other provinces the rate varies between Yuan 90 and Yuan 220. Some companies are also able to negotiate a discount: one company paid Yuan 190 * registered weight * 12 * 0.91 per annum, the 0.91 being a discount factor. 264. This system of charging appears to lead to under-registration of truck weights. Trucks capable of operating at over 20 tonnes were seen with registered weight of only seven tonnes painted on the cab door. Most trucks seen in the project provinces appeared to have registered weights well below what they were physically capable of carrying. MOC is aware of this problem and is working with the MPS, NDRC and other ministries in trying to correct it. 265. Figure 16 shows how declared gross vehicle weight (GVW) influences the fee paid and its percentage of total truck costs; the base case represents existing conditions, with loads averaging 1.5 times the permissible limit and trucks registered at half their permissible GVW. It shows that the highway maintenance fee is a large cost component even when truckers bend the rules with under-reported registration weights and more-than-legal payloads – confirmed by the 2004 TLI-AP surveys. If they were to follow the rules about registering at actual maximum operating weights, the highway maintenance fee would be as high as 20 percent of operating costs for some trucks. Figure 16: Effect of Declared GVW on Highway Maintenance Fee and Truck Operating Costs

25%

20%

15%

10%

5% Highway MaintenanceFee as a Percentof Truck OperatingCosts

0% 11 12 11S1 11S2 12S2 12S3 12S4 Truck Type Base case 100% of GVW declared 74

b. Tolls

266. Highways and expressways are being financed by a user-pays policy94: users pay tolls designed to recover the costs of building, operating and maintaining these highways (para. 19). In May 2004 an attempt was made by MOC to unify toll structures for all tolled highways, but the changes have not been fully implemented. 267. Compared with other countries, China’s toll rates are quite high. For carriers with trucks driving significant distances on tolled roads – necessary for most inter-provincial operators – they are a high cost component. Figure 17 shows toll expenditures as a percent of operating costs (excluding overheads) for two cases, one with 25 percent of driving distance on toll-roads, the other with 50 percent. For one truck type, at 50 percent toll-road usage, tolls would account for over half of total operating costs. The proportions in the figure are similar to those found in the 2004 TLI-AP surveys. Figure 17: Tolls as a Percentage of Operating Costs

60%

50%

40%

30%

20% of Operating Costsof Operating Tolls as a Percentage

10%

0% 11 12 11S1 11S2 12S2 12S3 12S4 Truck Type

25% of driving on tollroads 50% of driving on tollroads

268. The figures above assume that tolls are based on the actual operating weight of the truck. Toll authorities in at least two provinces95 assess tolls in this way. On most other toll- roads, however, tolls are assessed on the basis of the registered weight which, as discussed above, is likely to be less than the truck’s operating weight.

c. Impact of Cost-Recovery Structure on Freight Costs

269. Earlier in Table 7 (page 63) it was seen that base freight costs do not vary much by type of truck. But with trucks carrying 1.5 times the legal load, trucks registered at one-half their permitted GVW and 25 percent of the driving done on toll-roads, toll fees and the highway maintenance fee would account for 44-51 percent of total operating costs. If the amortized value

94 The Highway Law stipulates that tolls should permit the repayment of money invested together with an appropriate return. 95 Provinces using scales and actual operating weights are Shandong and Jiangsu; some scales are also in use in Yunnan.

75 of the vehicle purchase tax were added, these fees and taxes would account for around half of freight costs, acting as a significant disincentive to the use of larger, more productive vehicles – their comparative advantages are being swamped by the effect of higher fees and taxes. And the disincentives are greater when trucks operate with legal loads and register at their correct weights (Figure 18). Figure 18: Freight Rates: Base Case and with Full Compliance

0.20

0.18

0.16

0.14

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0.10

0.08

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0.04

Freight Costs (Yuan per tonne-km) per (Yuan Costs Freight 0.02

0.00 11 12 11S1 11S2 12S2 12S3 12S4 Truck Type

Base case costs Costs with legal loads/100% registration

15. Vehicle Weight and Dimension Regulations

270. Maximum permissible vehicle weights and dimensions (VWD) are set out in GB1589- 2004 Size, Axle-load and Weight Limits of Road Vehicles. In addition to vehicle dimensions, this specifies maximum permissible axle loads as shown in Table 10 below. Table 10: Maximum Permissible Axle-Loads

Axle Type Spacing between Maximum axles (m) (“a”) Weight (kg) Steering axle n.a. Unknown, assumed same as single axle Single axle n.a. 11,500 Two-axle groups - trucks and tractors a < 1.0 11,500 1.0 ≥ a < 1.3 16,000 1.0 ≥ a < 1.8 18,000 Two-axle groups - trailers < 1.0 11,000 1.0 ≥ a < 1.3 16,000 1.0 ≥ a < 1.8 18,000 1.8 ≥ a 20,000 Three-axle groups - trailers a ≤ 1.3 21,000 1.3 > a ≤ 1.4 24,000 Note: For 3-axle groups, spacing is between adjacent axles

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271. In addition to these, the following maximum truck weights are specified: rigid truck, 31.0 tonnes; trailer, 40.0 tonnes; articulated truck, 49.0 tonnes. 272. There is one single rule for spacing between axles and axle groups: the distance between the last axle of a tractor and the first axle of a semi-trailer must exceed 3.0 meters. 273. A consequence of these rules is that legally-loaded trucks in China have relatively heavy axles compared with other countries and, more importantly, have heavy loads over short distances between axles or axle groups. 274. Consider first axle weights. Table 11 compares the permissible limits for common axles in Canada, the US, Australia and China96. It shows that axle (including axle group) loads are heavier in China than elsewhere. Moreover, they concentrate loads over shorter spaces: the 24 tonnes allowed on a 3-axle group in China, for example, can be accomplished with as little as 2.6 m between the first and third axle; in Canada, this same weight is allowed only where there is a minimum of 3.66 m between first and third axles. Also, when axles and axle groups are combined, the load per meter of total axle spacing is high in China. To pick one example, compare a 5-axle tractor-semitrailer in China with the same vehicle in Canada. Given certain assumptions97, such a truck in China has 4,643 kg of load per meter of distance between first and last axle. In Canada, this same truck would have 3,779 kg of load per meter of distance between first and last axle98. And, in the US, loadings per meter of axle spacing are even lower than in Canada. Table 11: Comparison of Common Maximum Axle Loads (maximum axle mass, in tonnes)

Axle type Canada USA Australia China Single axle 9.10 9.07 9.00 11.50 Tandem axle 17.00 15.42 16.502 Trucks: 18.00 18.001 Trailers: 20.00 3-axle groups 24.00 n.a.3 20.00 24.00 1 Two jurisdictions allow up to 19.1t in some cases 2 Tandems with pavement-friendly suspensions may be allowed slightly more 3 3-axle groups are possible but they are not included in the federal regulations

275. Heavy axles damage pavements rapidly and, given the 3.0 m axle-spacing rule, the heavy loads over short distances are tough on bridges. China’s 49-tonne cap on articulated truck weight is not optimal in terms of encouraging the use of more efficient trucks (larger loads) with more axles that are more pavement- and bridge-friendly. The justification for this cap is probably bridge strength, but from the perspective of the bridge two relatively short heavy trucks traveling one after the other are generally harder on bridges than a longer truck (with more axles) spread over a longer span but exceeding the 49-tonne cap. One consequence of the heavy axles and the 49-tonne cap is that tractor-semitrailers with more than six axles do not make economic sense from the perspective of operators: adding more axles simply increases tare weights and reduces effective payloads. (This is one reason why Table 7 on page 63 shows higher freight costs for the larger trucks.)

96 In each country the rules are more complex than shown in the table, but the figures are reasonably representative. 97 1.22 m tandem axles on both tractor and trailer and a minimum wheelbase of 3.0 m for the tractor. 98 This is under the National MOU; individual provinces and territories do allow shorter, heavier trucks.

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16. Truck Overloading

276. Weight and dimension regulations are ineffective if there is no enforcement – and efforts at enforcement in China have failed to prevent the common practice of overloading trucks, as observations in Yunnan, Gansu and Heilongjiang found. Operators have significant incentives to overload (see below) and therefore do so99. Officials have long been aware of this issue and concerned about its impact on road deterioration. A campaign was launched in June 2004 to curb the practice. In Beijing alone, 19 inspection stations were established. The campaign involves increased fines and a requirement that overloaded trucks remove parts of their loads. Road transport prices were reported to have increased as a result, with carriers raising rates to compensate for smaller loads100. According to TLI-AP, by August 2004, overloading cases had decreased significantly. But the impacts of these campaigns tend to be short-lived without lasting commitment to strict enforcement and the removal of economic incentives to overload. 277. These incentives are easily demonstrated: a reduction in average load from 1.5 times to 1.0 times the legal limit increases freight costs by between 17 and 47 percent (Figure 19). Figure 19: Effect of Overloading on Freight Costs

0.50

0.45

0.40

0.35

0.30 50% overloaded 0.25 Legal loads 0.20

0.15

0.10 Freight Cost (Yuan per tonne-km) per (Yuan Cost Freight 0.05

0.00 11 12 11S1 11S2 12S2 12S3 12S4 Truck Type

17. Safety Compliance and Enforcement

278. Beyond overloading, there is concern about safety compliance and enforcement. Although trucks are required to undergo inspections on a regular basis, they often avoid doing so101. Unlicensed trucks are not uncommon in some regions, though this is not true of Yunnan, Gansu and Heilongjiang, according to officials there. Though the RTO requires the legal maximum load to be marked on the vehicle, trucks were seen with lower loads marked; some operators are believed to maintain different sets of registration documents for the same vehicle,

99 See, for example, FU Lin, Explore the Reasons of Overload in Road Cargo Transportation from Aspect of Economics, Railway Transport and Economy, June 2005. 100 The Economist, Transport in China: Going After the Truckers, June 10, 2004: “An American manufacturer in the port city of Tianjin says its road transport costs are up by around 30% since the start of the year, when some provinces began cracking down on overloading as a prelude to the new law. He Jun of Beijing Anbound Information, a consultancy, says some manufacturers report a doubling of road transport prices.” 101 USDA Foreign Agricultural Service, GAIN Report, 2003 (Op. Cit.) 78 one used when paying tolls, the other when stopped by officers enforcing maximum load regulations. 279. The Ordinance requires terminal operators to enforce loading and vehicle-inspection regulations. This is impractical: they have an interest in encouraging trucks to use their facilities. Observations suggest that terminal operators are not enforcing the Ordinance as required: no vehicles were seen being inspected for mechanical condition; no vehicle inspection certificates were seen given by drivers to controllers; there appeared to be no checking for overloading. 280. PSB officials complain about the lack of staff and other resources to enforce vehicle safety, VWD and overloading regulations. This may be true, but they appear capable at enforcing other regulations, such as speed limits, especially when on-the-spot fines are able to be imposed. The problem is probably three-fold: shortages of suitable equipment like portable axle-weight scales; a lack of priority given to enforcing vehicle safety and loading rules; and an interest on the part of police in maintaining existing arrangements – the practice of overloading presents them with welcome opportunities to levy unofficial fines. 281. Complicating the issue is the division of responsibility for enforcement. The PCDs are charged with road administration, but the PSBs – who are probably less familiar with the technical and economic justification for the rules they apply – enforce the regulations. Load security is an example: this is the responsibility of the PCD under the RTO, but it is also regulated by the Road Traffic Safety Law administered by the PSB. And when PCDs (and EPBs) need to carry out enforcement campaigns, they have to be accompanied by PSB officers. This makes it difficult to maintain continuity of enforcement efforts. Some other countries have special enforcement units under the technical agency authorized to carry out this kind of enforcement.

18. Corruption

282. No evidence of corruption was seen in Yunnan, Gansu or Heilongjiang, but it is commonly known to be a problem among local officials and enforcement agencies, despite large-scale and even draconian efforts by central government to eliminate it102. Corruption is linked with the problems of enforcing traffic and vehicle safety, VWD and truck loading regulations. Illegal payments are commonly made to circumvent these regulations. Transport operators and enforcement officials both have strong incentives to continue this practice, for obvious reasons. The threat of prosecution is only partially effective in reducing the extent of the problem. The Government might achieve better results if it were to address these incentives directly, by making it more rewarding for the regulations to be complied with, as well as strengthening enforcement measures themselves. Options to be considered include: placing more responsibility for traffic and vehicle safety performance on the operator, rather than the driver, and linking renewal of an operator’s license to his safety performance; changing the structure of road user charges (tolls, highway maintenance fee and annual vehicle registration fee) to penalize those types of truck that do most pavement damage per tonne of laden payload, thereby encouraging more economically efficient, multi-axle trucks; utilizing technology more effectively in enforcement, e.g. by the use of automatic weigh-scales, cameras and vehicle identification devices; and increasing the incentives for enforcement agencies to achieve compliance with the regulations, including outsourcing the enforcement task under competitive contract, with payments related to the effectiveness of enforcement.

102 China’s Frantic Crackdown on Corruption, Geoffrey York, Globe and Mail, May 28, 2005.

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19. Effectiveness of Safety Regulations

283. Standards of road safety are influenced by several aspects of regulation, including those governing: • VWD regulations (GB1589-2004 Size, Axle-load and Weight Limits of Vehicles on Roads, 2004), which affect the stability and handling properties of trucks by specifying the way loads are distributed and vehicles are joined together • transport of dangerous goods (Administration Rules for Dangerous Goods Transport by Road, 1993; Implementation of National Guidelines on Dangerous Chemical Goods Transport by Road, 2001) • driver and traffic behavior, speeds and load security (Road Traffic Safety Law, 2003). • driver education, testing and licensing • transport business licensing, and the provisions of the RTO on such matters as qualifications of operators, load security, inspections, hours of work, plans for dealing with accidents, maximum age of drivers, inspections of trucks at terminals etc • technical standards for vehicles, including lights, brakes etc • vehicle maintenance and inspections (the RTO; Regulation of Technical Management for Vehicles in Transport Industry, 1990; Regulation of Maintenance and Management of Road Transport Vehicles, 1998; Regulation of Management of Comprehensive Performance Inspection Station for Transport Vehicles, 1991; Comprehensive Performance Requirements and Inspection Method for Operation Vehicles, GB18565; Technical Specifications for Vehicle Repair, Inspection and Diagnosis, GB/T18344; and Technical Condition of Safe Operation of Motorized Vehicles, GB7258). 284. Many of these regulations lack the specific details required to give them real force: a law that says “truck operators must ensure that loads do not fall off trucks” is too general as a legal basis to ensure load security. Dangerous goods regulations requiring operators to use the “best handling and transport methods” are too vague. Controls on drivers’ working hours that simply state “no driver shall drive for more than four hours” do not help enforcement agencies to enforce the intent of the law.

20. Licensing Procedures

285. In its 1995 report the World Bank found licensing and permit requirements for trucks in China administratively cumbersome. Even now, an applicant for a road freight transport operating permit must provide detailed documentation to show that he meets conditions relating to his financial standing, the vehicle/s owned, the driver/s employed, his vehicle maintenance facilities, his safety management system etc. He must also register his business with the Industrial and Commercial Administration Department; have his vehicle/s registered and inspected by the PSB; and provide details of the vehicle purchase invoice, vehicle certificate, vehicle purchase tax receipt, organization coding certificate (if the applicant is an enterprise), tax payment/exemption certificate, evidence of insurance, and a receipt for payment of the highway maintenance fee. After this process he obtains a Road Freight Transport Operating Permit, a Vehicle Registration Permit and a Vehicle Operating Permit, the last of which must be kept always with the vehicle. Operators intending to carry dangerous goods have to meet further conditions. 80

286. The process is indeed cumbersome and bureaucratic, though the steps are logical enough. Little effort is made to streamline the procedures or use technology to automate the process, as in other countries103, though the Gansu TAB has brought each step in the process under one roof.

21. Government-Industry Relations

287. Trucking industry associations, of which the CRTA is one 104 , seem to have little significant input into the development of government policy, regulations or standards. Respondents to the 2004 World Bank survey identified the need for better industry associations and closer consultations between customers, service providers and government officials. The recently-formed Society of Transportation and Logistics (STL), under the auspices of the China Communications and Transportation Association (CCTA), is a step in the right direction. It aims to bring together companies, university departments and R&D agencies in promoting transport and logistics and related IT, and to act as a conduit for the flow of technology between Chinese and overseas logistics technology developers. 288. Government needs to make more effective use of these associations. At present, except in the process of consulting over new laws, government policies, regulations and standards tend to be developed with much less industry input than in western countries. In August 2003 a national committee was formed to formulate standards for the logistics industry, but membership was mainly confined to government agencies, even though advances in logistics are mostly market-driven. It is a common complaint that regulations are promulgated without warning or consultation, with implementing rules not issued until months later, making compliance overly difficult105. These difficulties could be avoided if the government were to involve industry experts in the drafting process and spend more time explaining new regulations to affected stakeholders.

22. Policy Research

289. When drafting new laws or policies, MOC usually establishes an expert committee and engages in a process of limited public consultation and technical workshops. Special technical inputs are provided by expert committees and studies commissioned from MOC’s China Academy of Transportation Sciences (CATS), Highway Science Research Institute (HSRI) and/or Transport Planning Research Institute (TPRI). 290. These procedures lack some of the comprehensive analysis and discussion of options and impacts that are involved with the same process in most western countries. China’s centralized system of decision-making has the effect of omitting the industry-wide research and debate that elsewhere leads to a more comprehensive and better-considered regulatory process. Calls for industry submissions in response to policy issues and draft regulations would help ensure more effective implementation of policy.

23. Skills

291. As noted earlier, the TLI-AP surveys revealed commercial and management skills among upper-tier firms that are as good as anywhere in the world. On the evidence of the

103 In many western countries, the process of license registration and renewal can be done over the internet. 104 The CRTA was established by MOC, from which it receives some funding. Its membership mostly comprises SOEs. Its main function is to offer industry training programs and carry out small-scale research into road transport matters. 105 American Chamber of Commerce, Op. Cit.

81 limited sample in Yunnan, Gansu and Heilongjiang, however, skills among middle-tier firms are lower: the organization of accounts, access to corporate information, load-matching and vehicle dispatching, loading and unloading operations, vehicle maintenance and vehicle and staff productivity all suffer from evident management and operational shortcomings. Skills among the lower-tier operators would be lower. 292. Opportunities for upgrading management and operational skills exist through technical universities, training programs provided by government agencies, the training programs of the CRTA, and private training facilities, including the in-company programs of enterprises like Han Dan. Courses offered by CRTA include transport theory and management, transport administration and enforcement, freight and passenger transport, WTO knowledge, and industry standards. At least three of these are offered each year, with total enrolment of about 500. Since the CRTA program started, 4,000 people have been enrolled, and 200 have traveled overseas on training courses.

C. Reform Options in Road Freight Transport

1. Competition and Industry Structure

293. China’s road freight industry is fully deregulated: operator permits are granted on the basis of simple administrative criteria and rates are not controlled. The result has been a much wider and more flexible range of services and lower rates. Western countries have all deregulated their trucking industries for the same reasons. 294. Maintaining liberalized transport markets will continue to allow efficiency to be improved and quality standards to be raised through the power of competition. Competition encourages innovation and change, raises management quality and improves demand-responsiveness. The Government can help this by continuing to improve the quality and capacity of infrastructure, removing any remaining unnecessary or ineffective restrictions on market entry and choice of vehicle technology, and establishing incentives through the structure of user charges to encourage efficiency. Market-led industry reforms can also raise safety standards and reduce overloading, particularly if transport customers continue to demand higher-quality, more reliable and secure services; this will encourage the adoption of higher packaging and loading standards, greater use of sealed containers and operational efforts to reduce damage and losses. Allowing markets, rather than government regulation (with the exception of land-use, traffic and environmental controls), to determine the location, type, layout and operations of terminals would also help ensure that they more effectively meet the needs of their customers. 295. By allowing entry to lower-tier operators willing to adopt lower standards, however, market liberalization could also result in lower safety standards if not accompanied by an increase in compliance and enforcement efforts. Overall improvement must be achieved by a combination of competitive pressures for higher standards and tighter controls over vehicle, driver and operator safety performance. This means a shift in regulatory priority: relaxing unnecessary restrictions on competition, and tightening efforts – and incentives – to protect safety and environmental standards. This same change in emphasis has helped achieve higher- quality, more efficient services and lower accident rates in most western countries: North American truck collision rates are lower now than they were before deregulation; in Canada the number of commercial vehicles involved in collisions has been falling since deregulation, while total truck activity has probably doubled106.

106 Transport Canada, Transportation in Canada: 2004, Annual Report, TP 13198E, Ottawa. 82

296. China’s three-tier industry structure is to be expected in a market that has recently been liberalized. If the North American experience is a guide, top-tier firms will continue to expand and improve; opening the market to foreign participants, most likely through alliances rather than direct investment, will hasten the process. They will put competitive pressure on middle-tier firms to raise the quality of the services they offer. Shippers using top-tier firms typically transport higher-valued products, often consumer goods or parts for just-in-time manufacturing processes. As more firms enter this top tier, competition will lower rates and raise service levels. The bottom tier will also consolidate, putting further rate pressure on the middle tier. Operators in the bottom tier will cater for price-sensitive, lower-value markets. 297. Change will be most evident in the middle tier. Some firms will adopt management and operating procedures that will put them in the top tier; others may compete with bottom-tier operators in the market for low-value commodities. A good number may face extinction, as happened in North America after deregulation. The top-tier firms are already providing high levels of service. These services can be expected to continue improving as top-tier firms expand and middle-tier firms compete. This will gradually lower trucking rates for this type of service. Rates in the bottom tier will not be affected significantly by further market liberalization. They are already low. Other factors will be more significant in lowering rates further: continuing improvement in the highway network, truck fleet replacement with more efficient technologies, lower input prices and strengthened enforcement of safety and environmental regulations. 298. Market competition and better roads will progressively raise truck productivity. Freight costs could fall by between 22 and 27 percent for larger tractor-semitrailers if annual utilization were to rise to levels achieved in western countries. 299. The conclusion: China should “stay the course” with the market liberalization first started in 1983. It should reduce the remaining areas where the state directs the affairs of business. It should rely on competitive market pressures, the structure of user charges, safety incentives and strengthened enforcement of safety and environmental regulations to raise standards and weed out the bottom-tier operators that undermine safety and quality-based competition.

2. User Cost Recovery and Taxation

300. The 1999 Highway Law amendment provided for a restructured system of road user taxation, with a fuel tax intended to replace the road maintenance fee, but implementation remains delayed. As a result, other than on its tolled expressways, China has no effective system of road cost recovery from users: users – especially operators of heavy commercial vehicles – do not face the true costs they impose in terms of road damage, congestion and environmental impact. 301. Cost recovery at the level of individual vehicle type would have many benefits: • users facing the full costs associated with their transport decisions would weigh them explicitly against the benefits of the trip, resulting in economically-optimum levels of demand rather than levels inflated by infrastructure subsidies • this would have the result of encouraging both more efficient use of vehicles and more efficient choice of vehicles – users would select more economical types of vehicle (e.g. multi- axle trucks that do less road damage per tonne of payload) when expanding or replacing their fleet, and inefficient types of vehicle that do most pavement damage (e.g. 2-axle trucks with high load capacity) would be discouraged • highway developers/operators would receive the right signals about the demand for extra capacity

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• revenues would contribute to the costs of highway maintenance and development. 302. Using in-vehicle and roadside sensor technologies some countries are able to monitor and charge for network use by individual vehicles by time of day (hence degree of congestion), though most such systems are used in urban areas like Singapore. Also effective, however, would be a system of user taxes or charges based on the type of vehicle (classified by potential road damaging power in terms of Equivalent Standard Axles, or ESALs) and the extent of its use of the road network. Most countries have established such systems by combining an annual vehicle registration fee, structured largely on the basis of ESALs, and a tax on fuel use, as a surrogate for road use107. Ideally the rates for each would be set at the point where, as near as possible, users of each type of vehicle paid an amount equivalent at least to the marginal costs of road use they cause to be incurred. 303. Separate taxes based on road use (fuel tax) and vehicle choice (annual registration fee) raise difficulties when they are collected by different agencies – e.g. with a fuel tax collected by a national government agency but road maintenance costs incurred by provincial governments. In such cases a system of pro-rating is sometimes used, with tax revenues distributed on the basis of estimated road use. In Canada and the US, for example, all jurisdictions (62 territories, states, provinces and districts) belong to two major user tax plans: the IRP (International Registration Plan) and IFTP (International Fuel Tax Plan). These allow each to set its own level of fuel and vehicle registration tax, but revenues from trucks are divided among the jurisdictions on the basis of the distance driven in each. There is no possibility of one jurisdiction using its tax level as an incentive or disincentive to attract or discourage trucks from any other; they will always be assured of tax revenues based on the amount of truck activity on their roads, and any two trucks operating on the same route will always pay the same level of tax whether they are based in a high-tax or a low-tax jurisdiction. European countries have not established comparable pro-rating schemes. As a result, trucks from one country where taxes are low, say, are able to compete unfairly (according to some) on routes with trucks from other countries where taxes are high. 304. A road cost allocation study would be needed if the structure of road user taxes is to be put on a more rational footing. At the same time, consideration should be given to arrangements to pro-rate taxes among provinces and other taxing jurisdictions.

3. Compliance

305. Existing procedures for enforcing road traffic and safety rules do not seem to be working effectively. A new incentive and enforcement mechanism along the lines of the safety- monitoring and rating systems linked to license renewal used in the US, Canada and Australia would give operators a stronger incentive to comply with the rules – and indeed to exceed the minimum prescribed safety standards. Under such an approach, the right to hold a road transport operator permit would be conditional on achieving a satisfactory level of compliance and on-road performance. 306. Middle-tier operators are feeling the pinch: upper-tier firms provide higher-quality services in a growing, more discerning multimodal logistics market; below are all the small-scale operators who are driving rates down for shippers who do not need high levels of service. Those in the middle complain of unfair competition from small operators not complying with the rules. A system that monitored an operator’s compliance with regulations and its on-road safety performance would have a significant impact on the structure of the industry. It would screen out

107 For a review of road cost recovery policies and sustainable maintenance funding, see Road Funds and Road Maintenance – An Asian Perspective, ADB, July 2003. 84 unsafe operators and raise rates for companies in the bottom tier. If their safety performance were being monitored and linked with permit renewal, operators would find have a strong incentive to establish procedures for ensuring safer operations, including better vehicle maintenance and driver selection, training and supervision. 307. Overloading of trucks can be dealt with similarly. More on-road inspections – preferably using automatic, tamper-proof technology – and stiffer fines are obviously needed, but it should also be possible to reduce overloading by including overload infractions in a safety-rating mechanism. Operators caught persistently overloading would lose points on their rating score and risk losing their operator permit. Another advantage of such a system is that it would keep responsibility for compliance largely in the hands of the technical agencies responsible for road administration – they would administer the safety-rating and re-licensing procedures, and would not have to rely solely on the PSBs. 308. In most western countries, the main underpinnings of safety regulation are tied to two concepts108: (a) the right to have a license (the road freight transport operation permit, in China’s case), conditional on maintaining an adequate level of safety and compliance performance; and (b) a mechanism to monitor safety and compliance and to impose sanctions on those who violate the permit conditions. The main requirements for such an approach are: • appropriate on-road enforcement staffing and facilities (e.g. truck weighing and inspection stations) • a system for monitoring the performance of each truck operator in terms of compliance with safety regulations, the results of safety and overloading inspections, and involvement in traffic accidents or collisions • a rating system that uses the monitoring results to grade operators (the number of grades is not as important as having a series of sanctions that are implemented as the operator’s rating falls) • a link between the right to operate a truck on the road and the safety-rating mechanism, so that operators that are deemed unfit by the rating mechanism lose the right to operate a truck • a data system – all information on compliance with rules, results of vehicle inspections, collisions and other matters has to be brought together into one database system that can be used by the enforcement agencies • auditing – a system whereby enforcement agencies can perform safety audits on selected motor carriers, e.g. new entrants, randomly-selected carriers or carriers that reach a certain grade on the rating scale. 309. The TABs currently revoke operator permits only for administrative reasons like non- payment of taxes or fees. If a safety-rating system were implemented as suggested, they would also revoke permits when the operators fell below a specified level of performance on the rating system.

4. Vehicle Weight and Dimension Regulations

310. China’s current axle-load and GVW limits tend to discourage the efficient types of trucks with large carrying capacities seen in North American and Australia. The longest permitted semi-trailer in China is 13.0m which can operate as an articulated vehicle at weights up to 49.0 tonnes. In the US and Canada the longest semi-trailer is 16.15m or more109. A “double” in China

108 See, for example, the procedures of the US DOT’s FMCSA at http://www.fmcsa.dot.gov/. 109 A few US states allow longer semi-trailers (57+ feet).

85 is a rigid truck and full trailer with overall length of 20.0m; the effective length of the freight deck is probably 14.0m at best. In Canada and Australia, the longest truck on normal roads is a B- double with an overall length of 25.0m and an available freight deck of about 19.0m (a regulated box length of 20.0m with an allowance of approximately 1.0 m between the trailers). This has a maximum weight of 62.5 tonnes in Canada110. In the US, Canada and Australia there are many permit trucks111 much bigger than this: e.g. Australia’s “triple road train” at 115.5 tonnes (125.2 tonnes in some cases) with a length of 53.5 m. Some provinces in Canada have permit trucks in the 20-40m length range, with many operating at 75.0 tonnes and one at 90.0 tonnes. In the US, many states allow LCVs (long combination vehicles). Some of these consist of triple-trailer combinations with a total length of over 30.0 m; many of these consist of two 16.15m trailers. In some states (e.g. Montana) these operate at close to Canadian weights, i.e. the national standard of 62.5 tonnes. 311. According to this project’s costing model, if the VWD regulations in China were changed to allow loads like those in Canada and Australia (i.e. payloads of 40 tonnes or more), freight costs could fall by about 40 percent112. Freight rates, particularly for large shipments, would fall – except where overloading is already practiced. 312. China’s current regulations are relatively simple; they contain little complex detail. The earliest regulations in other countries limiting VWD were also simple: they limited a vehicle’s length, width and height and put a relatively modest cap on weight. As the design of pavements and bridges became more sophisticated and pressure for larger trucks grew, VWD regulations became more complex. It also became apparent that VWD regulations had an impact of truck handling and stability, hence safety. Most western countries have now conducted major studies on the subject, some lasting 3-4 years. 313. If China’s VWD regulations were move towards comparable regulations in western countries, there would be an impact on the need for monitoring compliance and enforcement: instead of just weighing axle loads to see if they comply with regulated maxima, for example, it would be necessary to consider the distances between axles and axle groups. 314. VWD regulations play a role in road safety, but this only becomes critical when truck combinations involving the coupling of more than one vehicle are allowed. For now, stability and handling are not a major issue in China: the only coupled vehicles allowed are a rigid-truck-plus- trailer and a tractor-semitrailer. They would become more critical if China were to allow the double (or even triple) trailer combinations seen on roads in North American and Australia. Whether or not on coupled vehicles, however, the height of the load is important in considering a vehicle’s propensity to roll over, particularly when traveling at speed on a corner. 315. The potential impact of changing VWD limits is illustrated in Figure 20, which shows the effect of removing the current 49-tonne cap on combination vehicles and lowering permitted axle loads113, with and without legal maximum loads. The assumed axle loads are based on those currently permitted in Australia and Canada. To be effective (particularly from the perspective of bridges) they would have to be accompanied by detailed rules on axle spacing but this is not important for this simple demonstration. A further caveat: the truck types are the

110 Three jurisdictions allow 63.5 tonnes. 111 A “permit” truck is one that has obtained a special permit allowing it to exceed the standard VWD regulations. 112 Operators who currently overload their trucks with loads of about 40 tonnes are reducing their freight costs by 40% or more through the same mechanism. 113 To 6 tonnes on steering axles, 9 tonnes on other single axles (dual tires) (current regulations allow 11.5 tonnes), 18 tonnes on tandem axles (dual tires) (current regulations allow 20.0 tonnes on trailers), 24 tonnes on 3-axle groups (dual tires) (current regulations allow 24 tonnes), and 30 tonnes on 4-axle groups (dual tires) (current regulations do not recognize 4-axle groups). 86 same in all cases, but in practice the market might respond by introducing new truck types to China. Figure 20: Effect of Load Limits on Freight Costs

0.60

0.50

0.40

0.30

0.20

0.10 Freight Cost (Yuan per tonne-km) per (Yuan Cost Freight

0.00 11 12 11S1 11S2 12S2 12S3 12S4 Truck Type

Existing conditions Reduced VWD limits Reduced VWD limits with legal loads

316. Note that freight costs increase with the changes in loading limits for all trucks except the 7-axle tractor-semitrailer (which now makes economic sense). With legal loads, rather than the 50 percent overloading assumed under existing conditions, they would increase further. Without better enforcement and a changed policy of road damage cost recovery, it is difficult to overcome the incentive to overload. 317. Specific recommendations on VWD limits and cost-recovery policies are beyond the resources of the present project. It would be necessary to carry out a detailed analysis of pavement performance under load (axle-load/pavement interactions), bridge performance (truck-load/bridge impacts), road geometry (turning circles, clearances), truck stability and handling (safety), truck economics and road damage cost allocation.

5. Industry Associations

318. A common complaint is about the lack of harmonization of regulations between provinces. Allowing industry to have an input on policies, regulations and standards would help improve harmonization. Many states, provinces, districts and territories in North America used to have different regulations on truck-trailer dimensions; US federal regulations only made it a requirement that the maximum length for all states was 48 ft (14.65m). When the 53-ft (16.15m) semi-trailer first appeared its use was limited, but over the years, as industry associations made representations to governments, acceptance spread. It eventually came to be accepted at the national level in Canada and, ultimately, under standards agreed to by the three countries under NAFTA114. Now it is the de facto standard, and shippers use pallets and unitized loads that are compatible with the 53-ft trailer. Intermodal rail services also use the 53-ft semi-trailer (as well as others) as a standard. Truck-load shipments, at least dimensionally, are set at the 53-ft standard. This dimensional unit can now move seamlessly throughout North America.

114 Although a NAFTA panel accepted the 16.15 m semi-trailer, this acceptance has no status under the law in any of the three countries, however.

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319. This serves as an example of how industry developed a standard, worked with governments in approximately 60 jurisdictions to change relevant regulations and eventually achieved increases in truck productivity. Other examples include industry-government cooperation in standardizing pallet sizes and drivers’ hours of work. In Canada the trucking industry has a permanent seat on the inter-provincial task force that sets VWD regulations; in the US, industry was represented in the organizations that developed by-pass standards for highway inspection stations115 and participated with governments in developing most aspects of safety regulation. Industry associations can also play an important role in the development of policies, regulations and standards through policy research. When allowed meaningful input into the decision-making process, they soon learn that this input has to be based on sound research. 320. China would benefit from greater consultation with industry associations in formulating its policies, plans, regulations and standards.

6. Operator and Vehicle Licensing

321. China’s licensing procedures are administratively cumbersome compared with western countries where the practice is to issue a transport operator’s license – like the road freight transport operating permit in China – to a company or individual. They can operate any number of trucks (which simply have to be registered) under that license. But no truck can be operated on a public road unless it is under an operator’s license. So the operator responsible for the performance of that truck can be identified. This is an important concept for enforcement. It means that the safety performance of a truck can be linked to the process of operator license renewal, and operators can be made responsible for the safety performance of their trucks. A similar linkage can be used to strengthen controls on overloading: operators found to overload their trucks would incur penalty points and risk losing their operating license if a threshold point total were reached in any one year.

7. Maintenance and Inspections

322. MOC currently regulates the type and frequencies of maintenance (Appendix 2). But there is no effective system in place that routinely catches and tracks trucks that do not follow the regulations. One option is to establish a system of inspection stations on all major highways with procedures for inspecting trucks and a method to track which trucks have not been inspected in a given time period. This would have to be linked to regulations specifying the technical standards and conditions of trucks permitted to use public roads, rather than the maintenance history. A network of inspection stations, with standard procedures for checking the condition of vehicles, and stiff rules on what constitutes an un-roadworthy truck, is the only way to ensure that trucks on the road are safe. Setting minimum roadworthiness standards would make it no longer necessary for the PCDs and CBs to regulate maintenance and to carry out periodic checks of maintenance records. 323. Roadside inspections are a key tool for enforcing safety standards, implementing the safety rating scheme proposed above and monitoring compliance with VWD limits. Yet existing inspection stations are not effective, partly because it is possible for drivers to circumvent the inspections through illegal payments. Apart from periodic crackdowns, efforts to overcome this problem could be made by using modern automatic weigh-scales (including weigh-in-motion, or WIM, equipment), cameras and other inspection/testing technologies to generate tamper-proof records of the results that can be sent electronically to a central control or monitoring point. If

115 Approved trucks that have passed over a weigh-in-motion scale embedded in the pavement, with transponders that can be read by inspection stations, are allowed to by-pass the inspection station. 88 necessary, inspection procedures could be outsourced under competitive tender to carefully- vetted companies whose performance (subject to independent audit) in achieving compliance would be the basis for payments under the terms of their contract. 324. MOC should consider implementing a nationwide system modeled on the North American CVSA that would continue to allow decentralized responsibility for inspecting trucks, use standard inspection procedures and records (with outsourcing attempted on a trial basis), have inspections based on a standard list of basic conditions defining a roadworthy vehicle (which need not include maintenance records), and have a system of marking/stickers to identify a truck that had passed inspection. Although the primary thrust of this proposal would be on vehicle and driver condition, the same stations could also be used to enforce VWD and loading regulations.

III. PASSENGER TRANSPORT

A. Issues in Road Passenger Transport

1. Licensing of Bus Services

325. Separate permits are required for drivers, vehicles, bus operating enterprises, terminal operating enterprises, maintenance workshops and driver training establishments. Permits for bus operations are issued at various levels, depending on the areas and routes covered. The PSB conducts driving tests and licenses drivers and vehicles. 326. Buses, routes, operators, bus stations/terminals and workshops are all categorized into various grades in accordance with criteria set out by MOC. At the time of writing, the criteria for bus operating enterprises were under review, and were to be reissued as “industry standards”. Under the existing criteria, bus operating enterprises are graded (I-V) according to their years of experience, numbers of passengers and passenger-kms, management experience and qualifications, driver safety record, asset value, numbers and grades of buses and seats, in various classes and ages, numbers of bus stations and workshops owned in specified grades, total annual revenue and asset ratios. Bus terminals are graded (1-5) according to passenger throughput and availability of facilities and other factors. Bus routes are graded (A-D), with sub- categories (1-4); A1, the highest, is for services between provincial capitals, and D wholly within one county. Only the higher-graded enterprises may operate the highest-graded routes. In addition, while there is no restriction on the length of route which may be operated by a Grade I or II enterprise, those in Grades III, IV and V are limited to routes of 800, 400 and 150 kms. Bus service licensing procedures are summarized in Appendix 4. The above categories and the relevant criteria are summarized in Appendix 5. 327. For an inter-provincial route, permits are required from the PCDs of the provinces at the origin and destination of the route, and any provinces through which the route passes where buses are scheduled to stop. For inter-city routes within one province permits are required from the PCD. For a route operating from a city to a county a permit is required from the CB for the city. 328. An existing bus owner wishing to introduce additional buses, or a potential new bus operator wishing to enter the market, must apply to the relevant authority for a permit, specifying the route on which he proposes to operate the vehicles. If there is spare capacity on the route, and provided that the applicant has the necessary qualifications to operate the type of route applied for, he will be given a permit for that route; otherwise he must select a different route for which he is eligible, and which has spare capacity.

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329. As mentioned earlier, the RTO requires road transport authorities to take into account the demand and supply situation in the market and the convenience of the public when considering applications. In order to satisfy the demand/supply requirement, the PCD calculates a maximum permitted capacity, in terms of the total number of seats, for each route. It is not clear how this figure is calculated, but it is invariably much higher than is required to satisfy normal demand. It is reviewed periodically, on the basis of traffic information which bus and terminal operators are required to provide monthly, as described below. 330. On many routes, capacity has increased when small-sized buses have been replaced by a similar number of larger ones. However, each province has now set regulations requiring that replacement of vehicles should not result in an increase in the total number of seats. Bus operators must decide whether to purchase a large number of small buses or a small number of large buses to achieve their allocation of seats. Government authorities also require that when buses are replaced, the new vehicles should be of the same level or higher than the old ones, provided that there is no increase in total capacity. The majority of operators replace with higher-grade vehicles. 331. If the number of passengers using the route daily is above a specified percentage of the permitted total seating capacity, applications for permits to operate additional buses will be granted. This percentage varies: it is typically 70 percent, as in Gansu and Heilongjiang, but Yunnan specifies 75 percent. 332. For each class of bus route, a minimum vehicle standard is specified. For example, buses used on inter-city routes operating on expressways must be of “luxury” standard. Any type of bus may be used on the lowest classes of route. 333. Each license specifies the route on which the bus must be operated: normally buses may not be used on services for which they are not licensed without authority from the PCD/CB. In practice, many operators allocate long-distance and short-distance trips to the same vehicle for better utilization, and the authorities have given concessions to selected operators to permit them to do this. 334. Operators may propose new routes but the PCD/CB will take into account the permitted capacities of other routes using the same roads; in practice this sometimes means that the proposed route cannot be introduced since the capacity on part of the route is already fully allocated. 335. With regard to inter-provincial routes, the RTO states that these should be coordinated by the provinces at the origin and destination of the route concerned. Departure times from the respective terminals are determined by the two authorities based on local requirements. In practice, the PCD in one province may propose the introduction of a new inter-provincial route, and if the PCD in the other province thinks the route will be viable, the two parties will come to an agreement and bus operators in the two provinces will operate the route together. If the PCD in the second province thinks the route will not be viable, it will suggest that it should first be operated from the initiating province, but may join later if it so wishes. 336. Such cooperation does not always exist in practice, however. Even within one province, external operators report that local operators often receive preferential treatment at terminals, with more departures being allocated to local operators than to the operators from the opposite end of the route. This happens where some terminal operators are stronger than others. In Yunnan, for example, there are many small passenger terminals in Kunming under the control of different operators, while in the other cities in the province there are fewer terminals mostly owned by the principal local bus operators that are able to exert greater control. Although the provincial authorities do not encourage this practice, the result is discrimination against certain 90 operators. If vehicle and terminal management were to be separated, this problem would be resolved. 337. Bus and terminal operators are required to provide certain operating data to the PCD/CB on a monthly basis and, in addition, specifically for peak holiday periods. Information is provided by the bus operators on the number of passengers carried and total passenger-kms on each route. Terminal operators give the number of departures and passengers on each route. The SOEs also give revenue information but this is not required from private-sector operators. The PCDs pass this information on to MOC. Additional information provided at holiday times includes the number of passengers who could not be carried or who had to wait for buses for an excessive time as a measure of shortage of capacity. On the basis of this information, the PCD/CB decides how many additional buses are required to cater for peak demand; operators may apply for permission to run additional buses at these times.

2. Passenger Transport Fares

338. The Ordinance is silent on bus fares, but these are regulated by decree, and are determined at provincial level. According to the Notice of Release of Bus Transport Price by MOC and NDRC (Decree 502/1998), each province should determine the pricing structure and procedures after consideration by transport authorities and price bureaux. 339. Fares are based on the distance traveled, and vary according to the class of travel: for example, in Heilongjiang, fares are currently Yuan 0.23/km for a luxury bus and Yuan 0.13/km for a standard bus. They include the transport cost, insurance, added fees and tolls. They are based on a price benchmark and are calculated according to different vehicle grades, types and highway classes. The formula for calculation is: fare = benchmark price * (1+route price rate) * (1+vehicle type) + floating scale (determined by regional factors) * travel mileage + added fees. 340. The fare set by the PCD in some provinces is the maximum which may be charged, and operators may charge lower fares if they wish. This applies in Yunnan: the Kunming Transport Corporation, for example, reduces fares at certain times in accordance with market conditions; current fares are displayed electronically at the terminals. In some other provinces, the set fare is a recommended one, and operators are allowed to charge fares above or below this level, provided that they remain within the “floating scale” set by the authority. On the other hand, in Gansu and Heilongjiang, operators have no such flexibility, but must charge the exact fares specified by the PCD. Most operators would prefer greater flexibility. 341. Bus operators in some provinces are permitted to charge higher fares at peak holiday times, although the application of these fares is often inconsistent. In Heilongjiang, for example, normal fares must be charged at peak holiday times except on additional buses which are operated, and which are loaded in one direction only, for which operators are permitted to charge 50 percent higher fares. In some provinces, the same fares apply throughout the year, so that they cannot be varied with fluctuations in demand. The railways are permitted to raise all fares by 10 percent at peak times. 342. Compliance with the fares set by the authorities varies. Fares collected at bus stations are generally correct, but unauthorized passengers are sometimes picked up outside terminals or at the roadside along the route when there is space available on the bus; in these cases the drivers often charge reduced fares, which they keep for themselves.

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3. Subsidy for Passenger Transport Services

343. Long-distance and inter-city bus services are generally profitable, and the question of subsidy does not arise. However, in all three provinces visited passenger transport services in rural areas are claimed to be inadequate. Demand is low, journeys are short and rural passengers cannot afford to pay high fares. Services are unprofitable and do not attract investment from private enterprises. 344. Some loss-making rural services are provided by SOEs: the Kunming Transport Corporation, for example, has subsidiaries which operate rural services; these incur losses which are covered through cross-subsidy from more profitable subsidiaries. 345. There are some government subsidies for rural services, but these apply mainly to infrastructure such as bus stops. Village road development is normally the first priority of local governments; second is the development of village passenger transport. In two groups of villages in Gansu a demonstration village passenger transport network has been developed, involving the construction of 106 bus stations in small towns, and 1,000 bus stops in villages. 346. Several county authorities charge lower fees and taxes to bus operators in rural areas where their services cannot make profits. In Heilongjiang, for example, operators of passenger transport services in rural areas are helped by reduced transport management fees and passenger charges.

4. Size and Categories of Operator

347. In accordance with MOC’s Regulation on Management Qualification for Road Passenger Transport Operators (No 225), passenger transport enterprises in China are categorized according to their size and capability; details are given in Appendix 5 116 . The category of operator determines the types of service and maximum route length which may be operated. One aim of this categorization is to encourage the formation of large enterprises, especially though consolidation of smaller operators. 348. The authorities in Yunnan, Gansu and Heilongjiang are actively promoting a policy of restructuring the industry, through both privatization of SOEs and consolidation of small operators. Progress has been made in the privatizing and restructuring the SOEs, but in several cases ownership remains largely in the public sector, albeit at a more local level. For example, ownership of the Kunming Transport Corporation, the largest transport company in Yunnan, recently passed from central government to the Kunming Municipality (which holds 39 percent of the corporation’s shares) and private individuals. After three years of reform, 78 of 83 state- owned transport operators in Gansu selected for reorganization now involve private participation; even so, the state still holds the majority of shares in most of them. 349. Change in ownership is through the issue of shares. Government-approved accountants are required to determine the asset value for each SOE. The state shareholdings in SOEs are sold, through government-licensed stockbrokers, to individuals and organizations, which may include public-sector organizations. Most operators are now joint-stock companies, owned by both private and public-sector shareholders. 350. The main objective of the move towards consolidation of smaller operators is to improve their strength, efficiency and competitiveness, while facilitating regulation of their activities to avoid the less desirable aspects of competition. It is implemented through the system of

116 This regulation has recently been rescinded by MOC and at the time of writing no replacement has been announced, but in the meantime provincial and lower-level transport authorities continue to apply its provisions. 92 operator categorization which restricts the smallest and least-qualified operators from all but the shortest routes, thus encouraging them to combine into larger units, through merger, restructuring, incorporation and share transfer, if they wish to expand their areas of activity. 351. By this means, for example, Yunnan has brought about the integration of 170 transport operators into 16 regional transport corporations. In Heilongjiang, the Heilongjiang Dragon Passenger Transportation Group was formed in 1996, through the initiative of the PCD, to develop as a leading operator capable of setting high standards of service and quality. This joint-stock company was established with shares from operators in the cities along its routes, and has become one of the leading operators in the province. It has been granted special discounts on road tolls and road maintenance charges, while the categorization criteria have been relaxed so that the company can be classified as a Class I enterprise even though it does not own the requisite number of buses or facilities. 352. Table 12 shows the number of operators in each category in two of the cities visited. (The figures for Kunming do not include some counties in the city, although the figures provided give an indication of the distribution of categories). There are very few operators in Category I, with the majority in Categories IV and V. Table 12: Number of Bus Operators by Category in Kunming and Lanzhou

Category Kunming Lanzhou I 0 1 II 7 14 III 12 29 IV 39 24 V 41 14 Total 99 82

353. The characteristics of the seven operators interviewed are given in Table 13. They suggest that the qualifications for the various categories are not rigidly adhered to. For example, the Heilongjiang Dragon Passenger Transportation Group is classified as Category I, even though its fleet, at 154 vehicles, falls far short of the requisite 800, while the company does not own its own terminal, which is also a requirement for this category. The Lanzhou Transport Corporation’s fleet of 569 buses does not qualify this operator as a Class I enterprise either. Table 13: Characteristics of Seven Bus Operators

Characteristic A B C D E F G % state ownership 39 0 100 0 24 100 0 Operator category II III I II II III I Operational buses 1397 263 569 161 179 86 174 Subcontracted buses 1254 120 0 0 0 0 20 (included in above total) (89.8%) (45.6%) (11.5%) Bus stations 3 1 13 3 2 1 0 Vehicle workshops 4 1 7 3 1 1 1 Key: A - Kunming Transport Corporation; B - Shilin Transport Services; C - Lanzhou Transport Corporation; D - Dingxi Transport Company; E - Daqing Passenger Transport Corporation; F - Acheng Transport Company; G - Heilongjiang Dragon Passenger Transportation Group

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354. The majority of buses are owned by relatively large companies, with 50 buses or more, although there are many small operators with five buses or fewer. Sample data from a number of CBs are shown in Table 14. Although the sample is small (for example, the figures for Kunming are for only one of the four licensing offices in the city), it gives an indication of the size distribution of bus operators. Note that city bus operators are not included since these do not come under the responsibility of MOC. (If they were to be included, it is likely that the proportion of buses in large fleets would be higher.) Table 14: Distribution of Bus Fleet Size in Selected Provinces

No in fleet Kunming Kunming Gansu (A) (B) 1 3 0 2 2-5 10 1 7 6-10 2 2 3 11-20 2 2 3 21-50 8 2 3 51-100 4 0 2 101-200 3 1 1 201-500 1 1 1 501-1000 0 1 1 A – Tour buses; B – Service buses

355. Although there are fewer buses owned by very small operators compared with most other Asian countries, they still represent a significant proportion of the long-distance bus market. Since the purchasing power of an individual operator is usually limited, many of the buses in these small fleets tend to be relatively old, and are operated mainly on the “standard” services. A substantial number are operated as sub-contractors to larger operators. 356. Small operators generally have a poor reputation. The condition of their vehicles is often poor, fares are varied without notice, and some drivers exceed speed limits and drive dangerously in an attempt to maximize their earnings. These operators are often under-insured and in the event of an accident cannot afford to pay compensation. 357. Table 15 shows the number of licensed buses, and the number of operating permits, in Yunnan, Gansu and Heilongjiang. It does not show the size distribution of operators, but it does indicate a significant variation in the average size of operator between provinces. In Yunnan, with over 18,000 operators and a low average fleet size, there is clearly a much higher proportion of small fleets than in Gansu, with a little over 1,000 operators and a much higher average fleet size. This difference is reflected in the higher number of Grade 5 operators in Yunnan, where there are 41 compared with 14 in Gansu. Table 15: Average Fleet Size, Case-Study Provinces

Yunnan Gansu Heilongjiang

Number of buses 56,780 38,336 75,461

Operating permits 18,245 1,029 6,062 Average buses per operator 3.1 37.3 12.4

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358. Most large companies are structured as groups, under the “small company, large group” principle, with separate subsidiaries for each of the various activities, such as freight transport services, terminal operations, maintenance facilities, training of drivers and mechanics, and often different types of bus service such as long-distance and rural services. 359. The main subsidiaries of a typical enterprise are the bus company, responsible for operating the buses; the maintenance facility, responsible for maintaining them; and the terminal. There are usually also other subsidiaries, often engaged in activities not directly related to the bus operation. This contrasts with the normal company structure in many other countries, where all activities are carried out by divisions or departments of a single company. An advantage of the Chinese approach is that each subsidiary is a separate cost center, dealing with the others on a commercial basis. In theory at least, this would enable the viability of each activity to be measured; this is very difficult in an organization which is not structured this way. 360. This form of structure is promoted by the categorization of operators: for example, the longest-distance routes may only be operated by organizations which own at least 150 buses, a Class 1 terminal and a Class 1 maintenance facility. 361. Among the enterprises visited in Yunnan, Gansu and Heilongjiang, all have both passenger and freight transport operations, except the three companies in Heilongjiang. Several operate bus terminals, which are normally available to other bus operators also, and all also carry out work for third parties in their maintenance workshops. The larger bus operators in China typically engage in a range of other activities only loosely related to the core activity: some companies operate restaurants and even hotels, usually in connection with their terminal operations. The Lanzhou Transport Corporation, for example, has 14 long-distance passenger transport companies, seven vehicle maintenance companies, six bus terminals, three freight transport companies and other subsidiaries including a petrol supply company, a driver training school, apartment blocks for the company’s employees and a hotel.

5. Informal Public Transport Operators

362. An important part of the passenger transport industry is the informal sector, operating mainly minibuses and other small vehicles, which are not licensed to operate as public transport vehicles. However, very little information is available on the extent of its operation. In addition to the informal operators, some licensed bus operators operate on routes other than those for which they are licensed, deviate from their licensed routes, or do not enter terminals. Most informal or illegal operators charge fares lower than those charged by the legal operators, although at times of peak demand they might exploit passengers by charging fares higher than those authorized. Their buses are often not properly insured, poorly maintained and dangerously driven, and the drivers have been known even to force passengers to board their buses against their wishes. Most operate only for short distances: there appears to be very little informal transport on long-distance routes. The informal operators are recognized as a serious problem, but the road transport authorities do not have enough staff to enforce restrictions on them. 363. A large proportion of rural transport is by informal means such as agricultural tractors and trailers, although there are also many full-sized buses, often in poor condition, which are operated without the necessary licenses.

6. Private Drivers or Sub-contractors

364. Several of the large bus operators sub-contract part of their work to private drivers. These are drivers who have a share in the ownership of the bus which they regularly drive; in

95 some cases they own the bus entirely. This practice started around 1980 as a means of financing new buses. At that time it was difficult for SOEs to raise finance but drivers were able to obtain personal loans from banks or credit facilities from vehicle suppliers to buy new buses. These drivers operate on the company’s routes; the license is held by the company. The company requires a specified amount of income from each bus (typically of the order of Yuan 100,000 p.a., but determined according to the nature of the route and the expected passenger volume). Any revenue collected in excess of this is paid to the driver, who is not paid a salary by the company. The driver is responsible for buying fuel for the bus and for its maintenance costs, as well as other costs such as road tolls. In the case of the Shilin Transport Services, the company meets the cost of insuring the buses and pays the transport management fees; sub- contractors of the Kunming Corporation must pay these costs themselves. 365. Finance is still a problem for some companies. For example, the financial condition of the Kunming Transport Corporation is such that banks will not finance new buses, and because of this about 90 percent of its buses are sub-contracted. The Heilongjiang Dragon Passenger Transportation Group, on the other hand, is in a stronger financial position, and does not employ any sub-contractors. 366. In addition to the private drivers, a large number of buses are operated on what is known in Indonesia as the “setoran” principle. Buses are rented out to their drivers, who are required to pay the owner a specified sum of money at regular intervals, usually monthly. The driver pays for all fuel, maintenance and route costs such as road tolls and terminal fees, and may employ an assistant if required. The charge is normally calculated to cover the full costs of replacement and a contribution to the owner’s overheads, plus an element to provide a satisfactory return on investment in the vehicle; the operator will pay the bus license fee, but in some cases the driver must pay for insurance. The charge will also reflect the revenue-earning potential of the route operated or area served, so that the driver must pay more for a more profitable route. All fare revenue collected, after all costs and charges have been met, is retained by the driver in place of a regular wage. 367. Some operators consider private drivers, and those operating under the setoran system, to be a problem since they have little control over them. The main problems include aggressive driving, defrauding passengers, inadequate insurance, illegal operation, and touting for passengers at terminals and on the road.

7. Bus Fleet Composition

368. There are various categories of bus, ranging from luxury and sleeper buses, offering a high standard of comfort, to standard buses, with only basic accommodation. There is also a range of sizes, typically between 20 seats and 40 or 45. The MOC classifications of the various bus types is given in Appendix 5. 369. An aggregation of the fleet figures for a sample of five bus operators for which data are available gives a break-down of bus types and sizes, as shown in Table 16. While there are, as would be expected, significant variations in fleet composition, these figures are indicative of the approximate composition of the national fleet. 96

Table 16: Fleet Composition by Bus Type in Selected Provinces

Bus type Bus size Large Medium Small Unspecified Total % Ordinary 238 378 356 0 972 42 Medium 141 411 46 0 598 26 Luxury 161 59 0 0 220 10 Sleeper 0 0 0 512 512 22 Total 540 848 402 512 2,302 100 % 23 37 17 22 100

370. It is generally agreed by the authorities and larger operators that the capacity of the passenger transport system far exceeds the demand, and this is manifested in the low vehicle utilization discussed below; therefore, while during the peak season it is possible to charge the maximum fares set by government, for about 60 percent of the year lower fares must be charged, thus limiting the operators’ profits. 371. Because of excess capacity in the industry, the larger operators would like to see a reduction in capacity, and have suggested a market exit scheme, to enable the smaller, weaker operators to be removed through the regulatory process, and to allow the stronger ones to expand. Such a scheme, but for taxis rather than for buses, has already been implemented in Lanzhou, where 96 taxi companies have been integrated into 25. Taxi operators are permitted to replace only 80 percent of their life-expired taxis automatically; of the remainder, a quota of 10 percent is given to those companies with the best records for safety and reliability, and 10 percent are allocated by public auction. In the case of Lanzhou, where the number of taxis is considered not excessive, this results in the total number remaining constant, although the allocation between operators will change. The bus operators are proposing a similar scheme, but with the total number of replacement buses to be less than 100 percent.

8. The Range of Bus Services

372. There are various categories of bus routes, and different classes of buses operating on them. The main categories are A (inter-province), B (inter-city), C (inter-county) and D (within a county); within each of these categories there are sub-categories: definitions are given in Appendix 5. 373. The bus operators visited in Yunnan, Gansu and Heilongjiang are mainly engaged in operating medium- and long-distance services, although some, such as the Kunming Transport Corporation, also operate some services in rural areas. 374. On most long-distance bus routes passengers have a choice between sleeper, luxury, medium and standard buses, at different fare levels reflecting the standard of service; minimum standards of bus are specified for each class of route, so that passengers’ choice is more limited for the longest-distance routes and those operating on expressways. Full definitions of the different classes of bus are given in Appendix 5. 375. Sleeper buses have fully-reclining seats or bunk beds, and operate mainly at night, although a large number operate during the day too, particularly on very long routes such as Lanzhou-Lhasa. Luxury buses normally have aircraft-style seats, air conditioning, and TV/video equipment; some are also equipped with toilets and catering equipment. Several companies operate very high quality buses: for example the Heilongjiang Dragon Passenger Transportation

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Group has a fleet of Volvo, King Long and some Neoplan buses, equipped with toilets and facilities for drinks and snacks, served by stewardesses. 376. Medium and standard buses have more basic accommodation. Many of these, particularly those operated by the larger enterprises, are in very good condition. On the other hand, some, particularly small- and medium-sized buses run by the smaller operators on short- distance and rural routes, are older buses, downgraded from luxury services. These often have most of the facilities provided in luxury buses, though they tend to be in poor condition or not functioning; it would be preferable when downgrading buses to replace reclining seats with fixed seats, and to remove any equipment which is not required. 377. During the off-peak season, when capacity exceeds demand, passengers will not take buses in bad condition. This adds to the difficulties of the smaller operators, many of whom are forced to charge lower fares than those authorized in order to attract passengers, but it also provides the incentive to invest in newer and better-quality buses to those able to do so. 378. On the busier routes there are normally several operators providing services at each level, although most operators concentrate on a particular class; only a small number of the larger enterprises offer more than one standard of service. 379. Many sleeper buses are restricted to overnight use and are idle during the day. Similarly, many buses with ordinary seats are idle overnight. Dual-purpose buses with good reclining seats which may be operated day and night would give better utilization and therefore lower costs; operators would have to be allowed to pass on the lower costs to passengers through lower fares. Many passengers may prefer a slight reduction in comfort in return for a lower fare. The Heilongjiang Dragon Passenger Transportation Group has only two sleeper buses, and uses its high-quality luxury buses with reclining seats on both day and night services.

9. Competition

380. In practice there is limited competition between the larger bus operators. Although there may be several operators serving a route, licensing restrictions on market entry, and on total route capacity, and the allocation of terminal departure times by the terminal operators, impose restrictions on the degree to which passengers can exercise choice of operator. 381. The control of fares limits the scope for price competition too. Operators in many provinces must charge fares determined by the PCD, although in some provinces operators may charge more or less than the prescribed fare within specified margins. There may also be some quality competition, with some operators offering a higher standard of service, or quality of vehicle, than others for the same fare. During the field visits, however, there was little evidence of such competition. 382. Competition from the smaller operators is fiercer. Load factors are about 40 percent during the off-season, so that capacity exceeds demand by a substantial margin at these times. A common complaint by larger operators is that the small operators ignore the regulations and charge very low fares; they can afford to do so by skimping on maintenance and insurance, and through such malpractices as deviating from their licensed routes and picking up passengers outside terminals. On the other hand at peak holiday periods they charge fares higher than those authorized. 383. Private drivers, and those operating under the setoran principle, have an incentive to maximize their fare collections and tend to indulge in various tactics to this end. Outside the terminals they will compete with other drivers for passengers to be picked up at the roadside, and this often involves aggressive and dangerous driving. 98

10. Bus Stations and Terminals

a. Terminal Categories

384. Terminals are categorized into five classes, depending on passenger throughput and the types of facilities and services which must be provided, with the level of service and extent of facilities increasing up the scale. The requirements and throughputs for each category are summarized in Appendix 5. 385. There are several terminals in most cities. Table 17 shows the totals in Yunnan, Gansu and Heilongjiang, and the numbers in the respective provincial capitals. Table 17: Passenger Terminals in Selected Provinces

Category Yunnan Kunming Gansu Lanzhou Heilongjiang Harbin First Grade 16 2 17 3 41 2 Second Grade 82 8 38 5 65 Third Grade 69 7 57 5 163 Fourth Grade 64 10 46 7 51 Fifth Grade 72 23 118 0 0 Total 303 50 276 20 320 7

386. Table 18 shows the main characteristics of four bus terminals for which data were available, together with key operating and financial statistics for 2004.

b. Terminal Ownership

387. Most bus stations and terminals are owned by bus operators, partly as a result of the requirement for Class I and Class II bus operating enterprises to own at least one terminal. There is however a tendency, as part of the process of reorganization of the SOEs, to separate ownership of terminals from ownership of operating companies. For example, all six terminals in Harbin are subsidiaries of one state-owned Terminal Company, in which no bus operators are involved.

c. Planning Policy

388. It is government policy that all buses operating on long-distance services should pick up and set down passengers only at designated bus stations and terminals: it is, however, common practice for buses to stop for this purpose at the roadside, although this is technically illegal. 389. Bus stations or terminals are subject to government control. A potential terminal operator wishing to open a new terminal must submit an application together with a feasibility study for approval; the PCD passes the application to the Provincial Development and Reform Commission (PDRC). The City Public Service Management (CPSM) must also be consulted. If all these bodies approve, the operator may begin detailed design. 390. Until recently the majority of bus terminals have been developed by public-sector enterprises directly controlled by provincial or city transport management departments, but with private investors becoming increasingly involved problems may arise where public policy conflicts with the interests of the investors.

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Table 18: Characteristics, Operating Statistics and Ratios for Four Bus Terminals, 2004

Name of Terminal Provincial Long Xiyuan Passenger South Bus Station Nangang Highway Distance Bus Terminal Bus Terminal Station

Location Kunming Kunming Lanzhou Harbin

Ownership Kunming Transport Private Lanzhou Transport Harbin Passenger Corp (SOE) Corp (SOE) Terminal Co (SOE) Category Class I Class II Class I Class I

Area (m2) 26,222 9,913 42,346 5,800

No. of departure bays 60 38 40 26 Other parking spaces 123 50 230 0 Transport companies served 45 23 17 109 No. of routes 112 45 71 103 Total daily departures 431 232 318 627 Average departing passengers/day 10,000 1,274 4,932 13,000 Employees 276 65 273 121

Annual Revenue (million Yuan) 21.65 2.09 37.98 15.22

Annual Expenditure (million Yuan) 20.70 2.00 35.10 13.67

Departures per employee 1.56 3.57 1.16 5.18

Passengers per departure 23.2 5.5 15.5 20.7

Revenue per departure (Yuan) 138 25 327 67

Expenditure per departure (Yuan) 132 24 302 60

Revenue per passenger (Yuan) 5.93 4.49 21.10 3.21

Expenditure per passenger (Yuan) 5.67 4.30 19.50 2.88

Note: Financial data relate to 2004

391. Yunnan PCD’s plan for Kunming is to replace the existing 17 terminals in the city with 6 new terminals located on the Third Ring Road. Four of these will be for ordinary bus services to the north, east, south and west of the city, and two for express services. The owners of the existing stations, which include public- and private-sector enterprises, are holding discussions with PCD on this issue. The provincial government has advised that a single corporation should be formed to operate all six new terminals, similar to the arrangement in Harbin. This organization would provide the finance for the entire project. 392. In practice, at present, the location of terminals is normally controlled by the PCD although the design and layout are determined by the investor, albeit in accordance with government guidelines and subject to government approval. It would seem that in effect the private sector is expected to fund projects planned by the government, with relatively little opportunity to use its own initiative with regard to location, layout or routes served. Nor is there at present any flexibility on charges (see below). 393. There are few bus stations between towns, even though passengers may wish to join or alight from vehicles at intermediate points. Where the number of such passengers is small, the provision of bus stations cannot be justified. In practice, many buses stop illegally at intermediate points, and by so doing are meeting a genuine need: ideally the practice should be formalized. Buses could be permitted to stop on demand at designated points at the roadside, which should be selected taking into account such factors as safety and convenience; alternatively, buses could be permitted to stop at any point on demand, provided that it is safe to do so. Where passenger demand at a particular point is low, it is unnecessary to provide facilities, although in some cases a small passenger shelter, and on busy roads a lay-by to 100 enable buses to stop out of the main traffic flow, may be desirable. A problem in some countries with such facilities, however, is that they tend to be taken over by informal traders, so that they are not available for their intended use. 394. On major highways with high-frequency long-distance bus services there may be potential for service areas for bus services, where passengers may use rest-room and restaurant facilities and buses may be fuelled, and such service areas might also allow interchange between buses. However, the need for passengers to interchange other than at urban bus stations is unlikely to be sufficient to justify terminals on expressways. 395. Present policy regarding the provision and location of bus stops, stations and terminals is unnecessarily restrictive. Because of the variations in requirements between one route and another, and between one location and another, it is unrealistic to lay down rigid specifications for the types of facilities to be provided. The number, sizes, location and layout of bus stations in cities and towns should be determined according to local conditions, including geographic and environmental factors as well as the number of passengers and vehicles arriving and departing, and the pattern of demand at different times and on different days. 396. On main highways and expressways between towns and cities, stopping places should be provided where there is demand, and these should be designed according to the volume of passengers using each stop, and must also take into account considerations of safety. International experience has shown that it is difficult to lay down rigid rules without creating unnecessary problems, or incurring unnecessary expense. When new highways are designed, stopping places should be provided to meet expected demand. On existing roads, bus operators and local community representatives should be consulted as to where stopping places should be provided: in many cases buses will already be stopping illegally to pick up and set down passengers, and the requirement will be to formalize what is already happening, and where appropriate to provide facilities such as lay-bys and shelters.

d. Terminal Location, Design and Layout

397. In Kunming and Harbin, there are long-distance bus terminals located centrally, within walking distance of the main rail station, and also several other terminals near the outskirts of the city. In Lanzhou, the bus terminals are reasonably close to the main road running through the city. Centrally-located terminals are convenient for passengers connecting with rail services, and whose journeys commence or end near the city centre. However, there are disadvantages of traffic congestion which increase bus journey times, while the buses themselves contribute to congestion in adjacent streets. Land is scarce and expensive in central areas, resulting in restricted sites: the terminal in Harbin, for example, is very restricted, and there is no space for buses to park within the terminal, while loading time is strictly limited to 15 minutes for each bus. 398. Terminals located in outlying districts generally have more space for buses to load and park, and are less affected by traffic congestion. There may be problems of access for passengers, and at some terminals, such as the Xiyuan bus station in Kunming, a large number of small informal public transport vehicles were observed, waiting outside the station for passengers needing transport to various parts of the city. In some cases, different terminals cater for different destinations; in others, most destinations are served by most terminals – in other words a passenger may use the terminal most convenient to him, regardless of his destination. 399. Most Class I and II terminals provide excellent facilities for passengers waiting to board buses. There is typically ample seating accommodation (accessible to ticket holders only), good toilet facilities and kiosks selling refreshments. Passengers’ luggage is normally subject to

101 security checks. At the larger terminals, there are small shops selling a wide range of goods. Several of the larger terminals also have VIP waiting facilities, and superior seating for passengers booked on luxury services. In terms of passenger facilities the more modern terminals are at least as good as, and in many cases better than, those found in many western countries. The central station in Harbin, built in 2002, is particularly attractive: it is clean, modern, and has good passenger facilities, and in many respects resembles an airport terminal building. Facilities at lower categories of terminal are more basic, while most terminals, even in the higher classes, have minimal facilities for arriving passengers, with passengers being dropped outside the terminals in some cases. 400. Although facilities for passengers are often excellent, the layout of vehicle circulation areas is generally less satisfactory. The terminals visited were generally not well laid out. Most have poor vehicle circulation, poor layout of departure bays, and insufficient attention paid to safety considerations: for example in most stations passengers are required to walk in vehicle circulation areas, often where buses are reversing. 401. The majority of terminals have facilities for vehicle safety checks, typically an inspection pit and at the newer terminals brake testing equipment also. Minor repairs can be carried out at most terminals. Bus washing facilities are provided at some (regulations are strict regarding water pollution although machines which recycle water are permissible), but very few have fuelling facilities: there are legal space requirements and regulations regarding the minimum distance from adjacent buildings. 402. Most stations have large parking areas for buses standing between journeys. Typically, the number of parking spaces is around three times the number of departure stands. This reflects the low level of utilization of buses, particularly sleeper buses, many of which travel only at night and are parked in terminals for the entire day. In effect, operators are using terminals instead of depots to park buses for relatively low charges. If parking charges were to reflect the true cost of providing the space, particularly in central areas, market forces would not only encourage operators to make better use of their buses, but it would also encourage some of them to have their own depots in more suitable locations.

e. Operation

403. Bus stations owned by bus operating enterprises are used by buses belonging to the terminal operators and by other operators, although the station operators may select the bus operators permitted to use it. The bus operators and terminal operators must normally negotiate an agreement, covering essential items such as charges, the basis for allocating departure times and procedures for handling revenue, which must be submitted to the PCD TAB for approval. If an operator cannot find a terminal to operate from, technically he cannot operate legally. But there are exceptions: in Heilongjiang, for example, the agreement is directly between the bus operator and the city TAB. 404. The operation of most terminals is efficient in the sense that passengers are processed in an orderly manner, and vehicle movements are reasonably well controlled. Booking systems are computerized, and several stations have automatic ticket-reading equipment at departure gates. Revenue collected is usually paid directly into the bus operators’ bank accounts, after deduction of the appropriate charges. 405. The central terminal at Harbin is particularly well organized. Because of the limited space, buses are allowed only 15 minutes to load and all buses depart simultaneously at 15 minute intervals. As the departure time approaches a queue of buses builds up outside the terminal, waiting for their time to enter for loading. But this contributes to traffic congestion, as 102 also does the wave of departing buses. On the other hand, there are safety benefits from this arrangement: when passengers are walking in the departure bay area, no buses are moving, and immediately before the buses depart, the gates are closed and no more passengers are allowed to enter the area. Good use is made of the available space, and the terminal is well organized bearing in mind the constraints. At most terminals where space is less of a problem, each bus is normally allowed 30 minutes loading time on the departure stand. 406. The terminal operators are normally responsible for allocating departure times to each bus. In Yunnan and Gansu, they determine the departure times for each route, and allocate them to operators. At some terminals, such as those in Gansu, departure times are allocated on a rotating basis, so that each operator on a route has a turn on every departure time. This may be more equitable for the operators, but has the disadvantage that different types of bus will operate the same departure on different days, making it difficult for passengers to choose the type of service they want. The practice is also disadvantageous to passengers who wish to travel with a particular operator, since the constant reallocation of departure times will make this difficult. In Harbin, the CB, and not the terminal operators, decides on bus departure times and the routes served by each terminal. The terminal operators would prefer to make these decisions for themselves. 407. Most bus operators have little or no control over their schedules. There is a natural tendency for terminal operators, if they are also bus operators, to give preference to their own buses, in terms of the most attractive departure times; in some cases, drivers or bus operators bribe the terminal operators to get preferential treatment. This prevents other operators from operating efficient schedules which would enable them to optimize the utilization of their vehicles, for example pairing outward and return journeys to give minimum turn-round times; this would apply mainly to medium-distance services, or to long-distance services if it is possible to change drivers at the terminals. It is not so critical on sleeper bus services, where a long layover during the day is inevitable. 408. In most respects it is preferable for bus operators to determine their own departure times. Initially this may lead to too many operators departing at the busy times and too few departing at less busy times, but over time the situation tends to resolve itself. It may be necessary for the authorities to take steps to ensure that this will not lead to disorder. Small operators might cooperate, perhaps through an operators’ association (of which there appear to be none at present), to coordinate their departure times, or to operate on a rota system so that every operator has an equal share of “good” and “bad” departure times. 409. Staff levels at terminals are high by international standards, although wages are relatively low. Substantial staff reductions would be possible if staffing levels were matched to activity levels, with reductions in staff numbers at the less busy times.

f. Terminal Charges

410. Charges to bus operators for the use of bus stations and terminals are based largely on revenue collected, and vary according to the class of station: typically no more than 10 percent of ticket revenue for a Class 1 station, 8 percent for a class 2 station, and 6 percent for stations in Class 3 and below; in Yunnan, though, 8 percent is charged for a Class 1 station, 6 percent for Class 2, 4 percent for Class 3, 2 percent for Class 4 and 0.5 percent for simple terminals. There are no separate charges for departures. Passengers are also charged for services such as luggage handling. Additional fixed charges are imposed for the use of facilities such as bus washing and safety inspections. These charges too are determined by the Provincial Price Bureau, and terminal operators have no authority to vary them.

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411. Most terminals charge for parking buses between journeys when the time spent in the terminal exceeds the time permitted for loading on the departure stand. These charges, set by the authorities, are generally very low, and do not reflect the cost of land. For example, at the Kunming Provincial terminal, in the centre of the city, parking charges for a luxury bus are Yuan 6 for up to 12 hours, and Yuan 12 for over 12 hours; for a lower class of bus the charges are Yuan 4 and Yuan 8 respectively. Imposition of higher bus parking charges would (provided that there were controls on parking in adjacent streets) deter bus operators from parking for excessive times, and encourage better utilization of buses. 412. Revenues and expenditures vary considerably between terminals, reflecting variations in throughput as well as the services and facilities provided. Ignoring the figures for the Lanzhou terminal, which are distorted by hotel and other facilities on the site, the average expenditure per departing passenger at the terminals visited varies between Yuan 2.88 (Harbin) and Yuan 5.67 (Kunming). The low cost at Harbin reflects the high turnover of buses at this station. 80 and 83 percent of revenues collected at Harbin and Kunming provincial terminals respectively were from ticket sales; this figure was not available from the other stations visited.

g. International Experience

413. In some countries, government regulation of bus stations and terminals has undesirable results. In Indonesia, for example, there are strict regulations governing the size, location, layout and use of bus stations, and even the distances between them. There are three precisely- defined categories of station, designated A, B, and C, each of which must meet certain minimum standards for site area and access. Inter-city services operating between two or more provinces are permitted to use only Category A stations, while inter-city services operating wholly within one province may use only Category A or B stations; local services may use any station. This has resulted in the situation in some cities where different inter-city routes operate into different stations, and passengers transferring from one service to another must travel between stations by local bus or taxi. Minimum site areas are specified for each category, which vary from one part of Indonesia to another. In Java, these are five hectares for Category A and three hectares for Category B stations, regardless of the volume of traffic which will use them. Also in Java, Category A stations should be 20 kms, and Category B stations 15 kms apart, regardless of the location of towns along the route, or the need for terminals at such intervals. 414. As a result, although the regulation regarding the spacing of bus stations is not generally observed, there are several very large stations which are virtually unused. The specification of minimum sizes often results in the unsuitable location of a station even though sufficient land for a station of adequate size to meet actual requirements may be available in a more suitable location. In an extreme hypothetical case, a small town with only one bus passing through it each day, which happens to cross a provincial boundary along its route, would require a station built to Category A specification. 415. The effects of this policy on the provision of bus stations in Indonesia are exemplified by the station at Kepanjen in East Java, opened in November 2000 at a cost of approximately US$500,000. Because it is used by a small number of inter-provincial services, the station was constructed to Category A specification, even though the number of services using it requires a relatively small space. It has four lanes for buses to unload and five for loading, and five lanes for minibuses, as well as a large parking area for all types of vehicles. Virtually no passengers board or alight at the station, but buses and minibuses are directed through it by enforcement officers stationed at the entrance, and stop only briefly at the toll booth to pay the terminal charge. There are unoccupied administrative, restaurant and toilet facilities and booking offices, and several booths used by the staff of the regulatory authority. The large area of the station 104 necessitated its location in open country, two kms from the centre of town, one km outside the developed area and far from where passengers wish to go. In theory, bus passengers should transfer at the station to local public transport services for the journey into town, but in practice they are picked up and set down illegally at various roadside points in the town117. 416. The provision of adequate and appropriate terminal or bus station facilities is important, and despite potential problems from inappropriate or misapplied regulations, some form of regulation may be desirable to ensure that these are built to suitable designs, are of adequate size and appropriately located, taking into account all relevant factors in each case. There are so many variables that it is inappropriate to set out rigid design specifications. If facilities are to be provided by local authorities, they will have control over their design; if they are provided by the private sector, government authorities should have power under planning regulations to ensure that the facilities will be suitable. It will normally be appropriate for responsibility for planning control to be given to local authorities, although it may be necessary for central government to determine guidelines to be followed, or to provide expertise to assist in the planning process. As with all transport and planning regulations, it is important that any which apply to bus stations are designed to ensure the provision of appropriate facilities without imposing undue restriction on the services provided or causing undesirable distortion of market forces.

11. Flexibility in Responding to Demand

417. Under existing licensing regulations, bus operators are limited in their ability to respond to changes in demand, either temporary or permanent. At peak holiday times, when demand for long-distance services is high, bus operators are not permitted to supply additional buses without authority from the CB. Ideally, if queues of passengers begin to build up at a terminal, bus or terminal operators should be allowed to deploy any buses which are available, without delay. It is often useful to be able to transfer buses from one route to another, if one has abnormally high demand: again, the licensing system in China, which restricts a bus to a particular route, does not permit this, unless prior approval has been obtained to transfer it temporarily to another route. Nor does it permit one operator to hire buses from another, if one has surplus capacity and the other a shortage. Terminal operators and bus operators, who are constantly “in the front line”, are best placed to make such instantaneous operating decisions, and ideally should be allowed to do so.

12. Services to Isolated Communities

418. The level of provision of bus services in remote areas is generally viewed as a problem. Demand for such services is low, and revenue is usually insufficient to cover the costs of formal bus operation. Bus operators are reluctant to provide services which lose money although some, such as the Kunming Transport Corporation, cross-subsidize some rural services from the profits of other routes. Most rural transport services are provided by operators at county level; for example, approximately half of the business of the Acheng Transport Company is rural transport. 419. Good public transport services in rural areas are important to the reduction of poverty in these areas, and therefore it may be necessary for government to take action to ensure that adequate services are provided. Such action may take the form of subsidies to bus operators, to enable them to provide services which otherwise would not be viable. If subsidies are to be provided, it is desirable that the amount paid in the form of subsidy is minimized, and therefore

117 Iles, R, Public Transport in Developing Countries, Elsevier, Oxford 2005.

105 that the services provided are the most cost-effective in the circumstances. Local road conditions and patterns of demand are often such that conventional buses are not the most cost-effective: for example, where demand is very low, it may be practical for vehicles carrying agricultural produce to be designed to carry a small number of passengers also. The marginal cost of carrying a small number of passengers on a vehicle which would be traveling anyway is far lower than the cost of carrying them on a bus which can carry only passengers. In many cases, such vehicles may be able to provide an adequate level of service, at affordable fares and to acceptable standards of comfort and safety, without the need for any subsidy. 420. At present, many rural transport services, particularly in the more remote areas, are provided illegally by informal operators. Some of them use buses, usually in very poor condition, but many use vehicles such as agricultural tractors and trailers. As mentioned elsewhere, these operators meet a demand which would otherwise not be met without substantial subsidy, and in the absence of such subsidy it is in the best interest of the community to permit them to operate, provided that basic standards of safety and insurance are met. There is therefore a need for regulations to accommodate these services. 421. There may always be some remote areas where public transport services cannot be commercially viable, and which will require subsidy if they are to be provided. But transport operators should be encouraged to provide innovative services such as those combining freight and passenger transport, or using other types of unconventional vehicle. Vehicle construction and use regulations should therefore be amended to permit such flexibility. It is not suggested that there should be any lowering of standards: on the contrary, the regulations should ensure that acceptable standards are set and enforced, and that the illegal operation of sub-standard services would be prevented. 422. Already, government is taking action to improve the provision of public transport services in rural areas. The Highway Access in Each Village project is accelerating the integration of urban and rural transport, improving accessibility of towns and villages, and providing more convenient travel for inhabitants of rural areas. 423. Table 19 shows the percentage of towns and administrative villages in Gansu and Heilongjiang Provinces with access to bus services in 2004. Table 19: Percentage of Towns and Villages with Access to Bus Services, 2004

Province Gansu Heilongjiang Towns 98% 99% Villages 86% 89%

13. Bus Operator Performance

424. Table 20 presents key operational statistics for the seven bus operators visited in the selected provinces.

a. Bus Utilization and Productivity

425. The range of average bus capacities (22-39 seats) indicates a high proportion of small- and medium-sized buses, although compared with most other countries these averages are reduced by the large proportion of sleeper buses typically carrying up to 35 passengers. The newer buses tend to be larger than those they replace. The Heilongjiang Dragon Passenger Transportation Group, for example, which operates a relatively young fleet, has the largest 106 average capacity (39 seats). On long-distance services where demand is high, maximum- capacity buses, seating up to 55 passengers (or about 40 if built to full-luxury specification), give greater vehicle and crew productivity, in terms of passenger-kms per bus and per driver. On low-frequency routes, smaller buses may be more appropriate in order to enable a higher service frequency to be provided than would be practical with larger buses. Table 20: Operating Statistics and Performance Indicators (annual figures for 2004)

Company A B C D E F G

Number of buses 1,652 263 569 161 179 86 174

Number of seats 36,763 5753 5750 2470 6822 Ave seats per bus 22 - 36 32 28 39 Kms operated 112,389,424 60,299,009 9,000,000 21,579,000 Passengers carried 10,599,214 2,803,537 3,830,000 2,373,000 Drivers 1,617 263 184 245 198

Conductors/ticket sellers 459 63 180 401 43 194

Mechanics 114 50 125 150

Management Staff 273 55 68 183 19 113

Financial Staff 61 15 33

Other Staff 155 4 114 35

Total Staff 2,679 450 704 829 690

Accidents 256 43 3 11 25 8 23

Fatalities 15 1 3 2 0 - 25

Injuries 77 10 10 0 0 - 56

Kms/bus/yr 68,032 105,974 55,901 124,017

Kms/bus/day 186 290 153 340

Passengers/bus/day 17.6 13.5 65.2 37.4

Drivers per bus 1.0 1.0 - 1.1 1.4 1.1

Staff per bus 1.6 1.7 - 4.4 4.6 4.0

Kms per accident 439,021 751,163 20,099,670 818,182 - - 938,217

Kms per fatality 7,492,628 32,300,000 20,099,670 4,500,000 - - 863,160

Key to Companies: A - Kunming Transport Corporation; B - Shilin Transport Services; C - Lanzhou Transport Corporation; D - Dingxi Transport Company; E - Daqing Passenger Transport Corporation; F - Acheng Transport Company; G - Heilongjiang Dragon Passenger Transportation Group

426. The range of daily kms per bus (153-340) indicates a very low level of vehicle utilization. Shilin Transport Services claim that their buses average 300-350 kms per bus per day. The inspection pit at Lanzhou Eastern Terminal inspects 80 buses daily; if each bus is inspected after 3,000 kms, as is required, this suggests that buses using this terminal operate on average 360 kms per day. The highest figure (340 kms, on the basis of the data provided) was recorded by the Heilongjiang Dragon Passenger Transportation Group, which is not only one of the more efficient companies visited, but also operates some very long routes. Nevertheless, in the conditions prevailing in the selected provinces, a figure of 750 kms per bus per day should be achievable on long-distance services using mainly expressways; buses using ordinary roads should achieve at least 500 kms daily. 427. The figures for average passengers per bus per day (13-65) suggest that the majority of buses operate only one single journey (a journey in one direction only) each day, with relatively low load factors. The highest figure was recorded by the Dingxi Transport Company, which

107 operates relatively short routes, for which the number of passengers would be expected to be higher. 428. From observation also, it is clear that buses are not scheduled to give maximum utilization. The very large numbers of buses parked for long periods at bus terminals are an indication of low productivity: about a quarter of the fleet of the Heilongjiang Dragon Passenger Transportation Group was idle in the company’s depot at midday on the day of the visit; at such a time at least 90 percent of a fleet used for long-distance services would normally be expected to be on the road. 429. Constraints on efficient bus utilization include scheduling practices, with departure times determined by the terminal operators, and excess capacity on most routes. Another factor affecting utilization on some long-distance routes is the use of sleeper buses mainly at night, although on some very long routes these buses operate during the daytime also. Relatively low utilization for such specialized vehicles is inevitable, and the resulting higher cost should be reflected in the fares charged. 430. Most of the operators visited employ approximately one driver per bus, although in reality the number of drivers is higher than the number on the payroll due to the use of sub- contracted drivers and others on the setoran principle. There are recognized advantages in having each bus always driven by the same driver, and where buses are jointly owned by the driver and the operator the driver may be reluctant to allow others to drive his bus. However, this practice restricts the hours of operation for each bus to the hours which a driver may work. Bus operating hours could be more than doubled by manning buses on a shift basis. Up to 2.5 drivers per bus, provided that they are used efficiently, would be a more appropriate figure. 431. Increased utilization would enable additional kms to be operated by the existing fleet of buses, or the fleet size to be reduced while maintaining the existing level of kms; an operator may, of course, operate some additional kms while also making some reduction in fleet size. 432. Efficient bus utilization could reduce current fleet requirements by up to 30 percent. Not only would this reduce operating costs; it would also substantially reduce the parking space required at bus terminals and depots since buses would spend much more time on the road, and less time standing idle. This can be particularly significant at city-centre terminals where space is scarce and expensive. 433. Increased utilization would have a significant impact on bus depreciation costs. The economic life of a premium-quality bus such as the Volvos used by the Heilongjiang Dragon Transportation Group is of the order of 12 years at the current low level of utilization of about 124,000 kms per year. The economic life would fall to about 8 years if utilization were increased to 250,000 kms per year (in practice, with this company’s principal type of operation, namely long-distance services on expressways, a much higher annual km figure should be achievable). Depreciation costs per km would be reduced by approximately 25 percent; since depreciation represents 15-20 percent of distance-variable costs, the overall reduction in variable costs attributable to depreciation would be of the order of 5 percent. 434. Where routes are short, not only is bus time wasted if bus utilization is low, but also crew time. Crews must wait with their buses between trips, reducing crew productivity and incurring unnecessary labor costs. 435. Other cost savings resulting from increased vehicle utilization are less easy to quantify, but in aggregate may be significant. Experience in other countries has shown that maintenance costs per km decrease when kms per vehicle are increased. Some maintenance costs are largely time-based (for example the cost of preparation for annual inspections, and regular repaints) and if these are spread over more kms then the per-km cost is reduced. The lives, in 108 terms of kms, of major units such as engines and gearboxes tend to increase too, giving further cost reductions. Time-based costs such as license fees are also spread over a greater number of kms. 436. In total, operating cost savings of the order of 10 percent could be expected from optimal vehicle utilization. A proportion of these savings should be passed on to passengers in the form of lower fares; this would tend to result in increased demand, which would absorb some of the additional capacity created by the more intensive utilization of the fleet. 437. Reducing the economic life of the vehicle through increased utilization also has the benefit of a younger and therefore more modern fleet. Not only is this more attractive to passengers, but it enables new vehicle technologies to be introduced into the fleet more quickly. 438. The current level of service on long-distance routes in China is generally adequate for most of the year, although there are reportedly capacity shortages on some routes at peak holiday periods. Improved vehicle utilization, therefore, should result in a reduction in the total number of buses in service for most of the year, even after allowing for additional demand generated by lower fares. This would enable older and less reliable buses to be withdrawn from service without replacement. It would not affect the employment of drivers on long-distance services, since, assuming that the level of kms does not change, the same number of drivers would be required, although the average number of drivers per bus would increase. Any additional kms operated would increase the number of drivers required. On short routes where drivers are not fully utilized, an increase in bus utilization would result in a reduced requirement for drivers for a given number of kms. 439. At times of peak demand (principally during the major holidays) the existing surplus capacity enables additional services to be operated to handle the increased demand, provided that sufficient drivers are available: in practice many drivers work longer hours at these times, with obvious safety implications. If the surplus capacity were to be eliminated, peak demand periods could be dealt with in other ways. Preventive maintenance programs could be scheduled so that no buses are required for routine maintenance at holiday periods, thus increasing the number available for service; if some mechanics hold licenses to drive buses they could be used to operate additional services, since they would not be required in the workshops. Any new vehicles purchased could be put into service before the holiday period, while the buses to be replaced could be retained until the period is over, thus temporarily increasing fleet strength. Drivers could be encouraged not to take leave at these times. Lastly, it is common in many countries for fares to be increased at peak holiday periods, to reflect the higher costs of meeting demand and to spread the peak load over a longer period. 440. In some countries, large operators which run both urban and long-distance services have some buses designed to be used on both types of service: these are normally used on city services but at holiday times when the demand for city services is reduced, they are redeployed temporarily to long-distance services. Alternatively, such buses could be operated by an urban bus operator, but hired to another operator for use on long distance services.

b. Staffing Levels

441. The staffing levels shown above in Table 20, using figures provided by the bus operators, are distorted by the numbers of drivers who are not on the payroll, but even allowing for this are in line with those in many western countries; however, staff productivity is affected by the low vehicle productivity. Staffing levels at terminals are generally high.

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c. Passenger Volumes

442. Average load factors quoted by the enterprises visited vary from 48 percent (Daqing Passenger Transport Corporation) to 60 percent (Shilin Transport Services and Heilongjiang Dragon Passenger Transportation Group). 443. There are marked seasonal fluctuations in demand for passenger transport services. Long-distance services are particularly affected by the peak holiday periods in January (New Year) and May, and by the demand for travel by students at the beginning and end of academic terms. Agricultural cycles also affect the demand for travel, as people travel to their villages to plant and harvest their crops. Approximately six months are “peak” and six “off-peak” although there is normally a transition or “shoulder” period between peak and off-peak periods. 444. At one of the Lanzhou terminals during each month in 2004 revenue collected in the lowest month (February) was only 75 percent of the monthly average for the year, and revenue in July was 118 percent of the monthly average. The figures for May and November were 107 percent and 113 percent respectively. Table 21 shows passenger loadings, expressed as a percentage of total route capacity, at different times of the year for three provinces. Table 21: Average Load Factors in Selected Provinces

Period Yunnan Gansu Heilongjiang Peak Holiday Periods 100% 100% 100% Peak Months 70-80% 70% 70% Off-Peak Months 40% 40% 40%

445. Individual operators provided the following information for 2004. Table 22: Load Factors of Individual Operators

Load factors A B C E F G Peak Holiday Periods 100% 100% 100% 100% 100% 100% Peak Season 70-80% 60-70% 50% 75% 70% 67.8% Off-Peak Season 40% 40% 30% 45% 30% - Key to operators: A - Kunming Transport Corporation; B - Shilin Transport Services; C - Lanzhou Transport Corporation; E - Daqing Passenger Transport Corporation; F - Acheng Transport Company; G - Heilongjiang Dragon Passenger Transportation Group

446. Load factors have been adversely affected by increased productivity which has not been matched by a reduction in the level of supply. For example, the Kunming Transport Corporation reported that with the opening of new freeways buses are able to run additional journeys, increasing service capacity by up to 100 percent; the level of demand, however, has not increased commensurately, so that there is now surplus capacity. Some of the larger operators have agreed to reduce the numbers of their buses on such routes on an equitable basis; such collaboration may be regarded as anti-competitive, but it is permitted in some provinces though not in others. 447. The low load factors in the off-peak season represent excess capacity, in terms of seat- kms provided (i.e. not taking into account the additional surplus due to poor bus utilization), of up to 300 percent at these times. Many operators, in provinces where this is permitted, charge lower fares at these times, but together with low demand these result in low revenue levels. 110

d. Vehicle Maintenance

448. Vehicle maintenance procedures are largely specified by government regulation. Most large bus terminals have covered inspection pits where routine safety inspections and minor rectification work can be carried out. Some of the newer facilities incorporate sophisticated equipment. However, the depot and workshop facilities visited were generally relatively basic. Layout of depots and workshops is generally poor, with inconvenient access to covered pits in several, particularly for large vehicles. Most depots are not used for parking buses which are not in use: most of these are normally parked at the terminals, though sometimes the terminal is adjacent to the depot. At some depots, particularly in provinces such as Heilongjiang where extreme climatic conditions result in cold-start problems in winter, undercover parking is provided. 449. The best facility visited was that of the Heilongjiang Dragon Passenger Transportation Group, which has a large workshop with state-of-the-art equipment and a large parking area for buses. It has an agency to service Volvo and King Long buses; Volvo provided technical assistance in establishing the workshop. 450. The Class 2 depot at the Southern Terminal of the Lanzhou Transport Corporation is more typical. The workshop has basic facilities, a fuel injection shop and facilities for electrical repairs and brake relining. The workshop was generally clean and tidy but the stores were not. A new safety inspection shed is being built, incorporating one inspection pit, a weighing machine and three rolling-road machines to check brakes, engine power output and steering. This will be open to all operators using the adjacent terminal; it is a legal requirement that every bus must be inspected every 3,000 kms, and terminal operators are obliged by law to ensure that operators using the terminal comply. There is no bus washing machine but the company plans to install one. There are no vehicle fuelling facilities at the depot, for safety reasons. 451. Most operators carry out work for third parties in their workshops, in addition to working on their own vehicles. Those visited appeared to have little work going on, suggesting that overall workshop capacity is excessive relative to the level of service provided. Some operators have several small depots, often in relatively close proximity within the same city, rather than a smaller number of larger depots. Larger workshops are more effective than several small ones, since the higher volume of work justifies the provision of more sophisticated and expensive equipment, and the employment of mechanics with more specialized skills than at small workshops, where the smaller workforce must deal with a range of different tasks. Buses requiring work which cannot be carried out at a small workshop must be transferred to a larger one, with increased cost and unproductive vehicle time. 452. Compliance with maintenance regulations appears, from observation, to be good. During the field visits very few buses were seen broken down at the roadside, and the condition of most of those seen at terminals was good. This situation compares favorably with many other countries, and with the situation in China ten years ago. However, some vehicles are operated which are clearly not maintained to an acceptable standard (for example emitting black exhaust smoke, running on worn tires and “crabbing”, indicating poor wheel alignment or chassis distortion) and there is a need for increased enforcement effort. Buses at the smaller terminals, operating on shorter routes to small towns and villages, seem to be in the worst condition: most buses on longer-distance services, particularly on expressways, appear to be in good mechanical condition.

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e. Service Standards

453. Travelers’ requirements with regard to comfort vary, from those preferring low-cost basic services to those willing to pay a higher fare for greater comfort. Comments from passengers interviewed at terminals in Yunnan, Gansu and Heilongjiang suggest that in general they are satisfied with the service provided by the majority of operators, but they expressed dissatisfaction with the service provided by some of the smaller operators, particularly those operating illegally.

f. Financial Performance

454. The cost data obtained from the companies visited are, unfortunately, incomplete. Nor can comparisons be made between one company and another. Some of the companies employ private drivers who are co-owners of the buses they drive; this reduces the company’s depreciation costs. In addition, the private drivers normally work on the setoran principle, so that revenue figures are distorted, and some of the operating costs, including fuel, road tolls, some terminal charges and some maintenance costs, are paid by the drivers and do not appear in the company’s accounts. Some drivers who are not part-owners are also employed on this basis. All of the companies visited either employ some private drivers, or employ some on the setoran principle, or both. The most useful data were obtained from the Heilongjiang Dragon Passenger Transportation Group, which owns all its buses outright, but does employ some setoran drivers. This company is also reasonably profitable: its profit in 2004 of Yuan 18.25 mln represented 10.5 percent of total revenue. On the other hand, Kunming Transport Corporation’s annual income is approximately Yuan 300 mln and profits only Yuan 1 mln; the company has to borrow for working capital, and frequently takes out new short-term loans to repay old loans. Vehicle manufacturers provide finance for new buses, for both companies and individuals. 455. Table 23 summarizes the key financial data for five of the seven operators visited. 456. The considerable variations in most costs between one operator and another highlight the effect on costs of the different operating systems: with the setoran system many of the variable costs are borne by the drivers, and no salaries are paid to drivers working on this basis. Similarly, revenue earned from buses operated on the setoran principle is less than the fares collected from passengers, often by a considerable margin. In fact, a major disadvantage of the setoran system is the lack of accurate cost and revenue data, which would normally provide the basis for financial and operational planning. 457. Table 24 shows the payments made to drivers and mechanics for the operators interviewed. 112

Table 23: Financial Costs Reported by Case-Study Operators (all costs in 2004 Yuan)

Operator A B C D G Number of Buses 1239 163 569 161 174 Management cost per km 0.22 0.06 0.48 0.63 0.38 Operating cost per km 1.12 1.39 0.86 1.45 6.02 Fuel cost per km 0.14 0.51 0.26 0.87 1.14 Maintenance cost per km 0.10 0.06 0.14 0.11 0.44 Tyre cost per km 0.04 0.02 0.01 0.05 0.12 Depreciation cost per km 0.06 0.15 0.02 0.09 1.19 Road toll per km 0.00 0.40 0.23 0.20 0.54 Personnel cost per kilometre 0.14 2.11 0.21 0.09 0.54 Total cost per km 1.35 1.45 1.34 2.09 6.40 Total cost per bus per day 334.99 786.15 388.64 319.58 2,174.13 Management cost per bus per day 55.48 31.88 138.36 96.84 130.01 Operating cost per bus per day 279.51 754.27 250.28 222.73 2,044.12 Depreciation per bus per day 13.68 82.19 4.71 14.38 405.05 Depreciation per bus per year 4,992 30,000 1,719 5,248 147,844 Key to operators: A - Kunming Transport Corporation; B - Shilin Transport Services; C - Lanzhou Transport Corporation; D - Dingxi Transport Company; G - Heilongjiang Dragon Passenger Transportation Group

Table 24: Payments to Drivers and Mechanics

Operator A B C D E F G Drivers’ salaries (Yuan/month): Highest 4500 3000 1450 3000 6000 1800 7500 Average 2500 200 1000 1400 2500 1300 3035 Lowest 2000 1500 850 750 1000 800 700 Mechanics’ salaries (Yuan/month): Highest 2000 4500 1000 1800 1500 1000 2000 Average 850 200 700 860 1000 600 1638 Lowest 350 900 550 350 600 0 800 Contract Fee Paid to Bus Company (Yuan/ year) Company Bus Highest - 150000 90000 - 36000 54000 - (setoran) Average - 100000 66000 - 20000 36000 - Lowest - 96000 60000 - 10000 14400 - Private Bus Highest 90000 96000 54000 30000 84000 9600 - (sub-contractor) Average 72000 20000 54000 29400 36000 7200 - Lowest 54000 12000 54000 9600 5400 4800 - Key to operators: A - Kunming Transport Corporation; B - Shilin Transport Services; C - Lanzhou Transport Corporation; D - Dingxi Transport Company; E - Daqing Passenger Transport Corporation; F - Acheng Transport Company; G - Heilongjiang Dragon Passenger Transportation Group

113

458. Drivers’ salaries vary according to kms driven and revenue, while those of mechanics vary according to their skills and workload. Sub-contract and setoran payments vary according to the nature of the route, type of bus, and items paid for by the driver and the operator. Allowing for these variations, there are no significant differences between public and private- sector operators, nor any discernible correlation between salaries and operator size. However, the Heilongjiang Dragon Passenger Transportation Group, which appeared to be one of the most efficient and profitable operators, has the highest average salaries for both drivers and mechanics, by a considerable margin. 459. A significant item under salaries and wages for many operators is the payment of pensions to former employees. The Kunming Transport Corporation, for example, is responsible for 3,000 pensioners, a major financial burden on the company. 460. At present prices, fuel accounts for nearly 20 percent of the variable costs of operating full-sized buses. This proportion will increase if world fuel prices rise further. The effects of rising fuel prices may be mitigated in various ways, but the most significant measure is to maximize the number of passengers carried on each journey. This can be achieved by operating buses with high carrying capacity wherever possible, maximizing load factors through efficient scheduling, and eliminating journeys on which only few passengers are carried. Maintenance standards are also important; the fuel consumption of a poorly maintained vehicle is significantly higher than that of a vehicle in good condition. 461. Charges to bus operators for the use of terminals are based on revenue collected, as discussed above. Terminal charges are not shown as an item of expenditure, but since they are deducted from revenue at source by the terminal operators they are reflected in reduced revenue figures.

14. Shortcomings in the Regulation of Bus Passenger Transport

462. China’s road passenger transport industry is highly regulated, in many respects to an excessive degree, with the authorities making many of the operational decisions which in most other countries are made by the operators themselves. Bus and terminal operators provide data to the PCDs and CBs which use the data to decide, for example, how many buses should be allocated to each route, and even the bus schedules themselves, including the number of additional buses to be operated at peak holiday times. These data, together with other operating statistics and, more importantly, a detailed knowledge of commercial operations, could be used more effectively by the operators themselves as management information, on which day-to-day, medium- and long-term planning would be based. 463. The capacity of each bus route is controlled by limiting the total number of seats for which permits may be issued. Although operators may decide whether to use vehicles with low or high capacity, this effectively restricts the total number of buses which may be used on each route. 464. Some means of preventing over-capacity is certainly desirable. In countries where there is no such restriction, many routes are grossly over-supplied, to the extent that at any one time there may be more buses standing idle at terminals than on the road. In some countries such as Sri Lanka and Bangladesh, the number of days in each week on which buses are permitted to operate is restricted, either by operators’ associations or through regulation by the authorities; even with this restriction, long queues of waiting buses are commonly found at terminals. 465. However, the method used in China has certain deficiencies. The permitted capacity of each route is measured in seats, not seat-kms, and therefore does not take into account the number of kms operated. The capacity of a route could be doubled without increasing the 114 permitted number of seats simply by doubling the number of kms operated by each bus on the route, and this has occurred on some routes following the opening of new expressways. The number of seats allocated appears to assume low bus utilization levels, and therefore perpetuates an inefficiency that is prevalent in the industry. A significant reduction in the number of seats allocated to each route would force operators to utilize their vehicles more intensively. 466. Another shortcoming associated with restricting the number of seats on each route is that it limits passenger choice and the scope for one operator to attract passengers from others by offering a better service. If an operator provides a service which is so attractive that it has insufficient capacity to carry all those who wish to use it, he will be unable to increase the number of buses assigned unless other operators reduce their level of operation. This may happen in the longer term, but if there is limited capacity on the route passengers will be forced to travel with inferior operators, who would therefore have no incentive to improve. Alternatively (if fare regulations permit) the operator with excess demand could increase fares instead of increasing the level of service, to the disbenefit of passengers. No operator reported this as a problem, but it could arise in future. 467. The seat allocation does not distinguish between different classes of bus. The situation may arise where there is no spare capacity overall, but there is demand for additional capacity in a particular class of service, and excess capacity in another class. This would force passengers to travel in a class which they would otherwise not choose. Those operators with excess capacity may be reluctant to give up some of this capacity, and may not have the resources to replace their existing vehicles with those required to meet the unsatisfied demand. 468. In practice, because of the surplus capacity that is allowed, these problems rarely occur, and most bus operators appear to prefer the security of protection from a significant increase in supply by competing operators. Nevertheless the restriction of capacity does represent a limitation on the scope for an operator to compete more aggressively on a particular route, and as such is a potential constraint on innovation. 469. Specifying buses of a minimum standard for each class of route restricts passengers’ choice on certain services. For example, on some long-distance routes where all buses must be to luxury specification, there may also be a market for vehicles of a lower standard, at lower fares. The bus operators should be allowed to experiment with different service standards on any route, and to operate the appropriate combination of standards on the basis of this. 470. The control of capacity at peak holiday times appears to be particularly unnecessary and undesirable. Load factors of 100 percent are achieved at these times, suggesting that there is unsatisfied demand (it is unlikely that the service provided is sufficient to carry all prospective travelers, with no demand left unsatisfied). It should therefore be unnecessary for operators to seek permission from the authorities to operate additional services at these times; if there is demand which is unsatisfied by the regular services, and operators have vehicles available, they should be given the freedom to deploy those buses in the most profitable manner, without referring to the authorities. 471. Each permit specifies the route on which the bus must be operated: buses may not be used on services for which they are not licensed without authority from the CB. This restricts flexibility in the use of vehicles, and prevents operators from achieving optimum vehicle utilization. 472. These problems need to be resolved, but without incurring the risk of gross over- capacity. 473. The categorization of bus operators and routes, and the restriction on maximum route length according to the grade of operator, also creates potential problems. For example, the

115 shape of Gansu province (long and narrow) results in some very long routes, a large proportion of which are outside the limit for all but the first two classes of operator. Jiuquan, for example, is over 800 km from Lanzhou, the provincial capital. According to the regulation, most operators based in Jiuquan are not permitted to run services to Lanzhou, although in practice lower-class operators are allowed to provide this service. Moreover, since enterprises in Grades I to IV must have 2-5 years’ operating experience, a new entrant to the industry must start as a Grade V operator, and as such will be entitled to operate only routes within a county or between neighboring counties, of not more than 150 kms in length. This is a significant and unnecessary restriction on the entry of new enterprises to the industry. 474. Regulation of bus fares should not be necessary in a competitive environment. Some provinces are more rigid than others: some allow operators to determine their own fares up to a regulated maximum, while others allow operators to charge within specified margins above or below the recommended fare. In some provinces there is no flexibility at all. The situation in Heilongjiang at peak holiday times, where operators are permitted to charge 50 percent higher fares on buses which are loaded in one direction only, is unfair to those passengers who are unfortunate enough to board a bus which is operating in that direction; it would be fairer, as the operators argue, for all fares to be raised at peak times. Most operators would prefer greater flexibility. 475. Some operators complain that fares cannot be increased quickly enough in response to increases in the cost of inputs such as diesel fuel, road tolls, insurance and spare parts. They would like to have the freedom to adjust fares with the changes in market prices. On the other hand the larger operators complain that weak enforcement of fare regulations allows unscrupulous operators to raise or reduce their fares and compete unfairly with those complying with the regulations. Moreover, the standard rate per km, applicable throughout a province, does not reflect local differences in operating conditions, especially road and traffic conditions. 476. Operators should be allowed to charge fares commensurate with the level of service offered. There is enough competition in the market to ensure that passengers are not over- charged, unless operators collude; some regulation to prevent collusion may be necessary but the dangers of going too far in this respect must be guarded against. 477. Subsidy for bus services should not be necessary. Even in rural areas where demand is low, informal operators are providing a service at economic cost. If such services are technically illegal, the regulations should be amended to cater for them, and to enable them to provide the service legally, while ensuring that reasonable standards of safety are observed. 478. While regulations designed to ensure safety are essential, the focus is currently on maintenance procedures, rather than on-the-road standards. The vehicle inspection regulations, if effectively enforced, should be more than sufficient to ensure that the required standards of vehicle maintenance are being achieved. It should not be necessary to specify the maintenance programs which should be followed: a competent vehicle workshop should be able to work to the standards specified by regulation. In any case, maintenance requirements vary according to operating conditions, and vehicles operated under poor conditions will require greater maintenance inputs than those operated under good conditions. 479. Concentrating efforts on vehicle safety inspections, including random inspections carried out at the roadside or in terminals, would be more effective than monitoring adherence to maintenance schedules. However, the current requirement that buses should be inspected prior to the Spring Festival holiday should be reconsidered: if two annual checks are considered necessary (and with a system of random checks one annual inspection should be sufficient) it would be preferable if they were at six-monthly intervals. Requiring all buses to be inspected 116 within a short period creates an unnecessary peak in demand for inspection services, with the result that their effectiveness may be reduced. 480. In most countries only one inspection per year is required, although in many cases these are supplemented by random checks as suggested above. The UK has a different approach. Buses, like all other road vehicles, must undergo an annual inspection, known as the MOT (Ministry of Transport) Test. This is a rigorous inspection which includes safety and environmental factors. In addition, buses are subjected to a COF (Certificate of Fitness) Inspection, carried out on every new bus before it is allowed to enter service. In addition to the items checked in a MOT test, the COF inspection includes items relevant to a passenger service vehicle, such as seats, doors, hand-rails, interior lighting, heating and ventilation, and compliance with the requirements of the Disability Discrimination Act, designed to facilitate public transport use by the disabled. The duration of the COF varies. It is normal for the first to be valid for up to seven years; subsequent COFs will reflect the condition of the vehicle at the time of the inspection: a vehicle in very good condition may be issued with a new COF for up to five years, while one in poor condition may be given only one year if it does not fail the inspection. 481. In China, terminal operators are charged with the responsibility of enforcing safety regulations. They are expected to forbid vehicles without permits from entering stations, carry out safety inspections on departing vehicles and prevent overloaded vehicles or vehicles without safety inspection from leaving the station. In the case of stations operated by SOEs, enforcement through the terminals remains with government; but in the case of privately-owned stations, this represents delegation of the enforcement process to the private sector. The operation of a terminal and enforcement of regulations are two very different functions, and this requirement may lead to a conflict of interest, particularly, for example, if a bus station operator is also a bus operator, as is usually the case. 482. Long-distance and rural bus services in China are the responsibility of MOC and its corresponding regional agencies; urban bus services are the responsibility of the MCon and have therefore not been considered in the present study, nor have the regulations governing these services. While urban services have some characteristics which differ from other types of bus service, they also have much in common, and it is desirable that there should be consistency between policies and regulations affecting all bus services. With a freer market, bus operators should not be precluded from operating a mix of urban and other services, and under the present situation this would involve dealing with two separate ministries, possibly with inconsistent regulations. 483. The 2004 RTO states that international businessmen may invest in road transport and related road transport businesses in China, through JV, joint cooperation with Chinese investors or foreign investment alone. The freight transport industry might possibly be attractive to foreign investors but, with the existing regulatory constraints discussed above, the Chinese road passenger transport industry will be unattractive to most foreign professional transport operators. Foreign participation should be encouraged as a means of introducing international best practices to the industry but, in passenger transport, measures should be taken to ensure that the existing operators are not destabilized to the extent that the service to the public is affected adversely.

15. Overall Assessment

484. Bus services in China are generally very good, particularly on the longer-distance routes. The main routes are well served, with a range of service standards to choose from. Facilities for passengers are excellent at most large terminals, and standards are improving constantly. The

117 same applies to the vehicles themselves: the newer buses are built to the highest international standards. Safety requirements are generally well observed, although from observation driving standards are not always satisfactory. Standards on the shorter-distance routes, particularly those run by small operators, are less satisfactory. 485. A major shortcoming, however, is that bus operators lack flexibility to adapt services in line with passengers’ requirements. Bus routes, schedules and fare levels are effectively determined by the PCDs and CBs, and the administrative procedures involved in varying any of these are cumbersome, and stifle innovation on the part of the operators. In particular, the existing regulatory system has contributed to inefficient utilization of vehicles by most operators. 486. While many bus and terminal operators have invested in the latest technology, in terms of buses and other equipment such as ticketing systems, and many maintenance workshops have sophisticated equipment, management systems and procedures tend to be less efficient. In particular, bus utilization is low by international standards. Buses are expensive items, and to maximize the return on investment it is necessary to maximize their use. Also, staffing levels are unnecessarily high: although labor costs are low in China, wage rates are likely to rise as the economy continues to grow and, in the long term, a smaller but better paid work-force will be more effective. 487. The design and layout of bus station and depot facilities are often unsatisfactory, and in many cases unsafe. 488. Two major constraints on further improvement are the regulatory framework within which the industry must operate, and a lack of awareness on the part of the operators of industry best practices. A further constraint, particularly for the SOEs, has been difficulty in raising finance, which has been addressed in various ways, not all of them entirely satisfactory, such as the emergence of private drivers and their attendant problems. An increased involvement of the private sector in the provision of bus services should be encouraged as a means of introducing additional capital into the industry, but measures must be put into place to ensure that the industry is not destabilized by an influx of incompetent operators. 489. In the context of this project, the regulatory framework is the main concern, but it is equally desirable that bus operators and regulatory authorities should be made aware of, and encouraged to adopt, the most appropriate working practices. The main areas of concern are vehicle utilization, bus scheduling, maintenance systems, staffing levels and the size, design, and location of bus terminals and maintenance workshops. It is not recommended that any of these aspects of bus operation should be the subject of additional regulation, however: this would impose further undesirable restrictions on the freedom of operators to act in a commercial manner. The most successful approach to this issue in developed countries has been through operators’ associations, which provide a means of disseminating information on best operating practices and a forum for operators to meet and discuss matters of common interest. Establishing such an organization in China, specifically for bus operators, is strongly recommended, preferably affiliated with other international operators’ organizations such as the European-based UITP (International Union of Public Transport). All bus operators should be encouraged to participate, including urban operators currently under the jurisdiction of MCon. 490. With regard to the regulatory framework, it is essential that bus operators are given the freedom to plan and operate their services with minimum intervention from authorities. In particular, they should be able to plan their routes and schedules, set fare levels and utilize their buses in the way they consider to be most appropriate, with minimal restriction. On the other hand, there must be some regulation in order to prevent the problems which have been experienced in other countries where bus services have been totally deregulated: these include unnecessarily large numbers of buses on some routes and insufficient buses on others; very 118 poor vehicle utilization; dangerous, competitive, driving practices; lack of compliance with safety requirements; and even, in some countries, the involvement of criminal organizations in the allocation of work to operators. It will be necessary to achieve a balance between the degree of regulation necessary to avoid these problems, and the freedom to enable bus operators to run their businesses in an efficient commercial manner.

B. Reform Options in Road Passenger Transport

1. The Role of Regulation

491. An ideal regulatory system for passenger transport would create the environment for operators to provide optimal services, in line with government policy, with minimum intervention by the authorities. Some intervention would always be necessary, and its extent would depend on the level of competence of the bus operators: this is likely to change over time, so the regulatory system must also be capable of adapting to such change. 492. The regulatory system should encourage operators to develop as appropriate. Large operators are most suited to serving large urban areas or providing high-frequency, long- distance services; smaller operators are better suited to operating in smaller towns, on lower- frequency long-distance routes, and in rural areas. Ideally, operators should gravitate naturally towards the type of operation for which they are best suited. It is not realistic for a regulatory authority to specify the size or type of operator for a particular set of circumstances, and attempt to enforce this. 493. Market forces have a very important role to play. Where the lowest costs can be achieved by a large operator, large operators will have an advantage over smaller operators, which will tend to die out. On the other hand, a large operator competing with a small operator on a remote rural route will be at a disadvantage, and will withdraw. However, such a process takes time, and in practice will never be fully effective since the pace of change in China is so fast, and market forces by themselves will not force the industry to keep up with the changes. If it is left to market forces alone to achieve the most efficient system, this will never happen. 494. What is required, therefore, is a balance between market forces and regulation. An important lesson learned from other countries, both developed and developing, is that the degree of regulation should be kept to a minimum, but should be able to ensure that, as far as possible, adequate levels of service are provided on all routes, without grossly excess capacity on any route. This is quite difficult to achieve. 495. The three main elements of public transport regulation concern the quality and quantity of the services provided, and the fares charged.

a. Quality Regulation

496. Quality regulation in road transport is generally regarded as essential, whether or not regulations govern the level of service provided or the fares charged. It includes the general area of regulation, applicable to all forms of road transport, public or private, passenger or freight, which governs vehicle construction and use, and is mainly intended to ensure the safety of road users and protect the road system and other infrastructure from damage. It is concerned with setting and enforcing standards and does not impose any significant barriers to entry to the industry for transport operators who meet these standards. In this context, “quality” embraces a number of attributes, including safety and environmental factors such as exhaust emissions. Virtually all countries have regulations specifying vehicle design parameters, vehicle inspection requirements and safety-related rules in respect of maximum speeds and drivers’ hours of work.

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b. Quantity Regulation

497. Quantity regulation concerns the extent of the services provided, and relates mainly to the control of public transport routes, numbers of vehicles operated and frequencies of journeys run. It is usually intended to prevent a situation where there are too many buses on busy routes and too few on less profitable routes, and to curb wasteful competition. Under a regime of quantity regulation, protection of established operators makes it difficult for new operators to enter the market. The argument in favor of this type of regulation is that passengers benefit from a more consistent service throughout an area, with good route coverage even where demand is low. The counter-arguments are that protected operators are likely to abuse their position to the disadvantage of passengers, and that where the regulations encourage cross-subsidy, passengers on busy routes suffer from an inferior service so that a minority can benefit from a standard of service for which they are not prepared to pay the full cost. 498. To fulfill its objectives, quantity licensing requires the regulatory authority to have full knowledge of the requirements of the market, which in practice is unrealistic. The bus operators themselves are much closer to the market, and therefore better placed to determine what services are required. However, this does not apply when the industry is dominated by small operators, particularly in areas of high demand such as in cities or on busy inter-city routes. In such circumstances some intervention by the authorities is necessary, either to bring about a restructuring of the industry into operators with the necessary planning and organizational capability, or to assume the planning and organizational role itself.

c. Regulation of Fares

499. The question of regulation of bus fares is of major significance. Several reasons may be given to justify fare regulation. The stated objective is often that it ensures that fares are affordable by the traveling public. Where an operator has a monopoly, the objective may be to prevent the abuse of monopoly powers. If there are many operators on one route it may be desirable to ensure that fares are consistent, or to prevent the formation of cartels in which the stronger operators force the weaker ones out by charging uneconomically low fares and then exploit their resulting position of oligopoly. 500. However, there is disagreement as to whether regulation of fares is necessary to protect passengers from exploitation by unscrupulous operators, or whether it distorts the market to the passengers’ disadvantage. Fare regulation designed to protect passengers’ interests by preventing operators from charging fares they cannot afford often has the opposite effect: inappropriate control of bus fares has caused numerous problems, and has brought about the demise of bus companies in many parts of the world where fares have been held at levels that are insufficient to cover costs. 501. Regulation of bus fares should not be necessary. Operators know that there is a limit to what passengers can afford or are prepared to pay, and in a competitive situation this will prevent them from trying to impose unreasonably high charges – those who do will lose business to those charging less. Allowing operators more scope to determine their charges will encourage them to explore different markets, and adjust charges in line with variations in demand. 502. In other countries where fares have been deregulated, there have been no reports of serious over-charging by operators. In fact, other than raising fares where it has been necessary to cover increased costs, it has been much more common for fares to be reduced. It has, however, sometimes been necessary to introduce measures to prevent operators from charging uneconomically low fares in order to put a competitor out of business. In the early days of 120 deregulation in the UK, some unscrupulous large operators used this as a strategy to put smaller operators out of business, after which they were able to charge higher fares. 503. Some degree of control is desirable to ensure that passengers are able to learn in advance of their journeys how much they will have to pay. This can be resolved by requiring operators to notify the authority of their fare scales, and to observe a period of notice before any changes are implemented, as is now the case in the UK.

2. Measures to Improve Productivity

504. Bus productivity in China is low, in terms of kms operated, proportion of operating time to idle time, and number of passengers carried. On some routes in Yunnan, Gansu and Heilongjiang where bus utilization and load factors are both very low, there is excess capacity of up to 600 percent: in other words, if every bus ran with a full load, and idle time were minimized, the vehicle requirement would be one sixth of what is currently being provided. Productivity could be yet further improved on many routes by replacing small or medium-sized buses with buses built to the maximum permissible dimensions. 505. While it is not possible to aim for 100 percent load factors at all times, there is scope for substantial improvement. Improved scheduling to minimize idle time could reduce total vehicle requirements by about 30 percent, and should be a priority. This would enable the oldest and least reliable buses to be disposed of. Most of these are smaller vehicles, which are also the least productive. To achieve such improvements in utilization, operators must have the flexibility to schedule buses to operate on any route. Existing regulations which constrain buses to particular routes are therefore an unnecessary and detrimental restriction on productivity. 506. It should also be possible to vary schedules in accordance with demand. More capacity is required at some times than at others, and an efficient bus operator should be able to vary the service accordingly, by operating more or fewer journeys as required. Coordination of operating and maintenance schedules, so that as far as possible most maintenance work is carried out at times of low demand, would enable fleet utilization to be maximized. Again, current license conditions prevent this: the same schedules must be operated every day, regardless of fluctuations in demand. The only exception is at the three main holiday times, when operators are allowed to operate additional journeys, but only with prior approval of the authorities.

3. Measures to Improve Demand-Responsiveness

507. It could be argued that bus services in China are accurately tailored to demand: operators provide data to the regulatory authorities, from which maximum capacity is calculated for each route; as travel patterns change, these capacities are adjusted accordingly. The capacities are set to allow for surplus capacity for most of the year, so that demand should be fully satisfied at all but the busiest times. 508. Operators’ response to temporary or permanent changes in demand, however, is always subject to the approval of the authorities, whether they wish to vary the level of service provided, adjust their routes or vary fares as demand fluctuates. If an operator wishes to introduce a new route, or increase the number of buses on an existing route, there is a complex procedure to be followed, including a requirement for evidence that the service is needed. 509. At times of peak demand, bus operators may provide additional services by increasing the utilization of their vehicles and crews, but only with the approval of the authorities; approval is granted if they are satisfied that the additional services are required, based on information supplied by the bus and terminal operators. Response to a sudden and unexpected increase in demand, which could be immediately met within the operators’ resources, cannot be made or

121 must be delayed while approval is obtained. This is a cumbersome and unnecessary procedure which is in nobody’s interest. 510. Fares are also set by government; in some provinces operators can vary fares provided they do not exceed the authorized fare, while in others the operators have no such flexibility. 511. Bus and terminal operators have the information on which to make decisions about how demand variations should be catered for. At present they provide this information to the authorities, who decide what action should be taken. However, the bus operators themselves are fully aware of what is required, and should not need to be instructed by the authorities, or wait for approval to do what they know to be necessary. A responsible bus operator should be given the authority to do what is necessary without going through the bureaucratic process. 512. This is particularly important in respect of temporary changes, such as at peak holiday times. But more permanent changes should not need such complex procedures either. Bus operators should be given the freedom to plan and schedule their own services. While for the sake of stability they should be required to give notice of permanent changes to services, they should nevertheless be allowed to make such changes as they see fit, without requiring permission from the authorities. For temporary changes, such as at holiday periods, or to deal with unexpected circumstances, no notice should be required.

4. Measures to Raise Safety Standards

513. Legislation already exists to ensure that buses are maintained and driven to certain standards. Maintenance standards are monitored through the required safety checks, both as a prerequisite for vehicle permit renewal and at regular intervals. Inspection facilities at many bus terminals are good, and new facilities are being introduced. 514. Bus operators’ workshop facilities vary from excellent to poorly equipped. Enforcement of maintenance standards through intensified vehicle inspection is essential, and this may be supported by a requirement for all operators to keep vehicle maintenance records which may be inspected at any time by the vehicle examiners. 515. Safety standards are largely within the control of transport operators, who can take steps to improve the driving standards of their own employees, and to maintain their own vehicles to a higher standard of safety. The behavior of other road users is often a major problem which can be reduced to some extent by training in defensive driving techniques. 516. Enforcement of vehicle safety and driving standards by the authorities is essential to ensure that transport operators and other road users comply with the relevant regulations, carry out appropriate training and enforce driver discipline. Maintenance standards in many cases will improve only if roadworthiness regulations are enforced. 517. Existing regulations regarding the inspection of vehicles are basically adequate but they require much more stringent enforcement than at present. Traffic regulations are also largely adequate but may benefit from review: for example, pedestrians in urban areas are endangered by traffic turning right through red traffic lights, and it may be appropriate to amend this regulation. These regulations also require stricter enforcement. A major area of concern, where greater stringency is required, is the standard of driving ability required for the issue of a driver’s permit. This applies to all drivers, and affects all road users. 122

IV. A STRATEGY FOR REFORM

A. A New Approach to Road Transport Regulation

1. A Changed Role for Regulating Authorities

518. The Government relies on implementation and enforcement of regulations by provincial and county authorities to achieve its goals for road freight and passenger transport. Other countries have recognized that competitive markets are more effective than regulatory controls in driving up quality and efficiency standards and pushing down prices. In passenger transport, removing controls over operations and prices has always resulted in better-quality, more affordable services as long as controls preventing the entry of inappropriate operators have been retained. In freight transport, deregulation has been effective in expanding the range of services, raising standards and lowering rates. While there has been understandable concern in China about intense price competition in the lower tier of the market and the difficulties this poses for better-managed enterprises in upgrading their services, deregulation and competition have already encouraged the emergence of some world-class road transport and multimodal transport service providers (para. 206). Allowed to take its course, competition, combined with effective enforcement of safety and environmental controls and incentives to discourage uneconomical or unsafe practices, will eventually help achieve consolidation among smaller- scale operators and a general upgrading of efficiency, demand-responsiveness and technical standards. 519. Once the benefits of competition are recognized, the role of road transport administration becomes less one of regulatory control and more one of facilitating the efficient operation of markets while also protecting public safety and the environment through a combination of incentives and enforcement. This changed role involves: • monitoring the operation of markets, notably service standards and prices, to ensure that monopoly or predatory practices do not develop • opening up road transport to greater competition by identifying and removing any unnecessary restrictions on market entry or the ability of operators to customize their services to the perceived needs of users • permitting a greater range of services tailored to the needs of the market, including services which improve the accessibility of isolated communities, by regularizing any informal services that have developed in response to transport needs • leveling the playing-field between state-owned and private transport enterprises, and achieving arms-length relationships between regulating authorities, SOE managers and independent transport operators • encouraging the development of integrated national networks of services, including intermodal services, by eliminating unnecessary restrictions on market entry by operators domiciled elsewhere • adjusting the structure of user charges and taxes facing road transport operators, to help encourage a more economical structure of the transport fleet, internalize the costs faced by society (accidents, environmental pollution, congestion) and ensure economically optimal decisions on choice of transport mode, route and road class • reducing the incidence of truck overloading through more effective enforcement, sanctions and inducements

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• strengthening safety and environmental protection through more effective on-road inspections linked with economic incentives to raise safety/environmental performance.

2. Regulatory Priorities for Road Freight Transport

520. Current regulations allow relatively unhindered entry to the trucking industry and there is no control over rates. This has led to improved productivity and lower tariffs. Opening up the market has allowed some enterprises, both private and state-owned, to develop into sophisticated transport and logistics service providers with nationwide networks. With further opening under WTO rules and the possibility of foreign firms entering these markets, the forces of competition driving improvements in productivity and lowering freight rates will probably increase. Foreign participation will introduce more productive technologies and management approaches. Over time, there should be a trickle-down effect on other firms. Even among the lower tier of operators there should be an eventual consolidation, as the better-managed achieve greater market share and shippers learn the benefits of more reliable, better-quality services. 521. The most important regulatory priority, therefore, is to continue – to “stay the course” – with market liberalization, resisting the temptation to impose market-entry restrictions in the hope of accelerating industry consolidation and working at reducing those remaining areas where the state unnecessarily interferes with the commercial affairs of trucking companies. To weed out operators who employ unsafe drivers and vehicles, it is best to rely on better enforcement of safety regulations.

a. Quality Regulation

522. As with bus transport, efforts should be focused primarily on setting, encouraging and enforcing safety standards, in terms of both vehicle condition and driver behavior. There should be a more critical assessment of the effectiveness of existing regulations to identify those that are no longer effective, reduce overlap or conflict and tighten those lacking sufficient detail. As a basis for incentives to improve performance, a rating mechanism should be developed that would track the performance of individual operators in complying with safety and overloading regulations. This should be linked to the issue and renewal of operators’ and vehicle permits, and would require arrangements to manage the system – including the performance-rating database – to be established jointly within the PCDs and PSDs. 523. A more effective system of on-the-road inspections is also necessary. This would involve installing automatic, tamper-proof equipment at inspection stations and developing agreed procedures for carrying out inspections (possibly outsourced under competitive, incentive-based contracts with appropriate monitoring arrangements), putting a vehicle out of service when it fails to meet safety and overloading standards and identifying trucks that have been recently inspected. Lastly, efforts should be made to tighten the conditions for obtaining a truck driver’s permit, through more stringent driver training and testing and the possible introduction of endorsements to signify various levels of qualification.

b. Taxation

524. User fees, taxes and toll charges make up a large proportion of truck operating costs, particularly for those that make significant use of toll roads. Yet the structure and levels of road user taxes and charges have not been designed as part of an integrated policy of cost recovery. Their incidence, and the revenues raised from them, are not related to the marginal social costs caused by the use of roads by each type of vehicle. For heavy vehicles, they are structured 124 mainly on the basis of registered GVW (which itself is subject to manipulation, as noted earlier) rather than the number of ESALs, a better measure of potential road damaging power. The result is that the larger, modern, multi-axle trucks that do less road damage per tonne of payload are not encouraged and the smaller, 2- and 3-axle heavy trucks that are the main cause of road damage are not discouraged from using the roads by facing higher per-tonne charges. 525. It is beyond the scope of the present project to carry out a full cost-allocation study and recommend an appropriate cost-recovery structure of taxes and charges. The task is complicated by the current policy on toll-road pricing, intended mainly as a means of raising funds to repay loans. But it is clear that a review is needed, since a key element of an efficient transport system is a rational system of pricing such that users face the full costs associated with their use of the system. The recommended Action Plan includes a proposal to carry out such a study.

c. Vehicle Weights and Dimensions

526. The current VWD regulations allow what might be called short-heavy trucks in China, similar to those common in developing countries but now uncommon in most western countries where larger, more economical vehicles are encouraged and loads are typically spread over a greater distance between axles. 527. Again, its is beyond this study’s scope to carry out a comprehensive review of permissible VWD limits, but a review is needed, both to encourage an economically optimal vehicle fleet and to ensure that road and bridge safety, geometric and structural design standards are compatible with the heavy traffic they will be expected to carry in future. This would be a major undertaking: it would involve an analysis of the trade-off between economies of scale in vehicle operation and the costs of accommodating larger, heavier vehicles on roads and bridges, with account taken of trends in vehicle technology and safety and environmental requirements. The Action Plan includes proposals to carry out such a study.

d. Industrial Policies

528. The policy of promoting selected enterprises as industry champions is understandable and may indeed have achieved benefits in terms of industry consolidation by helping to amalgamate smaller firms under the wing of larger enterprises. A similar approach is being used in other sectors of the economy. But the transport sector, unlike perhaps the industrial sector, does not necessarily benefit from the having a limited number of dominant players; it would benefit more from a wider, more diverse market that is innovative and quick to adjust to customers’ needs. Strengthening the market share of dominant SOEs through government intervention would not help promote this; it runs counter to the policy of promoting fair competition. 529. Government might better help promote more efficient and demand-responsive services if it removed any discrimination in favor of selected enterprises and, instead, concentrated on eliminating unnecessary restrictions on market entry and expansion, tightening controls over road safety, weeding out unsafe operators and drivers and supporting the development of skills through education and training programs.

e. Industry Associations

530. Industry associations are important sources of information, research, ideas and policy initiatives in other countries. Governments elsewhere usually ensure that formal and informal

125 lines of communication are open to them over questions of regulatory policy. Industry representatives know best what road transport customers want and what is needed to meet their needs. China makes little effective use of such consultations, however. It is a common complaint that regulations are announced with little warning and often with unanticipated, costly consequences for road transport operators and their customers. 531. MOC should establish regular consultation forums with industry on matters of policy and regulation.

3. Regulatory Priorities for Road Passenger Transport

532. Current regulations governing the entry of new operators into the road passenger market are restrictive, and thus restrict potential competition, which in turn limits operators’ incentives to improve efficiency. Bus route capacity is regulated, so individual operators cannot increase their level of operation to compete more aggressively with others on the same route. Bus schedules are determined by the regulatory authorities or the terminal operators, rather than by the bus operators themselves, so the operators cannot schedule their vehicles to achieve maximum utilization and thereby to reduce costs. Bus licenses specify the route on which each vehicle must be operated, so buses cannot be utilized efficiently by inter-working them between routes. 533. Low vehicle utilization and other inefficiencies are not the direct result of the regulatory policy alone. Many bus operators in China have invested in modern vehicles and state-of-the art workshop equipment, and most large bus terminals have sophisticated ticketing systems, but management systems and procedures are generally weak, so that the benefits of this modern equipment are not fully realized. To some extent, such weakness is an indirect result of the limited competition, and therefore of the regulatory system. 534. It is therefore recommended in the Action Plan that the current policy should be relaxed, with regulation reduced to the minimum necessary to ensure that an adequate, safe, reliable and affordable service is provided.

a. Quality Regulation

535. As with freight transport, quality licensing should be focused primarily on setting and enforcing safety standards, in terms of both vehicle condition and driver behavior. It is recommended that the regulations specifying vehicle maintenance and inspection procedures should be replaced by a set of specific and quantifiable safety standards, rigorously enforced through routine and random inspections. Standards of driving should be improved by raising the conditions required for the issue of a driver’s permit, and more rigorous enforcement of traffic regulations; the traffic regulations themselves require review and strengthening. 536. In addition to quality regulations governing vehicles and the way they are used, maintained and driven, China also has very specific regulations regarding the qualifications of operators of bus services, though these are understood to be under review. The quality of management of the enterprise has a significant influence on standards of service, so some form of operator licensing is appropriate, to ensure that they meet required standards of competence and integrity. Even so, the existing system in China is overly restrictive, and it is recommended that this should be abolished, and replaced by an alternative system of ensuring operator competence. In some countries, in order to hold a license to operate buses, it is necessary to demonstrate the basic ability to manage a transport operation. In the UK this is provided by the Certificate of Professional Competence (CPC), issued when an applicant passes an examination on the operation and management of a passenger transport undertaking. License applicants may also be required to provide evidence of financial standing and a satisfactory 126 police record. It is recommended that a broadly similar requirement be applied in China, to replace the existing complex criteria which determine an operator’s eligibility for different types of service. The system must be sufficiently robust to prevent such measures from being circumvented, resulting in an excess of incompetent new operators.

b. Quantity Regulation

537. With regard to bus services themselves, a version of the western model is recommended for China, with minimal regulation of inter-urban and long-distance services and a form of franchise arrangement for urban services, with the minimum degree of intervention by the authorities necessary to ensure comprehensive route networks and properly coordinated schedules. If it is considered necessary to subsidize rural bus services, the European franchise or contract model is the most appropriate. 538. Bus operators should be permitted to determine their own routes, schedules and fares, with no restriction on the number of buses which may be operated on any route; they should also be permitted to operate any bus on any route, to enable vehicles to be utilized with maximum efficiency. 539. Each enterprise would be required to hold the following permits: an Operator Permit, Route Permit and Vehicle Permits. The Operator Permit would be issued to any passenger transport enterprise meeting the basic requirements of competence. It would specify the maximum number of vehicles that may be operated, based on the enterprise’s maintenance capability and maintenance and safety records, and would specify the operating bases or depots, but would not specify the bus routes to be operated or the areas to be served. The number of vehicles specified on the permit would be reduced for infringements of safety regulations; for very serious infringements the permit would be revoked. 540. A separate Route Permit would be issued to the enterprise for each route it operated. It would specify the starting and finishing points, the roads to be followed, and the points where passengers can be picked up and set down. There would be a procedure before the permit is issued to allow interested parties, such as the PSB or other local authorities, to raise objections on safety or environmental grounds, but objections by other operators, for example on the grounds that they are already adequately serving the route, would not be permissible. It would also specify the fares to be charged and the times at which buses will operate. Schedules and fares, and the route itself, could be varied at the operator’s discretion, provided that the licensing authority is given a specified period of notice (e.g. eight weeks as in the UK). The route permit should not specify the type of bus to be used, the standard of service or the number of buses to be operated, and under no circumstances should specific vehicles be identified for operation on the route. 541. A separate Vehicle Permit would be issued to the enterprise for every bus it owned. This would entitle the owner to use the vehicle on any route for which a Route Permit is held, driven by any driver who holds the relevant driver’s permit; the vehicle may also be hired to another operator, who may use the vehicle on any route for which a permit is held by that operator. Under no circumstances should a vehicle be restricted to a particular route. The vehicle permit may be suspended or revoked if the vehicle is operated in an unsafe condition. 542. Entry to the market would be free to any operator who can obtain the necessary permits. 543. It is recommended that the regulation of bus fares should be abolished in China, as has been done throughout Europe, North America and Australia. While there may be political obstacles, it should be remembered that bus operators are aware that there is a limit to what passengers can afford or are prepared to pay, and in a competitive situation this will prevent

127 them from trying to impose unreasonably high charges. The almost universal experience in other countries where bus fares have been deregulated has been that most fares were reduced, rather than increased. It will be necessary, however, to introduce measures to prevent operators from charging very low uneconomic fares in an attempt to put competitors out of business. 544. It must be emphasized that deregulation of bus fares must not be implemented in isolation: the benefits of fare deregulation to passengers will be achieved only if regulations which control other aspects of bus operation are relaxed at the same time, so that better vehicle and driver productivity will reduce costs and make possible the fare reductions envisaged. 545. It is important that the benefits of competition are achieved as far as possible while avoiding the problems created by complete deregulation. Competition should be encouraged, but not to the extent of outlawing practices which result in improved services, such as the coordination of schedules by different operators on the same route. The dangers of inappropriate legislation designed to promote competition must also be avoided, and if such legislation exists covering all sectors of industry it is essential that exceptions are made for public transport operators.

c. Terminals

546. The provision of bus stations and terminals, in terms of their number, size and location, as well as their design, also affects the efficiency and demand-responsiveness of bus services. Large terminals used by several operators give passengers greater choice of operator and can provide convenient interchange between services. But they should not be too large, for both operational and environmental reasons, and for convenience there should ideally be several in the larger cities. It is not realistic to specify standard sizes for terminals: the appropriate size can be determined only on the basis of specific local requirements. There should be no restrictions regarding the destinations to be served by each terminal. 547. The need for bus terminals in any city or town involves a number of considerations, including the interests of the bus operators, passengers and the community as a whole. In particular, the size and location of a terminal will impact on traffic in the immediate vicinity, but the interests of bus passengers must be weighed against those of other road users. Because of these different interests, bus terminal planning must be subject to regulation, but must involve consultation with bus operators, passengers’ representatives, local communities and all other interested parties. 548. Bus operators should be permitted to operate their own terminals, and they should not be required by law to permit other operators to use them, although they may do so if they wish. Their location should still be subject to planning regulations, and should take into account their impact on the neighborhood. 549. The role of the terminal operators should be clearly defined. If each route is served by one or only a small number of operators, then the allocation of departure times should not be necessary, except to achieve a smooth flow of departures. Operators should decide on their own departure times, but these should be subject to slight modification by the terminal operators, in consultation with the bus operators, if there are too many departures simultaneously. The terminal operators should be concerned with departure times, not destinations. 550. Terminal operators should be permitted to determine the charges for their services to operators. However, in view of the monopoly position which many of them will hold, there must be a procedure to ensure that operators are not exploited. While not being made responsible for setting charges, a body such as the Provincial Pricing Bureau should act as a regulator, with the 128 task of investigating complaints of overcharging by bus operators and the authority to impose lower charges if the operators’ complaints are upheld.

d. Rural Bus Services

551. The market will ensure that services will eventually operate to meet demand in all areas. In the short run, however, government intervention may be necessary to expedite this process, particularly in remote rural areas. Where it is established that demand is not being satisfied, it is recommended that the CB should have authority to offer fixed-term contracts for subsidized services. Such contracts should be awarded only to operators who are likely to be able to continue the operation on a commercial basis (i.e. without subsidy) once it has become established. The term of the contract should be determined accordingly, but should not be more than three years.

e. Urban Bus Services

552. Bus operators in urban areas should also be permitted, if demand justifies, to operate services which extend beyond the city boundaries. New suburban housing developments are in most cases more effectively served by extensions of urban routes than by long-distance routes with restrictions on picking up and setting down passengers within the city. In some provinces the PCDs and MCon authorities have cooperated to permit such services, but in many provinces they are not permitted. 553. MCon may continue to have a role in planning urban bus services. But it is recommended that these should be considered together with other bus services in connection with the proposals for policy reform. In particular, quality regulations governing such matters as vehicle construction and use, safety and operator licensing should be the same those for non- urban transport, and therefore should ideally be the responsibility of the same ministry. 554. There are parallels in other countries. In the UK, London’s bus services are planned and regulated by Transport for London (TfL), a local government department. They are operated by private-sector bus operators, the majority of which also operate local and long-distance bus services outside London. Vehicle and operator licensing for buses both in and outside London are the responsibility of a single central government ministry, the Department for Transport; TfL is responsible only for planning the services in London, and awarding and administering the contracts with the bus operators concerned.

f. Social Issues

555. The proposed regulatory reforms will bring about improvements in the efficiency of the bus industry. This will eliminate surplus capacity currently provided by many small bus operators and informal or illegal operators. The reduction in the number of formal buses should result in increased utilization of the remaining buses, so that the majority of existing drivers will still be required, although there may be some surplus. In other areas of operation, particularly in the bus terminals, there are unnecessarily high numbers of employees, and an efficient private- sector operator would likely reduce numbers to reduce costs. Many of those involved in informal operations would find it difficult to get other jobs and therefore would otherwise be unemployed. 556. Potentially this is a serious social issue. The employment of excess staff reduces the level of unemployment, but whether transport operators should be responsible for absorbing workers in this way is a broader policy issue which must be addressed by government. In any event, all industries should be treated equally. Similarly, illegal operators tend to be tolerated because they create employment, and harsh measures to deal with them would also have

129 serious social implications, and the authorities must be sensitive in this regard. Nevertheless, perpetuating these inefficiencies will have an adverse effect on the quality and cost of transport services, and the issue must therefore be addressed in a more appropriate way. New, efficient private-sector bus operators will not employ unnecessary staff unless they are required by law to do so, and those operators which do will be at a disadvantage. 557. It is recommended that all transport operators should be free to determine the number of staff to be employed. Where an organization must reduce its staffing levels, it must be allowed to do so, even if this requires legislative changes, although it should be carried out as sensitively as possible. A voluntary redundancy program may be feasible in some cases; in others staff reduction through natural wastage, i.e. by not replacing staff who leave or retire, will be appropriate. Where possible, surplus staff should be retrained for other jobs within the organization where there are vacancies. 558. The issue of pensioners in SOEs and former SOEs must also be addressed. This affects other industries besides transport and should be dealt with on a national basis; it is not within the scope of this study to make recommendations on this issue.

g. Administration

559. The present regulatory system and its administration are complex, with several tiers vertically (e.g. PCD, CB) and several organizations involved horizontally (e.g. CB, PSB, EPB). There is a need for some rationalization, but it must be borne in mind that China is a very big country and a degree of devolution to a fairly local level is necessary. The proposed reduction in the extent of regulation should facilitate this process. Lines of responsibility need to be clear, and regulations must be consistent where necessary; it is important to define which policies and regulations should be set at which level, and the number of agencies involved must be minimized. 560. The monitoring role of the authorities must be clarified also. At present they collect a great deal of data, ostensibly to enable them to carry out their regulatory functions; this would no longer be necessary, although the collection of basic operational data and calculation and publication of relevant performance indicators would be useful for both operators and regulators.

B. Action Plan

561. The following Action Plan was circulated in draft in August 2005 and discussed at a workshop held in Beijing in early September. The material presented at that workshop and the results of discussions are included in Appendix 9. The plan has been amended to reflect these discussions and separate comments received on the draft.

1. Priorities

a. Road Freight Transport

562. While licensing procedures have scope for further streamlining, the deregulation that has taken place in the road freight industry has had positive results. Productivity is low by western standards, partly because of the continuing transition being made by SOEs, but it has improved significantly as a result of both market pressures and fleet and management improvements. Continuing competitive pressures and more demanding customer requirements will undoubtedly raise efficiency and performance standards further and help weed out inefficient operators. Competition among smaller private operators is intense, however; safety standards are being compromised and truck overloading is common, partly because of high expressway tolls. 130

563. At the same time, there has been a revolution in the distribution supply-chain and among logistics service providers that has brought about an expansion of higher-quality services catering for more demanding export, manufacturing and consumer markets. MOC’s policy of moving SOEs towards consolidated joint-stock companies at arm’s length from government and promoting market leaders is supporting this trend and helping to encourage the development of integrated, nationwide networks, but in the long run market pressures will probably be more effective in achieving this; MOC should be careful not to discriminate against those companies that compete with its chosen firms. 564. In short, markets appear to be working. With regulations left largely unchanged and safety enforcement strengthened, quality, efficiency and safety improvements at the “top” end will percolate down and there will be a weeding out and consolidation among the lower-quality, smaller-scale operators. The latter would be hastened if regulatory authorities were to focus more on removing remaining market restrictions in the way regulations are applied by provincial and lower-level agencies, enforcing safety and loading standards more strictly, linking operator permit renewal to safety performance and regulatory compliance, and restructuring user taxes and charges to encourage the use of modern multi-axle vehicles and discourage the types of trucks that do most pavement damage. The last of these should also involve a review of highway toll policies. In addition, there is a need for a comprehensive review of on-the-road vehicle safety standards and VWD and loading limits; the aim should be to remove existing regulations governing vehicle maintenance and focus on enforceable technical standards required to be met by any vehicle using the public roads. This would be the basis for the improved system of on-road enforcement and safety performance rating.

b. Road Passenger Transport

565. Licensing regulations for operators, buses, routes, services and terminals are needlessly restrictive. Operators have little opportunity to innovate, tailor their services to passenger requirements or use buses more efficiently. Quality standards are high, but productivity levels low. Further restrictions on operations are imposed through terminals. With fares controlled, input costs rising and limited opportunities to reduce costs by raising productivity, many operators are facing growing financial difficulties. 566. The main priority should be to remove route capacity restrictions, to allow buses to be operated on any route rather than being restricted to particular routes. The resulting improvement in productivity would significantly reduce unit costs per passenger carried. In this situation, regulation of bus fares could be abolished; they would no longer be necessary. Existing operators would compete on price and quality and improve bus utilization by inter- working them within their networks. Later, when things have settled down, they should be allowed to compete on other routes. To minimize instability and prevent the influx of inexperienced and incompetent operators, existing market entry requirements should be retained for a period; some consolidation will occur; later, they can be eased. Even if they met higher competency standards new small operators would find it difficult to compete with established operators and would tend to focus on routes where they are more appropriate. 567. Bus operators should be allowed to operate terminals, and should not be required by law to share them (though they may do so if they wish). Bus operators should decide their own departure times, subject to minor adjustment by terminal operators if there are too many simultaneous departures. Terminal operators should not be required to enforce safety or loading regulations; that is the role of the enforcement authorities. They should be allowed to decide on terminal fees, subject to review by a Provincial Pricing Bureau charged with investigating overcharging complaints.

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2. Action Plan for Road Freight Transport

a. Road Cost Recovery

568. Until now, there has been no integrated policy towards road user fees, taxes and tolls. A restructuring is needed. Without this, heavy commercial vehicles will continue to be subsidized relative to other road users, inefficient vehicles (e.g. those that do more pavement damage per tonne of payload) will not be discouraged, users will not face the true costs of their road use and demand will be artificially inflated. Ideally, each vehicle should face taxes and charges at least equivalent to the marginal social costs (the costs to society) associated with its use of the road system. This can be achieved through a combination of vehicle-based fees, road usage-based fees and tolls. The balance between these should be established on the basis of an analysis of the fixed and variable costs of road use (including the externalities of safety risk, congestion and pollution), an attribution of these costs among types of vehicle, and an analysis of the optimum mix of cost-recovery options to achieve, as near as possible, full marginal-cost recovery for each vehicle type. 569. Such a study would likely result in proposals to establish an annual or periodic vehicle charge (a road maintenance fee or vehicle registration fee) and a fuel surcharge to supplement the system of highway and bridge tolls. Unlike the present structure of road maintenance fees based on GVW, the annual vehicle charge would be structured according to the number of ESALs – measuring potential road-damaging power – of each vehicle when fully laden. The fuel surcharge and tolls would be the main sources of revenue for recovering the variable costs of road use, i.e. those that vary with the level (volume and weight) of traffic. 570. It is recommended that MOC carry out an updated analysis of road cost recovery to determine the optimum mix of user taxes and charges to recover the marginal costs of road use. Outline tasks are given in Appendix 6. The study should be advised by a consultative committee comprising representatives of MOC, NDRC, the Ministries of Finance and Commerce, provincial governments and the road freight and passenger transport industries, and should involve extensive consultations with road users and other stakeholders.

b. On-Road Vehicle Safety Standards and Permissible VWD Limits

571. It is recommended that improvements in vehicle safety standards be achieved by replacing the present controls over maintenance procedures with a set of enforceable minimum safety, size, weight and loading standards required to be achieved by all vehicles using public roads. In addition to minimum safety-related features such as lights, brakes, steering, engine power, load security and stability etc, these should include an updated set of permissible limits on VWD and loading. The standards should be capable of being verified by inspection on the road. Failure to meet the minimum standards would result in fines, loss of points on the operator’s performance rating (see below) and, for persistent violations, confiscation of operator permit. 572. It is beyond the scope of the present project to draft these standards and to suggest revised VWD limits: the latter would require a detailed analysis of the impacts of alternative truck and axle-load configurations on geometric and structural standards for roads and bridges, road pavement and bridge performance under load, truck stability and handling, accident risk and the economic trade-off between the lower freight costs associated with larger vehicles and the additional costs of proving and maintaining higher-standard road pavements and bridges. It is recommended that this be done as part of a VWD and Safety Standards Study carried out by MOC. The main tasks are outlined in Appendix 7. It would require inputs from experts in vehicle technical regulation, vehicle, driver and road safety, highway/bridge engineering, enforcement, 132 contracts management and transport economics. The study should be advised by a consultative committee comprising representatives of MOC, MPS, NRDC, provincial governments and the vehicle manufacturing and road transport industries.

c. Vehicle Safety and Loading Compliance

i. Enforcement

573. The present arrangements for enforcing vehicle safety and loading standards are ineffective and need to be changed; under present arrangements there is little economic incentive for truck operators to comply with the regulations and for enforcement agencies to carry out their task effectively. Nor is it practical to achieve vehicle safety goals by specifying how they should be maintained. 574. The Government should aim for the following: • a revised set of minimum on-the-road vehicle standards (see above) capable of being checked randomly at the roadside or in permanent inspection stations • the facilities and equipment, including automatic axle-weighing scales and other testing equipment, printers and communications facilities, needed to verify compliance with vehicle standards regulations and to provide an automatic, accurate, tamper-proof record of whether each vehicle meets the minimum prescribed conditions • trained, committed and honest inspection staff, with incentives to achieve effective enforcement • a tamper-proof procedure for marking or identifying vehicles that have recently passed an inspection and been found to comply with minimum vehicle standards • a system of independent monitoring, including where appropriate weigh-in-motion equipment or other remote sensing equipment, to ensure that the enforcement system is working effectively • a structure of fines designed to deter non-compliance • a system for identifying and recording the holder of the vehicle and operator permits, and procedures for rating the compliance performance of each operator, linked to the renewal of permits (see ii below) • close cooperation between the relevant highway authorities (PCD or CB) and security authorities (PSD or PSB) in preparing, establishing and operating such a system (see ii below). 575. It is recommended that systems and procedures for meeting these conditions be developed under a proposed Vehicle Safety Compliance Project, outlined below, and that they be trialed and evaluated for their effectiveness in a pilot demonstration project in a selected province. Ideally the trial should include two options for implementation: one in which the inspection and enforcement continues to be done by PSD staff, the other where the operation of one or more inspection stations is outsourced to a carefully-vetted private operator, chosen after competitive tender, with a performance-based contract subject to independent audit .

ii. Performance Rating

576. A key feature of the recommended safety-related initiatives is a performance rating system, similar to the approaches used in North America and Australia, based on each operator’s compliance with safety, vehicle size/weight and loading standards. Renewal of an

133 operator’s permit would be conditional on his/her maintaining a threshold rating score; renewal of a vehicle permit would depend on its having complied with on-road vehicle safety standards. Non-compliance, determined by roadside inspection, would result in graduated fines and a lowering of the operator’s rating, and, if persistent, suspension or confiscation of the operator and/or vehicle permit, depending on the nature of the non-compliance. 577. Implementation of such a system would require careful preparation, done in conjunction with the planning for revised VWD and safety standards and enforcement procedures. It is recommended, therefore, that the Vehicle Safety Compliance Project should also be tasked with designing the vehicle/operator identification system, the compliance rating system, the procedures used at inspection stations, the penalties for non-compliance, the computerized record-keeping that would support the rating system, and the procedures for linking the rating system to the renewal of operator and vehicle permits, as well as the associated institutional arrangements, and drafting the necessary changes to licensing, safety standards and safety enforcement regulations. The main tasks are outlined in Appendix 8. They would require careful coordination both at the national level with the MPS and between the PCD and PSD at the provincial level. Coordination at the national level would aim to establish an overall framework and set of standards, protocols and procedures within which compliance-rating systems at the provincial level can be developed and integrated.

iii. Demonstration Project

578. To develop, refine, trial and evaluate the proposed approach to safety/loading inspection and compliance, a demonstration project is recommended in a province willing to introduce the changes118. This would involve: • specifying, developing and installing the integrated database system and associated data capture, storage, access and communications systems to maintain records on the results of on-the-road vehicle inspections and the performance of individual transport operators in complying with safety, VWD and loading regulations • specifying, procuring and installing the necessary equipment at selected inspection sites (including automatic axle weighing scales and other measuring and testing equipment, computers, printers and communications facilities) and in the offices of the PCD and PSD • developing, testing and refining procedures for carrying out inspections by enforcement staff, initially with PCD staff in attendance, and preparing standard operating procedures and manuals • trialing and evaluating the use of independent contractors to operate inspection stations, and drafting appropriate performance-based contracts and operating and monitoring procedures (though this could, if necessary, be done at a later stage in the implementation of the proposed compliance system) • implementing and testing procedures for independent monitoring of the effectiveness of the enforcement task

118 The Action Plan timetable allows for a period during which the pilot province is selected. It should be noted, however, that Guangdong has already made progress in establishing an integrated database system for sharing information between the PCD, the PSD and the provincial insurance regulation authority. It will be necessary, however, to establish national guidelines governing the development of such systems if a proliferation of non- compatible systems is to be avoided. 134

• trialing the operation of the performance rating and license-renewal systems, initially “off- line” in parallel with, and without initially replacing, existing procedures for imposing sanctions on offenders • evaluating the benefits of the trial and making any adjustments that may be necessary. 579. Although the systems and procedures for improved compliance would be tested in a single province, the aim would be to extend the performance-rating system throughout the country – otherwise there would be no way of linking offences occurring in distant provinces with the license-renewal procedure in the operator’s home province. Regulations for doing so would need to be issued jointly by the Ministers of Communications and Public Security.

3. Action Plan for Road Passenger Transport

a. Reform of Bus Regulations

580. In the case of road passenger transport, the proposed process of change from the existing situation must be carefully managed in order to minimize the problems experienced in other countries which have deregulated their bus services. It is also important to consider the social implications of the proposed changes, particularly the effect of reduction in employment through improved efficiency. 581. To eliminate the risk of inexperienced new operators entering the market and destabilizing the industry, it is recommended that existing operators are given time to adapt to a more competitive regime by initially competing among themselves; this can be done by retaining the existing entry requirements for a period after deregulation of routes: increased competition between existing operators will be a sufficient spur to improved efficiency without the added complication of a large number of new operators. This would enable large operators with the necessary critical mass to establish coordinated networks of services where required, and to develop related services such as terminal or workshop facilities as appropriate. Later, when entry to the market is made easier, new small operators would find it difficult to compete with established operators on those routes where large operators are more effective, and would therefore tend to commence operations on those routes where small operators are more appropriate. 582. The criteria for operator categorization should, however, be relaxed for existing operators, to enable them to expand, contract or restructure if they so wish, without this affecting the services which they may operate. For example, a large group may decide to divest itself of its terminal and maintenance subsidiaries, which technically would render it ineligible to operate the longest-distance services under existing regulations. 583. It is therefore recommended that the first stage in the deregulation process should be to remove restrictions on the capacity of each route and the permit condition restricting buses to particular routes. This will enable operators to experiment with different service levels, to make more effective use of buses by using them on different routes within their existing networks, and to compete more effectively, albeit with existing operators. At the same time, the categorization criteria should be abolished in respect of existing operators. 584. The immediate impacts of relaxing these route controls will be lower operating costs (through better driver and vehicle productivity) and a wider range of available services and schedules. If controls over fares are also removed, fares should fall in line with the reduction in costs.

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585. Later, when all operators have become accustomed to operating in a more competitive situation, and fares and service levels have become established on each route, operators should be permitted to commence operation on other routes (including routes not currently operated if they so wish), and to compete with existing operators on those routes; they are also likely to experience competition from additional operators on their own existing routes. This is likely to result in some operators expanding their networks of routes, while others may be forced to reduce their operations. Some operators may take over or merge with others to form larger enterprises. Fares and service levels may change further as a result of the increased competition. 586. The final stage of the process should be to ease restrictions on entry to the market, but this should be done with care to prevent instability caused by incompetent operators. It is recommended that potential new operators should be offered brief training courses on the legal requirements and practical issues involved in bus operation, with a certificate of professional competence issued on successful completion of the course. In addition to the legal content of the course, it is essential that potential operators are given guidance on commercial aspects, to minimize the degree of disruption to existing operators, and the number of failures of new operators, through ignorance of basic transport operating principles. 587. Illegal and informal operators must also be catered for. It is proposed that all existing operators in this category should be given a temporary permit to operate on their existing routes, valid for one year; no new operators would be eligible for permits after a specified date, after which any vehicle operated without a permit would be impounded and disposed of. Operators with temporary permits would be required to comply with all relevant regulations within one year; those failing to do so by the end of this period would have their permits revoked, and if they continued to operate their vehicles would be impounded. Those remaining in business would have to compete with the formal operators. They should be encouraged to form into larger units where appropriate, through merging or the formation of operators’ associations; such associations should be eligible to hold operators’ and route permits on behalf of their members, and perform the role of bus operators in their own right. Alternatively, the small operators may sell out to larger operators if any are willing to buy. 588. Bus station operators currently play a major role in the regulation of bus services, through their responsibilities for allocating bus departure times, and for ensuring compliance with vehicle safety regulations. Under the proposed reforms, these responsibilities will be transferred to the bus operators and to the government authorities responsible for enforcing vehicle safety regulations. Nevertheless the efficient management of bus stations is essential to the efficient operation of the bus services, and the terminal operators will therefore be key stakeholders in the Action Plan.

b. Training Requirements

589. Bus operators in China will have to adjust to a more competitive environment. In the medium to long term, increased competition will force operators to improve their efficiency; those which do not will eventually go out of business. If newcomers are allowed to enter the market, such as foreign operators in JVs, they are likely to introduce international best practices which will put them at an advantage over existing operators. 590. If this happens, existing operators may be destabilized with consequent problems and waste of resources. In the Chinese context it would be preferable to introduce best practices to the Chinese operators first. Chinese operators already employ some best practices such as smart cards on city bus services and automated ticket-checking at bus terminals, but these are 136 mainly technology-based; operators are lagging behind other countries in terms of management “software”, i.e. practices and procedures. 591. The strategy should therefore be to rationalize the regulatory system, eliminate restrictions on existing operators and give them more freedom to innovate and develop new services, without opening the flood gates to large numbers of new operators, many of whom would be incompetent and therefore likely to destabilize the industry. Existing operators should then be assisted in the introduction of best practices, primarily through training and study tours, in which they should have the opportunity to observe both good and bad practices. Officers in the regulatory authorities should also participate in appropriate training programs. Informal operators should also be given the opportunity for training if they so wish. It will then be appropriate to allow freer entry to the market, although it will still be necessary to guard against incompetent new operators, by imposing strict quality and safety requirements. At this stage new operators should also be eligible for training in best practices.

c. Demonstration Project

592. To demonstrate the potential improvements it is suggested that a demonstration project should be set up based on a large town or small city, with say about one million population119. 593. The bus operators would be exempted from certain controls as described above, and would also be given advice on best operational practices in order to maximize their efficiency. They would also be given guidance, where necessary, in the use of operational data for planning purposes. Bus station operators would cease to be responsible for allocating departure times to bus operators, although they would have to liaise with bus operators, and agree on some adjustments, if too many departures are scheduled by the operators at the same time. Like the bus operators, the station operators would be given advice in best practices in this and other areas of their responsibility. 594. All bus routes (other than local urban bus services which are not under the jurisdiction of the MOC) in the city concerned would be included in the project. Therefore bus stations and bus operators based in other cities would also become involved to some extent, as would the transport authorities in those cities. Bus station operators in cities at the destinations of the routes from the pilot project city would be required to relinquish responsibility for allocating departure times on the routes concerned. Bus operators based in other cities, but operating on routes into the pilot project city, would enjoy exactly the same relaxation of regulations, on those routes, as the operators based in the pilot project city; they would, however, continue to be subject to existing regulations on all their other routes.

4. Implementation of the Action Plan

a. Road Freight Transport Action Plan

595. The suggested timetable for the road freight transport action plan is set out in Table 25. It comprises three main groups of activities: • a Road Cost Recovery Study (Appendix 6), carried out by MOC, to develop proposals for a revised system of taxes, charges and tolls that would recover from road users the marginal costs of their use of the roads and make a fair and reasonable contribution to those components of cost that do not vary with road use

119 A demonstration project based on a single city is preferable to one involving several. If several cities are proposed, the demonstration projects should be staggered, so that lessons learned in one can be passed on to the others.

137

• a VWD and Safety Standards Study (Appendix 7), also carried out by MOC, to establish an updated set of on-the-road vehicle safety, VWD and loading standards that are capable of being enforced effectively and that would help maximize the economic benefits achievable by modern truck technologies in the context of an economically optimal strategy for road and bridge development, strengthening/upgrading and maintenance • a Vehicle Safety Compliance Project (Appendix 8), carried out by MOC with the cooperation of MPS, to improve operator compliance with updated on-the-road vehicle safety, VWD and loading standards, and to strengthen enforcement of those standards. A key feature would be a system for recording the performance of operators in complying with safety and loading standards at roadside inspection stations, linked to procedures for renewing operator and vehicle permits. This project would include a Demonstration Project to install the necessary equipment and develop, test and refine the procedures in a pilot province before they are extended throughout the country. 596. The suggested timetable for the key tasks and milestones is set out in Table 25.

b. Road Passenger Transport Action Plan

597. The suggested timetable for the road passenger transport action plan is set out in Table 26. It focuses mainly on preparations and implementation of the proposed bus service licensing reforms in a pilot project, but additional tasks are also specified in the schedule. 598. It is recommended that the initial pilot project should be undertaken in one city only. This will minimize the number of international consultants required at any one time. It will also provide an opportunity for the changes to be evaluated and modified if necessary before being extended elsewhere: one objective of the pilot project is to ensure that any problems can be identified and resolved before general implementation. If the Government wishes to carry out more than one pilot project, the starting dates should be staggered by at least six-monthly intervals. This will enable lessons learned in one city to be passed on to the next. It will also enable the team of external consultants to assist in more than one location, thus providing consistency. The involvement of the international consultants can be progressively reduced as their Chinese counterparts become familiar with the various tasks. 599. The project will be coordinated by the Provincial Communications Department but supervised on a day-to-day basis on its behalf by the Transport Bureau in the project city. Assistance from external consultants will be essential, and in practice the consultants will play the major role in managing the implementation of the project, in close liaison with the authorities and other stakeholders. 600. This cooperation and involvement of all key stakeholders is crucial throughout the period of implementation. The stakeholders will include the provincial and municipal regulatory authorities, all bus station operators and the principal bus operators in the cities concerned. When all stakeholders have been identified, there must be a period of intensive consultation in order to ensure that all concerned are fully aware of the purpose of the project, the implementation program and their respective roles. A Pilot Project Implementation Committee should be established, comprising representatives of all major authorities involved, and other stakeholders as appropriate. This committee will meet on a regular basis to review with the consultants the progress of the project and to agree on any changes found to be necessary. 601. The consultants employed must be fully conversant with the issues concerned. Some tasks, such as instruction in international best practices, will require consultants with substantial experience of bus operation outside China; in effect this will eliminate the majority of Chinese consultants. Other tasks, such as the development of new regulations and licensing procedures, 138 should ideally also involve consultants with international experience. However, it is equally important that the international consultants work very closely with Chinese counterparts, who eventually will be able to take on all aspects of similar projects, and assist in the implementation of reforms throughout China. 602. On completion of the pilot project(s) the consultants involved should produce a detailed report describing the changes made, and the effects of these changes; the report should also describe any problems encountered in the implementation of the changes, and how these problems were overcome. Finally, it should provide a practical timetable for introduction of the reforms nationally. 603. It will be important to ensure that the relaxation of regulations does not result in instability in the industry, or lack of continuity of service. In the long term, the regulations will cater for this, by requiring bus operators to give notice of any intended changes to the licensing authority. For the purpose of the pilot project, such notice should be given to the PCD, who should notify the consultants who in turn would assess whether or not the proposed changes are likely to cause disruption. If in the opinion of the consultants any proposed change will have undesirable results, this will be discussed by the PCD (who may in practice wish to delegate this task to local authorities in the city concerned) with the operator, who may be requested to amend his plans. It must be emphasized, however, that such intervention must be regarded as a last resort, and should be used only if the proposed change will be potentially damaging to the public interest or to the bus industry as a whole. The majority of bus operators in China have a strong sense of public responsibility, and are unlikely to knowingly take action which is against the public interest. Once bus operators have become familiar with the new regime and understand the effect of any actions which they might take, and market forces are functioning as they should, such cases should be rare.

139

Table 25: Road Freight Transport Action Plan Timetable

No Action By Whom Comment Duration Related (months) Actions Road Cost Recovery Study: 1 Establish steering committee and allocate responsibilities MOC Members to include MOC, NDRC, MOF, MIC and 1.0 and resources representatives of the transport industry 2 Assemble data on revenues from road users from all MOC Including all taxes, fees and tolls, by level of administration 3.0 sources and type of vehicle 3 Assemble information on the existing and projected costs MOC Requires assistance of consultants 4.9 of road/bridge development, upgrading, operation and maintenance; determine those that vary with traffic and those that are fixed 4 Allocate fixed and variable costs among classes of vehicle MOC Cost allocation requires use of HDM model or similar; requires 2.0 2, 3 based on the degree to which they are responsible for assistance of consultants them; estimate the level of cost recovery under existing policies 5 Estimate the additional costs of externalities (congestion, MOC Requires assistance of consultants 3.0 accident risk, pollution) 6 Identify alternative sources and mechanisms for cost MOC Consideration should be given to the different agencies 4.0 2, 4, 5 recovery; assess the practical implications of each as an responsible for collecting revenues and incurring expenditures instrument of cost recovery 7 Evaluate alternative combinations and identify those that MOC Aim should be to establish similar level of cost recovery among 2.0 6 fairly recover marginal costs from different users vehicle classes, and to create as close a link as possible between user charges and the benefits of improved roads 8 Test each option for its impacts on road transport costs, MOC Requires use of HDM model or similar, with assistance of 3.0 7 road funding and restructuring of the vehicle fleet consultants 9 Recommend the preferred combination of vehicle-based, MOC 2.0 8 road usage-based charges and tolls 10 Prepare a staged implementation plan MOC 1.0 9 11 Consult with government and industry stakeholders and MOC 2.0 10 provincial governments, and modify proposals as necessary VWD and Safety Standards Study: 12 Establish steering committee and allocate responsibilities MOC Members to include MOC, MPS, NDRC and representatives of 1.0 and resources the transport industry 13 Review available studies; determine relationships MOC Requires assistance of consultants 6.0 between vehicle/loading characteristics and road user and agency costs

140

No Action By Whom Comment Duration Related (months) Actions 14 Review vehicle technology trends and prepare scenarios MOC 4.0 for fleet development 15 Evaluate the trade-off between road user costs and road MOC Requires use of HDM model or similar, with assistance of 6.0 13, 14 agency costs for alternative vehicle size, weight and consultants loading limits and safety features 16 For the economically optimal combination, develop MOC 4.0 15 detailed vehicle safety, VWD and loading standards and associated road/bridge engineering standards 17 Check that the vehicle safety and loading standards can MOC, MPS In close cooperation with MPS 3.0 16 be verified by roadside inspection 18 Draft necessary changes to regulations governing on-the- MOC In close cooperation with MPS 3.0 17 road vehicle safety, VWD and loading standards 19 Consult with government and industry stakeholders and MOC 2.0 18 provincial governments, and modify proposals as necessary Vehicle Safety Compliance Project: 20 Establish national steering committee and allocate MOC, MPS Members to include MOC, MPS, NDRC and representatives of 2.0 responsibilities and resources provincial governments and the transport industry 21 Specify facilities, equipment and procedures for carrying MOC, MPS Aim should be to specify automatic, tamper-proof equipment 6.0 18 out roadside inspections to verify compliance with on-the- and procedures minimizing opportunities for avoidance and road vehicle safety, VWD and loading regulations corruption 22 Specify facilities, procedures and contract arrangements MOC, MPS Monitoring agency must be truly independent of the 3.0 21 for independent monitoring of the effectiveness of enforcement process enforcement 23 Specify procedures and contract arrangements for MOC, MPS Optional task; this could be done much later in the 5.0 21 outsourcing the vehicle inspection task implementation program, depending on the results of the monitoring task 24 Design a performance rating system for monitoring the MOC, MPS Based partly on a review of performance-based systems used 5.0 compliance of operators with safety, VWD and loading in North America and Australia; requires assistance of regulations consultants. Could include a study tour to evaluate alternative approaches (not included in time estimate) 25 Design a system for linking the performance-rating MOC, MPS Based on a points system; if an operator falls below a 3.0 24 system with fines and other sanctions, including specified threshold rating, he could be fined, his vehicle procedures for renewal of freight operator licenses permits could be reduced and/or his operating permit could be revoked 26 Draft any changes in laws and regulations needed to MOC, MPS 4.0 21, 25 implement the proposed procedures

141

No Action By Whom Comment Duration Related (months) Actions 27 Prepare a detailed plan for testing implementation in MOC, MPS Requires consultations with shortlisted provinces willing to 3.0 26 demonstration project in a pilot province establish cooperative arrangements between their PCDs and PSDs 28 Consult with government and industry stakeholders and MOC, MPS 2.0 27 provincial governments, and modify proposals as necessary Pilot Demonstration Project: 29 Select the pilot province and brief all stakeholders MOC, MPS Briefing all affected stakeholders is especially important 3.0 27 30 Specify, develop, install and test the shared information PCD, PSD System design will depend partly on the existing information 8.0 24 system and associated equipment and communications systems in the PCD and PSD facilities 31 Procure, install and test inspection/testing equipment at PCD, PSD Including tamper-proof, automatic axle weighing scales, 10.0 21 chosen roadside inspection locations printers and communications facilities 32 Implement, test, evaluate and refine the recommended PCD, PSD 4.0 21 procedures for carrying out roadside inspections by PSD staff, attended by PCD staff 33 Appoint independent agents and trial, evaluate and refine PCD, PSD Optional; could be omitted until later in the implementation 6.0 23 procedures for outsourcing inspection tasks plan 34 Implement, test, evaluate and refine procedures for PCD, PSD Requires transparent process of prequalification and selection, 6.0 24 establishing independent monitoring of the effectiveness with model contract documents and procedures developed of roadside inspections under Task 24 35 In parallel with existing procedures, implement and PCD, PSD The procedures being tested should run “off-line” initially, 10.0 24, 25 evaluate procedures for operating the performance-rating without replacing existing procedures for applying sanctions for system and linking it to procedures for permit renewal violations of the regulations 36 Prepare proposals for extending the trial to other PCD, PSD Aim should be to have compatible systems in every province, 6.0 35 provinces and specifications for linking the provincial so that enforcement and licensing agencies can share a systems into a national performance-rating system common pool of information on operators’ performance in accessible by all enforcement and licensing agencies complying with the regulations governing vehicle safety, VWD and loading limits 37 Consult with government and industry stakeholders and PCD, PSD 4.0 36 provincial governments, and modify proposals as necessary

142

Table 26: Road Passenger Transport Action Plan Timetable

No Action By Whom Comment Duration Related (months) Actions Pilot Project – Preparation: 1 Select city for pilot project MOC Approx. 1 million population, and as self-contained as possible 1.0 2 Form Pilot Project Implementation Committee (PPIC) MOC/PCD/ Steering Committee with representatives of all major 1.0 PSD authorities involved, chaired by MOC 3 Identify bus routes affected PCD All routes operating into the city 1.0 4 Identify all participating operators and terminals PCD Operators serving the city, whether based there or not 1.0 3 5 Identify other cities/provinces affected PCD Destinations of routes from project city, and terminals used by 0.5 3 these routes 6 Liaise with authorities in other cities/provinces PPIC Other authorities will have to make licensing concessions on 1.0 5 affected routes 7 Rationalise vehicle inspection requirements and PCD/PSD 6.0 enforcement procedures 8 Publicise pilot project PPIC Media announcements, presentations, workshops etc 3.0 Pilot Project – Implementation and Evaluation 9 Design procedures and criteria for operator licences, MOC Assisted by consultants 3.0 route licences, vehicle licences, licences for informal/illegal operators 10 Introduce new operator permits PCD 3.0 9 11 Introduce new route permits PCD 3.0 9 12 Introduce new bus licences PCD 6.0 9 13 Issue temporary licences for informal/illegal operators and PCD Licences valid for 1 year (for practical reasons it may be 3.0 9 embargo on new ones necessary to extend this). 14 Strengthen enforcement of licence validity PCD Checks to ensure no operators running without valid licences Continuous 15 Issue licences to those who can comply with the new PCD 1 year after issue of first licences 3.0 entry requirements and impound remaining illegal vehicles 16 Encourage formation of area-based operators’ MOC/PCD Media announcements, presentations, workshops etc 6.0 associations for small operators 17 Abolish bus fare regulation but introduce measures to MOC/PCD 2.0 9 prevent predatory undercutting 18 Relax categorisation for existing operators PCD - 9

143

No Action By Whom Comment Duration Related (months) Actions 19 Remove route capacity restrictions PCD - 9 20 Remove restriction of buses to particular routes PCD - 9 21 Permit operators to determine own schedules PCD - 9 22 Workshops for bus and terminal operators on best MOC Assisted by consultants. Intermittent over 1 year period 12.0 practices 23 Allow operators to run on any route PCD After operators have become accustomed to increased - 17-21 competition resulting from initial licence relaxation – say one year. Operators must obtain licences for new routes but this will be a formality 24 Introduce CPC – design exam, set up procedures MOC/PCD Assisted by consultants 12.0 25 Ease market entry conditions PCD Say one year after permitting operators to run on any route; - 24 categorisation to be replaced by CPC and related requirements 26 Rural bus services – design subsidised contract MOC Assisted by consultants 4.0 procedure 27 Set up contract procedures. MOC/PCD 4.0 26 28 Select routes for initial contracts PPIC Probably in one sparsely-populated area: criteria to be 1.0 26 determined 29 Award and monitor contracts PCD Contracts should be for 3 years 39.0 27-28 Additional Actions 30 Develop industry-wide trade association MOC Assisted by consultants 24.0 31 Develop training courses in best practices for existing MOC Assisted by consultants. Should be organised through industry 12.0 30 operators associations 32 Develop training courses for potential new operators MOC Assisted by consultants. Should be organised through industry 12.0 In associations parallel with 31 33 Study tours for operators/operators’ association, MOC Together with industry association 30 regulators 34 One ministry for all quality control on buses and freight SC ? transport 35 Bus terminals: code of practice: define responsibilities, MOC Assisted by consultants 4.0 procedures for planning – review current guidelines 36 Freight terminals: ditto MOC Assisted by consultants 4.0 37 Decide on social issues – natural wastage for people and SC ? buses 144

No Action By Whom Comment Duration Related (months) Actions 38 Pensioners issue SC ? 39 Study of driving standards – improve test requirements MOC Assisted by consultants 6.0 40 Review Construction and Use Regulations – quality MOC Assisted by consultants 4.0 regulation 41 Review traffic regulations MOC/PSD Assisted by consultants 6.0 42 Mechanism for reviewing terminal charges MOC/Price To set up a procedure to prevent terminal operators from 2.0 Bureau abusing their positions of local monopoly 43 Review administrative/institutional arrangements in light of MOC/SC Assisted by consultants 6.0 regulatory changes 44 Urban bus services – separate study required on MOC/MCon Assisted by consultants; probably not practical to include 6.0 mechanism for bringing into line with MOC-controlled bus urban services in pilot project services

Appendix 1 145 ADB ROAD SECTOR POLICY REFORM PLAN

Table A1.1: ADB Road Sector Policy Reform Plan

Initiative Current Status Actions Targets/Achievements

1. Poverty impact All ADB projects are in poorer central Project identification and design Recommended investment and SW regions of the country assistance through TA 3086-PRC: packages in 10th Plan period. Regional Road Sector Study

Project designs to include local roads Project assistance to improve and Local road components included in finance provincial and county roads. all Bank-financed road projects since 2001

Focus on understanding the relationship Poverty impact of transport projects Poverty-reduction procedures between access and poverty assessed through TA 5947-REG: implemented since 1999 Assessing the Impact of Transport and Energy Infrastructure on Poverty Reduction

Impacts of local roads on poverty Implemented since 1999 reduction assessed through TA 3150- PRC: Study on Ways to Support Rural Poverty Reduction Projects

Including village access to roads as a Implemented since 2001 poverty reduction indicator under TA 3610-PRC: Poverty Planning Methodology

Consulting with the poor in designing Completed in 2002 projects under TA 5894-REG: Voices of the Poor

2. Road design Highway design standards were MOC standards revised and reissued in New design standards applied standards and inadequate for changing vehicle mix and 1998 and further revised in 2004 from 2004 construction quality road conditions

Assistance in developing standards Highway design manual developed through TA 2573-PRC: Review of and tested from 2000; revised Highway Design Standards and TA 2004 2573-PRC.

TA 3375-PRC: Project Performance Implemented from 2000 Management Capacity Building to strengthen capacity of Key Projects unit in SDPC

3. Road safety High accident and fatality rates; lack of Road safety program for Heilongjiang Recommendations reviewed and attention to safe design and safe road under TA 2177-PRC disseminated from 2001 environment Recommendations of TA 5620 on road Implemented in 10th Plan safety adopted by Government.

Public awareness of road safety and Implemented from 2001 onward MPS capacity in traffic safety, planning and management strengthened under TA 3341-PRC: Capacity Building in Traffic Safety, Planning and Management.

4. Vehicle emissions Increasing vehicle pollution, especially in Leaded fuel to be phased out Production phased out in January large cities 2000, sales in July 2000

European emission standards to be Phase I: Small vehicles 2001, adopted for all new vehicles large vehicles 2002. Phase II: Small vehicles 2004, large vehicles 2005

Vehicle testing and inspection program Expanded on self-financed basis under Implemented from 2002 onwards recommendations of TA 2951-PRC: Promotion of Market-Based Instruments for Environmental Management Further recommendations under TA Implemented in 2001-2002 5937-REG: Action Plans for Reducing Vehicle Emissions Action plan for vehicle inspection & Implemented from 2001 onwards maintenance in Chongqing; emission control guidelines prepared in Yunnan; action plans developed for Liangshan and .

146 Appendix 1

Initiative Current Status Actions Targets/Achievements

5. Road pricing Principle of user-pays and cost recovery Toll levels reviewed to ensure cost Annual review of tolls for toll roads under implementation in recovery most provinces Government to replace road Delayed maintenance fee with a fuel tax to enhance user-pays principle

Toll diversion study completed Applied since 2001

6. Corporatization Several PCDs set up corporate Assistance provided through TA 1724- Implemented from 2001 onwards structures during 8FYP and 9FYP to PRC: Institutional and Policy Support in facilitate financing and leasing the Road Sector arrangements Further assistance provided through TA Implemented from 2002 onwards 2592-PRC: Corporatization, Leasing and Securitization in the Road Sector Lack of legal agreement between PCDs Model concession agreement prepared Shaanxi Project approved in and expressway companies under TA 2592-PRC to ensure August 2001; model agreements autonomy of operation, performance considered for other expressway indicators and future refinancing projects, including Western Yunnan

7. Commercialization Practices do not take full advantage of TA for competitive bidding in contracting Contracting of maintenance and possible revenues from expressway and maintenance and training in commercial operation of operation commercial expressway operation expressway services for 10th Plan projects

8. Financial resource Financing requirements will increase. TA 2409-PRC: Appraisal Methodologies Implementation under 10th Plan mobilization Refinancing or leasing for selected road and Restructuring Highway Financing in sections in place in several provinces Hebei Province BOT guidelines drafted and feasibility Implementation of pilot BOT road study for pilot project under TA 2649- project/s being considered by PRC: Facilitating the BOT Modality in Government the Highway Sector. Further assistance through TA 3569-PRC for Jiangsu Highway BOT Project and TA 2592- PRC

BOT law still awaiting approval

ADB-financed Jilin expressway and Stocks listed in 1999 expressway securitized as part of stock listing

9. Overall road Under WTO rules China’s transport and TA 4351-PRC: Policy Reform in Road Action Plan for Policy Reform to be transport policy and logistics markets will be opened up to Transport (this project) is reviewing discussed at September workshop regulation foreign competition. Policies and needed reforms and developing an and finalized in October 2005. regulations need updating to encourage Action Plan for implementation. greater efficiency and demand- responsiveness and to allow the industry to adjust to the changes taking place.

Appendix 2 147

VEHICLE INSPECTION AND MAINTENANCE REQUIREMENTS

Maintenance The maintenance and periodic inspections of motor vehicles in China are governed by the following regulations: • Regulation on Technical Management of Vehicles in Transport Industry (MOC no. 13) • Regulation on Vehicle Maintenance in Road Transport (MOC no 4) • Ordinance of People’s Republic of China on Road Transport • Regulation on Management of Comprehensive Inspection Stations in Vehicle Transport (MOC no 29) • National Standard Requirements and Inspection Methods of Comprehensive Inspections of Vehicles in Operation (GB18565) • National Standard Technical Criteria for Vehicle Maintenance, Inspection and Diagnosis (GB/T18344) • National Standard Technical Requirements for Safe Operation of Vehicles (GB7258) • Industrial Standard Technical Classifications and Requirements of Vehicles in Operation (JT/T198-2004) • Industrial Standard Technical Criteria of Computer Control System in Vehicle Inspection Stations(JT/T478-2002) • National Standard Requirements for Vehicle Maintenance Business (GB/T16739-2004) • General Technical Requirements for Comprehensive Inspection Stations for Vehicles (GB/T17993-1999) • Technical Criteria for Vehicle Maintenance (JT/201-95). The content and technical requirements for routine maintenance are specified in the Technical Criteria for Vehicle Maintenance, Inspection and Diagnosis (GB/T18344) and Technical Criteria for Vehicle Maintenance (JT/201-95), and comprise routine maintenance, first level maintenance and second level maintenance as follows: • routine maintenance – maintenance carried out by the driver before, during and after a journey, comprising safety inspection, supply of fuel, oil etc and vehicle cleaning • first-level maintenance – maintenance carried out by repair companies, including cleaning, lubricating, inspection of braking and steering systems and checking for loose fittings in addition to routine maintenance • second-level maintenance – maintenance carried out by repair companies. In addition to items included at the first level, the focus is on inspection of safety-critical parts such as steering components, braking system and chassis parts which are subject to wear and tear, removal of tires for checking and repositioning them on the vehicle, checking engine and exhaust emission and adjustment as necessary Second-level maintenance is compulsory and should be carried out at the specified intervals. In some provinces first-level maintenance is also compulsory. In Gansu, for example, the requirements are as follows: every 3,000 km for first-level maintenance and every 15,000 (±1,000 km) for second-level maintenance, for operators who keep records of kms traveled;

148 Appendix 2 otherwise every 20 days of operation for first-level maintenance and every 90 days of operation for second-level maintenance. Annual Vehicle Inspection Every vehicle must be presented for a comprehensive safety inspection each year at an inspection station authorized and supervised by the PSB, covering the following items: chassis condition; exhaust emissions; sound levels; speedometer accuracy; wheel alignment; braking efficiency; and headlight intensity.

Appendix 3 149

TRUCK COSTS

Survey Data Data were collected from eight companies for nine typical operations. The quality of the data is low. Different assumptions are made by different companies: some, for example, see certain taxes as truck-specific (e.g. the road maintenance fee) while others treat them as an administrative overhead. One company in Gansu reported five different taxes for its typical truck. Table A3.1 shows the raw data assembled. Table A3.1: Typical Truck Characteristics and Costs from Surveys in Yunnan, Gansu and Heilongjiang

Item Units A B C D E F G H I J

Axles 3 3 7 5 7 4 4 5 2 4

Registered weight t 30 20 55 40 34 27 15 30 3.9 27

Typical load t 38 20 35 40 100 25 15 30 3.6 27

Truck price Yuan 280,000 300,000 600,000 400,000 1,200,000 295,000 260,000 390,000 82,000 240,000

Annual distance km 120,000 50,000 80,000 34,161 33,000 150,000 78,000 86,000 35,000 75,000

Loaded km % 70% 50% 50% 53% 50% 97% 100% 100% 50% 85%

Insurance Yuan/yr 12,000 30,000 8,233 67,000 17,000 14,000 15,000 8,000 14,000

Purchase tax (rate) % 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%

Purchase tax (one time) 28,000 30,000 60,000 40,000 120,000 29,500 26,000 39,000 8,200 24,000

Other taxes (annual) Yuan/yr 2,000 48,600 20,000 24,136 67,537 37,500 73,500 2,400 78,516

Maintenance (annual) Yuan/yr 7,500 20,000 30,000 11,529 10,000 35,000 70,000 80,000 6,000 12,000

Driver wage Yuan/yr 15,000 24,000 30,000 9,600 42,000 43,200 24,000 30,000 20,400 9,000

Diesel price Yuan/L 3.5 3.771 4 3.58 3.6 3.66 4.2 4.2 4.163 4.6

Fuel consumption km/L 4.78 4 2.25 2.5 1.33 2.50 2.20 1.94 3.52 2.63

Highway tolls Yuan/yr 100,000 23,900 123,500 136,167 6000 162,000

Note: Numbers in blue are estimated by the project Key to operators: A – Chen Da Transport, B – Kunming Steel Group, C – Dali, D - Lanzhou (May 17 No 1), E – Lanzhou No 3, F – Suihua Freight Transport, G – Zhong Xim Logistics Co, H – Zhong Xim Logistics Co, I – Zhong Tie Modern Logistics, J – Bei Da Huang Logistics Centre

Some figures cannot be compared directly to other sources: when respondents were asked for information on maintenance costs, for example, they were asked to include everything (tires, oil, scheduled maintenance, repairs etc), but the interpretation of this appeared to vary, depending on how each enterprise organizes its accounts (some included tires under maintenance while others had a separate account for tires). Survey Averages Table A3.2 shows average values for trucks grouped by the number of axles; the computed averages omit non-responses or values estimated in Table A3.1. Table A3.2: Case Study Averages by Number of Axles

Axles 2 3 4 5 7 Registered weight (t) 3.9 30 21 35 34 Typical load (t) 3.6 29.0 22.3 35.0 67.5 Truck price (Yuan) 82,000 290,000 277,500 395,000 900,000 Annual distance (kms) 35,000 120,000 114,000 60,081 56,500 Loaded kms 50.0% 60% 99% 76% 50% Insurance (Yuan) 8,000 12,000 15,500 11,617 48,500 Purchase tax (rate) 10% 10% 10% 10% 10%

150 Appendix 3

Axles 2 3 4 5 7 Purchase tax (one time) 8,200 29,000 27,750 39,500 90,000 Other taxes (Yuan, annual) 2,400 25,300 52,518 48,818 20,000 Maintenance (Yuan, annual) 6,000 13,750 52,500 45,765 20,000 Driver wage (Yuan) 20,400 19,500 33,600 19,800 36,000 Diesel price (Yuan/litre) 4.2 3.6 3.9 3.9 3.8 Fuel consumption 3.52 4.78 2.50 2.2 1.8 Highway Tolls (Yuan) 6,000 100,000 123,500 80,033 - Total Operating Costs1 (Yuan, annual) 102,220 325,528 517,876 398,209 442,333 Yuan/km 2.921 2.713 4.543 6.628 7.829 Yuan/tonne-km2 1.623 0.156 0.207 0.248 0.232 1 For the purpose of the initial calculations, this assumes a 20% depreciation rate. 2 Total tonne-km were estimated by multiplying loaded km and ‘typical’ load

Model Variables Table A3.3 sets out additional information used as input to the model, and their sources. Table A3.3: Input Prices and Other Assumptions

Item Assumption Source Truck purchase price Yuan/unit Survey figures checked against values quoted for Ningxia RRP – see Table A3.4 Fuel price 3.93 Yuan/l Survey average Purchase tax 10% Uniform across China Road maintenance fee 200*Reg*12 Fee varies from province to province (and for individual companies in some cases). For here it is standardized at 200 Yuan/tonne of registered weight * 12 months Other taxes 500 (rigid truck) Operators reported different values. For here, it is assumed that a rigid 1,000 (artic truck) truck pays an additional 500 Yuan/yr and an articulated truck 1,000 Yuan. PanXi RRP quotes a total of 35% for purchase tax, VAT and consumption tax. Driver & crew wages Trucks: 12.0 46.2 - Ningxia economic cost of labour; 13.75 – PanXi; 12.88 - average (Yuan/hr) Artic. trucks: 13.0 from case studies (2,060 Yuan/month @ 160 hrs/month) Maintenance wages 9.38 18.9 – Ningxia RRP; 9.38 - PanXi (Yuan/hr) Maintenance parts 10% * vehicle From Ningxia RRP purchase price New tire costs (Yuan/tyre) Trucks: 1,000 Artic.trucks: 1,800 Oil price (Yuan/l) 10 From surveys Insurance (Yuan p.a.) 2-axle: 8,000 Ningxia – 2.5% of vehicle price (approx Yuan 2,000-22,000 per truck); 3-axle: 12,000 PanXi – 4,883 for medium truck, 8,368 for heavy truck. Values used here 4-axle: 15,500 based on surveys 5-axle: 20,000 6-axle: 25,000 7-axle: 30,000 Toll rates (Yuan per km) 5t: 0.65 Six firms showed an average of Yuan 1.29/km. However, it is not known 5-8 t: 1.00 what proportion of driving is on toll roads, so this cannot be used. Actual 8-20 t: 1.80 toll rates vary from one highway to another. For here, toll rates from Henan 20-40 t: 2.50 have been used. The rate for trucks > 40 t is actually Yuan 0.10 per tonne- >40 t: 5.00 km but has been converted here to Yuan 5.00/km.

Appendix 3 151

Item Assumption Source Overheads 15% 5% of other costs – PanXi; 15% of other costs – Ningxia. The higher figure is used here. Sources: Ningxia - RRP, Ningxia Roads Development Project; PanXi - RRP PanXi Highway Development Project.

Table A3.4: Truck Characteristics

Configuration1 11 12 11S1 11S2 12S2 12S3 12S4 Tare weight2 (t) 4 7.5 12 13 14 16 18 Legal GVW3 (t) 18.5 25.0 30.0 38.5 45.0 49.0 49.0 Registered weight4 (t) User specified as % of legal GVW Legal load5 (t) 14.5 17.5 18.0 25.5 31.0 33.0 31.0 Purchase Price (Yuan ‘000) 150 277 277 280 500 600 900 Truck Life (years) User specified; default is 10 Maintenance6 (hrs/yr) Toll roads 45 70 100 110 110 110 120 Other roads 50 77 110 121 121 121 132 Maintenance parts (% of vehicle price/yr) 10% Maintenance costs Increase by 10% when load > 2 times legal max load 1 Configurations are shown using North American symbols – each number represents an axle or axle group and an S represents a fifth wheel attachment to a semitrailer. 2 Tare weights are based on values in Ningxia for smaller trucks; the weights for larger trucks are lighter than in North America (or Australia) based on the figures for Ningxia 3 Legal weights are based on the following maximum loads: single axle, 11.5t; tandem axle, 18.0 (truck or tractor), 20.0 (trailer); tridem axle, 24.0; rigid truck, 31.0; articulated truck, 49.0. Since it unlikely that an ordinary truck or tractor can be loaded so as to have 11.5 t on the steering axle, the load on this axle is assumed to be 7.0 t in all cases. 4 Registered weights are specified by the user as a percent of the legal maximums. Most trucks seen in the case studies were registered at weights lower than the legal maximums or the assumed manufacturer’s rated capacities. 5 Load = GVW – tare 6 Maintenance requirements are based roughly on Ningxia; the assumption is that these are 10% higher on other roads.

Table A3.5: Truck Productivity

Fuel consumption Km/L = 5.5 – 0.04 Based on Canadian data, adjusted to produce results close to those of the (GVW) cases studies. A chosen formula is sensitive to assumptions about the size of load Fuel consumption -10% Fuel consumption on a toll road (at an assumed speed of 100 km/hr) would on toll roads be higher than at 40 km/hr but this would be offset by road and traffic conditions on other roads. Annual operating % of total hours in a User specifies % driving time and % load/unload time. Residual (“wait”) time hours year has no costs associated with it. Driving speed Km/hr on toll roads and User specified. Default values are 100 and 40 km/hr other roads New tyre life (kms) 90,000 PanXi - 40,000; Ningxia - 45,000-80,000 depending on truck size. The life chosen reflects observations in the case studies that most operators keep their tyres until they are bald. Retreads are ignored. Oil consumption <3-axle trucks: 2.8 Ningxia - 2.8-4.0 l/1,000 km for trucks with the numbers increasing with truck (l/1000 km) 3-axle trucks: 3.0 size 4 axle trucks: 3.5 5-axle trucks: 4.0 6-7 axle trucks: 6.0

152 Appendix 3

Table A3.6: Summary of User-Specified Variables

Driving hours Key variables determining annual utilization. Expressed as a % of the total hours in a year. Default Load/unload hours values are 15% and 10%, ie, 1,314 and 876 hrs respectively for a total of 2,190 working hours/year. While not based on empirical evidence, these produce values (trucking costs) in the model similar to those observed in the case studies. Driving Speed Default values 100 km/hr on toll roads and 40 km/hr on other roads. User specified. There is no direct function in the model relating speed to fuel consumption; the model assumes fuel consumption as a function of vehicle weight and reduces this by 10% for toll roads. Driving on toll roads Users specify split of total annual hours spent driving between toll and non-toll roads. The model then uses average speeds to calculate total annual kms. Percentages are specified separately for rigid and articulated trucks. Changes in driving on toll roads affects maintenance costs, fuel costs and (obviously) toll costs. No default values, but the base case assumes trucks spend 25% of driving hours on toll roads. Loaded kms User specifies percent of total driving when the truck is loaded. No default, but the base case assumes 70%; case study average was 59%. Load size User specifies load size (tonnes) as a multiple of the legal maximum loads. No default, but the base case assumes 1.5, resulting in loads significantly larger than those used in Ningxia or PanXi. Loads above twice the legal maximums increase maintenance costs by 10%. Registered weight User specified. Default is 100% of legal maximum weights, but the base case assumes 50% as most trucks observed were registered well below the legal maximums. Registered weight has significant impact on the road maintenance fee paid. Truck life User specified. The result determines depreciation (1/life with an assumed residual value of zero). Default is 10 years. Crew size User can specify 1 or 2 for trucks with 3 or more axles. For 2-axle trucks, the assumption is that there is only one driver. Fuel price User specified. Default is 3.93, the case study average. Weights User can specify new regulations based on 6 t steer axles, 9 t single, 18 t tandems, 24 t tridems and 30 t quads with total GVW = sum-of-axles. Overheads User specified. Default is 15% of other costs.

Table A3.7: Calculation of Trucking Costs

Annual fixed costs Sum of: depreciation (purchase price/life), other taxes, road maintenance fee, amortized purchase tax (tax/life). Driver/crew costs Sum of driving hours & load/unload hours * crew size * wage rate/hr Fuel costs Fuel consumption * distance * fuel price. Maintenance costs Sum of maintenance parts as % of vehicle price and maintenance labour (hrs) * wage rate Tyre costs (Total tires * tire cost)/tire life = Yuan/km Oil costs Oil consumption * price of oil Insurance costs Insurance costs/yr Toll costs Toll rate (function of vehicle operating weight) * kms on toll roads Overheads Overhead rate * sum of other costs

Appendix 3 153

Resulting Base Case Costs Table A3.8: Base Case Trucking Costs

Truck Type Small Truck, 20' Artic, 40' Artic, 40' Artic, 40' Artic, 40' Artic, 40' truck flat deck trailer trailer trailer trailer trailer Configuration 11 12 11S1 11S2 12S2 12S3 12S4 Yuan/km 3.80 4.54 4.84 6.63 7.81 8.51 9.67 Yuan/tonne-km 0.249 0.247 0.256 0.248 0.240 0.246 0.297

These base costs can be compared with the values from the surveys (Table A3.9), though the survey figures had no allowance for overheads; also, the survey figures assume a vehicle life of 5 years whereas the model assumes 10 years. The results are also compared with the Ningxia RRP results. Table A3.9: : Model Results Compared to Case Study and Ningxia

Truck Type Small Truck, 20' Artic, 40' Artic, 40' Artic, 40' Artic, 40' Artic, 40' truck flat deck trailer trailer trailer trailer trailer Configuration 11 12 11S1 11S2 12S2 12S3 12S4 Costs/km: Case study 2.92 2.71 4.54 6.63 --- 7.83 Model 3.80 4.54 4.84 6.63 7.81 8.51 9.67 Model – minus overheads 3.30 3.94 4.21 5.77 6.79 7.40 8.41 Ningxia 2003 2.69 5.40 ------6.34 ------Costs/tonne-km: Case study 1.623 0.156 0.207 0.248 --- 0.232 Model 0.249 0.247 0.256 0.248 0.240 0.246 0.297 Model – minus overheads 0.217 0.215 0.223 0.215 0.209 0.214 0.258 Ningxia 2003 0.599 0.360 ------0.198 ------All case study figures use an assumed rate of depreciation. Model results without overheads are shown to make the figures more comparable with case-study results.

The 2-axle truck in the above table is small and appeared to be more of an urban delivery vehicle than an inter-city truck. For Ningxia, the figures shown are for the “medium” 2-axle truck with a 4.5 t load. Ningxia shows no 3-axle articulated truck. The figures in the table are for the 3-axle rigid truck with 15.0 t load. There are several reasons why the model results in slightly higher costs than surveyed. Its maintenance cost estimates include tires and oil; often these were not itemized in the surveys. And in one or two cases operators gave figures for new trucks for which maintenance costs are low. Also, toll costs in the model are higher than from the surveys; this might be because the carriers did not use toll roads as much as the model assumes or because the toll rates chosen for the model are higher than those on the roads used by the carriers in the surveyed provinces. The model produces freight cost estimates that are more or less uniform across all vehicle types (Figure A3.1). This would appear to be counter-intuitive. But there are several reasons. The 49- tonne GVW cap makes additional axles redundant beyond 6 axles: the additional axles would add more tare weight (roughly 1,000 kg per axle), reducing the maximum payloads possible within the GVW limit. (Table A3.10 shows the actual payloads encountered in the surveys.) So

154 Appendix 3 the 7-axle configuration shown in the Figure A3.1 only makes sense when considering a policy that changes the legal truck weight and dimension regulations. Table A3.10: Base-Case Average Payloads

Truck Type Small Truck, 20' Artic, 40' Artic, 40' Artic, 40' Artic, 40' Artic, 40' truck flat deck trailer trailer trailer trailer trailer Configuration 11 12 11S1 11S2 12S2 12S3 12S4 Payload (t) 21.8 26.3 27.0 38.3 46.5 49.5 46.5

Figure A3.1: Freight Costs by Truck Type

Freight Costs by Truck Type

0.350

0.300

0.250

0.200

0.150 yuan/tn-km 0.100

0.050

0.000 11 12 11S1 11S2 12S2 12S3 12S4 truck type

As Table A3.2 earlier shows, the information assembled in the surveys also has freight costs rising with larger trucks. The lowest is for the 3-axle trucks which tend to be more heavily overloaded and are used more intensively than larger trucks. A further factor also helps account for the relatively flat profile of freight costs in Figure A3.1: the significance of annual road maintenance fees and highway tolls. This is shown in Table A3.11, where road maintenance fees and tolls in the base case are expressed as a cost per tonne-km and as a percentage of total operating costs (excluding overheads). These fees and tolls (primarily the latter) tend to be higher per freight tonne-km for the larger articulated trucks than for smaller, rigid trucks. Table A3.11: Road Maintenance Fees and Highway Tolls

Truck Type Small Truck, 20' Artic, 40' Artic, 40' Artic, 40' Artic, 40' Artic, 40' truck flat deck trailer trailer trailer trailer trailer Yuan/tonne-km 0.09 0.08 0.09 0.11 0.09 0.09 0.09 % of operating costs 43.7% 39.3% 38.8% 50.5% 44.5% 41.7% 36.7%

Appendix 4 155

BUS SERVICE LICENSING PROCEDURES

Application procedure for the establishment of a new passenger transport business enterprise: The applicant must submit the following material: • Completed application form for road passenger transport operation (obtainable from transport authorities at county or above level) • Company’s Articles of Association • Copies of the investors’ and representative director’s ID cards and letter of authority for the person submitting the application • Management rules for safety and security • Statement of commitment of compliance, including the proposed number of vehicles, type, and technical standard, and workshop grade • Copies of drivers’ licenses, professional qualification certificates and certificates indicating that each driver has no record of fatal accident in last 3 years. Application for additional vehicles for an established passenger transportation business enterprise: The applicant must submit the following material: (a) For a passenger transport route between two provinces: • A copy of the road transport operation permit • A copy of the certificate showing the business enterprise grade • Statement of commitment of compliance, including the proposed number of vehicles, type, and technical grade, condition, number of seats etc. • Copies of drivers’ certificates of employment and copies of certificates of proof of three years’ accident-free driving • Completed province route application form for one of six categories of route • A transport company applying for a route permit must provide a feasibility report detailing passenger demand, profit analysis and operational plan including schedules, proposed bus stops, and expected effect on other operators • Survey of passenger flow on a form which may be obtained from the City/County TAB • Copies of agreements with the operators of terminals to be used at each end of the route, and any intermediate terminals to be used (one of two categories of terminal) • Transportation service quality commitment • Copy of the applicant’s ID card and certificate or letter of authorization from the organization employing him • Map showing the proposed route (b) For a passenger transport route within one province: • A copy of the road transport operation permit • A copy of the certificate showing the business enterprise grade

156 Appendix 4

• Statement of commitment of compliance, including the proposed number of vehicles, type, technical grade, and condition • Copies of drivers’ certificates of employment and copies of certificates of proof of three years’ accident-free driving • Details of a route survey (one of four categories) on a form obtained from the County TAB, and copies of agreements with the operators of terminals to be used (one of two categories of terminal) • Copy of the applicant’s ID card and certificate or letter of authorization from the organization employing him • Map showing the proposed route. According to the Ordinance, the operation term for a passenger transport route is from 4 to 8 years: the term varies from province to province. Operators wishing to continue the operation should re-apply to the road transport authorities on expiration. In Heilongjiang, the route permit has no expiry date, although this is now under review by the local authorities. Vehicle registration and application procedures: The vehicle registration should be in accordance with Vehicle Registration Regulations (PSD NO. 56) released by PSD in 2001. Materials required for registration: • Copy of vehicle purchase invoice • For domestic vehicles: Qualification Certificate; for imported vehicles: Freight Import Certificate, Certificate of Confiscated Smuggled Vehicles, Notice of Plate Demand for Vehicles under Supervision and List of Commodity Inspection • ID certificate of vehicle owner. For vehicles belonging to an organization, the Code Certificate of Organization or Institution, both original and copy. Chinese citizens should present the original ID card and a copy for their private vehicles; the person entrusted to complete the formalities should present the Household Registration of the vehicle owner • Certificate of vehicle purchase tax paid or copy of tax exemption certificate • Vehicle Registration Application Form, available from the vehicle management agencies of the PSB in each district • If the owner entrusts another person to complete the registration, the ID card of the entrusted person. Procedure: • Pay vehicle purchase tax • Copy engine number and vehicle frame number to the Flow Chart List for Vehicle Registration. Go to the review counter and present all the mentioned materials, get a List for Waiting for Registration, and arrange the vehicle inspection • When the vehicle has passed inspection, follow procedures indicated in List for Waiting for Registration • Take the copy of Registration Form of Vehicles to the PSB vehicle management section.

Appendix 4 157

Application procedure for driving license • Fill in Application Form; undergo physical examination at medical station of Municipal Health Bureau or hospital at county level or above. Having passed the medical examination, the applicant will receive a Certificate of Health of Vehicle Driver • Take Application Form and valid ID certificate to Municipal School for Training in Transport Safety for relevant training and examination in safety and traffic regulations. Those who pass the examination will receive a Qualification Certificate • Take Application Form, ID certificate and Qualification Certificate and apply at the district PSB vehicle management section • The recipient of a Learner Driver’s License for a large bus, large truck, car or other vehicle should make an appointment for an examination in field driving and road driving 60, 40, 30 and 20 days respectively after receipt of the license. Those who pass the driving examination will receive a Driving License issued by PSD vehicle management agency • First-time applicants for a learner’s license for driving a large bus are restricted to driving on fixed routes in urban area demanded by public transport agencies, and should get the approval of PSB transport management authorities at province level.

158 Appendix 5

BUS SERVICE STANDARDS

Table A5.1: Bus Standards

Type Large Medium size Small High level of comfort, with High level of comfort, with High level of comfort, with adjustable reclining seats, air- adjustable reclining seats, air- adjustable reclining seats, air- conditioning, etc. conditioning, etc. conditioning, etc. Luxury 4 or more seats per row (no seats Up to 4 seats per row (including Up to 3 seats per row; total in aisle); total seating capacity 31 folding seats in aisle); total seating capacity not more than or more seating capacity 16-30 15 More comfortable than ordinary More comfortable than ordinary More comfortable than ordinary bus; soft seats; heater (in cold bus; soft seats; heater (in cold bus; soft seats; heater (in cold climate) climate) climate) Medium 4 or more seats per row (no seats Up to 4 seats per row (including Up to 3 seats per row; total in aisle); total seating capacity 31 folding seats in aisle); total seating capacity not more than or more seating capacity 16-30 15 No special comfort features; no No special comfort features; no No special comfort features; no separate luggage compartment separate luggage compartment separate luggage compartment inside bus inside bus inside bus Standard 4 or more seats per row (no seats Up to 4 seats per row (including Up to 3 seats per row; total in aisle); total seating capacity 31 folding seats in aisle); total seating capacity not more than or more seating capacity 16-30 15

Table A5.2: Definition of Bus Route Classes

Class Type A Type B Type C (inter-province) (inter-city) (inter-county）

1 Between cities in different Between cities in one province provinces 2 Between a city and a county in Between a city centre and a county Between counties in one city different provinces in a different city 3 Between counties in different Between counties in different cities Between neighbouring counties in provinces one city 4 Between neighbouring counties in Between neighbouring counties in different provinces one province

Table A5.3: Classes of Passenger Transport Enterprises and Minimum Qualifications

Item Class I Class II Class III Class IV Enterprise Over 5 years in Over 5 years in Over 3 years Over 2 years Experience expressway passenger expressway passenger experience in Class 3 experience in Class 4 transport or class 1 transport or class 1 bus-line operation. bus-line operation. route operation. route operation. Passenger Traffic Over 12 million Over 2.3 million Over 0.9 million Over 0.4 million passengers carried and passengers carried and passengers carried and passengers carried and over 1200 million over 230 million over 80 million over 25 million passenger-kms in 5 passenger-kms in 5 passenger-kms in 3 passenger-kms in 2 years. years. years. years. Manager’s Over 5 years Over 5 years Over 4 years Over 3 years Qualifications experience in experience in experience in experience in passenger transport passenger transport passenger transport passenger transport operation or over 10 operation or over 10 operation or over 8 operation or over 6 years in business years in business years in business years in business management. management. management. management.

Appendix 5 159

Item Class I Class II Class III Class IV Management Over 40% must have Over 40% must have Over 30% must have Over 30% must have personnel professional professional professional professional qualifications. qualifications. qualifications. qualifications. Driver Over 40% must have Over 40% must have Over 30% must have Over 30% must have Qualifications 0.3 million km safety 0.3 million km safety 0.3 million km safety 0.3 million km safety record. record. record. record. Net Assets Must exceed 500 Must exceed 50 million Must exceed 15 million Must exceed 5 million million Yuan, of which Yuan, of which over 30 Yuan, of which over 10 Yuan, of which over 3 over 300 millions Yuan million Yuan must be million Yuan must be million Yuan must be must be passenger passenger transport net passenger transport net passenger transport net transport net assets assets (including assets (including assets (including (including vehicles, vehicles, terminals and vehicles, terminals and vehicles, terminals and terminals and depots). depots). depots). depots). Fleet Requirement Operational buses must Operational buses must Operational buses must Operational buses must (owned buses) exceed 800, with a total exceed 150, with a total exceed 50, with a total exceed 20, with a total of over 24000 of over 4500 passenger of over 1500 passenger of over 600 passenger passenger seats; of seats; of these, high seats; of these, high seats; of these, medium these, high standard standard buses must standard buses must standard buses must buses must exceed exceed 50, with over exceed 15, with over exceed 5, with over 150 150, with over 4500 1500 passenger seats; 450 passenger seats; passenger seats. passenger seats; or or high standard buses or high standard buses high standard buses must exceed 60, with must exceed 25, with must exceed 300, with over 1800 passenger over 750 passenger over 9000 passenger seats. seats. seats. Fleet Age Index Over 0.70 Over 0.70 Over 0.65 Over 0.60 Maintenance Ownership of at least Ownership of at least Ownership of, or long Long term contract with Facilities one class I one class I or II term contract with, at at least one class I or II maintenance facility. maintenance facility. least one class I or II maintenance facility. maintenance facility. Bus Stations Ownership of at least Ownership of at least Ownership of, or long one class I bus station one class I bus station term contract with, at or two class II stations. or two class II stations. least one class I or two class II stations. Management Adequate management capability in operation, finance, statistics, safety, personnel etc, and appropriate systems. Minimum Annual 500 million Yuan 50 million Yuan 15 million Yuan 5 million Yuan Revenue Minimum Annual 300 million Yuan 30 million Yuan 10 million Yuan 3 million Yuan Passenger Revenue Asset Liability Not over 60% Not over 60% Not over 60% Not over 60% Ratio

Enterprises that cannot meet the requirement of Class IV are categorized as Class V.

160 Appendix 5

Table A5.4: Route Eligibility of each Enterprise Class

Enterprise Route Classes which Maximum Route Class may be operated Length (kms) I All No limit

II All No limit III All except type A (class 1), type B (class 1) 800 IV All except type A (classes 1 and 2), type B 400 (classes 1 and 2) and type C (class 1) V Type A (class 4), type B (class 4), type C 150 (class 3) and type D

Appendix 6 161

OUTLINE TASKS FOR ROAD COST RECOVERY STUDY

Background The present system of road user taxation and cost recovery in China does not result in users facing the road-related costs attributable to them. A highway maintenance fee structured mainly on the basis of registered vehicle weight is not levied uniformly by provincial authorities and fails to differentiate vehicles by their potential to damage roads when fully laden. A fuel surcharge intended to be introduced in 2000 has not been implemented. No attempt is made to make users face the cost of externalities such as accident risk, congestion, noise and pollution. And a patchwork of highway and bridge tolls is used as a means of financing the development, operation and maintenance of individual expressways without being integrated into a policy designed to achieve optimum road transport efficiency. As a result, the degree of cost recovery varies between individual types of vehicle, demand responds to inappropriate pricing signals and no incentives are given to the choice and use of more economical commercial vehicles that do less road damage per tonne of payload. It is recommended that MOC should carry out a review of the existing structure and levels of road user taxes, charges and tolls to determine a more optimal balance between alternative sources of revenue and alternative charging mechanisms and to create a more direct link between the pricing, provision and maintenance of road infrastructure. Objective The objective of the review would be to develop practical steps to achieve a revised system of taxes, charges and tolls that recovers from individual road users at least the marginal costs of their use of the roads and makes a fair and reasonable contribution to those costs that do not vary with road use. Tasks The main tasks would be to: • review the existing structure and levels of taxes, charges and tolls on road users, and assemble information on the revenues collected by the various levels of government from each source for selected classes of vehicle • analyze the costs incurred in developing, operating and maintaining the public road system, including tolled bridges and expressways, identify those components that vary with the volume and weight of road use, and attribute these costs among users in relation to the degree to which they are responsible for them • determine the level of marginal and average cost recovery for each selected class of vehicle • identify and estimate the additional (non-infrastructure) costs of externalities imposed on society by the use of roads and suggest alternative mechanisms for recovering these • identify alternative sources and mechanisms for improving the level of cost recovery for individual vehicle classes and strengthening the link between what users pay and what they receive in the way of road infrastructure services; assess the practical implications of each mechanism as an instrument of road cost-recovery • analyze these alternative options and mechanisms for their suitability as an equitable system for achieving full marginal cost recovery and making a contribution to the fixed costs of providing and operating roads, identifying and projecting into the future the attributable costs and revenues of each vehicle class

162 Appendix 6

• assess the consequences of each option for the efficiency of road transport, notably in improving the funding of road maintenance, reducing unit transport costs and achieving a restructuring of the vehicle fleet in favor of more economical types of vehicle that do less damage to roads per unit of payload • recommend a preferred system and structure of taxes, charges and tolls, demonstrating the benefits of the chosen option/s • prepare a detailed, staged implementation plan, identifying time-bound actions by particular agencies, that takes account of the need for consultation among stakeholders and anticipates likely resistance to increased charges. The study should be supervised by a committee comprising representatives of the Ministry of Communications (Chair), the National Development and Reform Commission, the Ministry of Finance, the Ministry of Industry and Commerce and associations representing provincial governments and state-owned and private freight transport operators.

Appendix 7 163

OUTLINE TASKS FOR VWD AND SAFETY STANDARDS STUDY

Background The present system for securing vehicle and driver safety on China’s roads is not effective, nor is the system of controls over vehicle overloading. In spite of a modernizing fleet and substantially increased spending on higher-quality roads, China’s accident rate is still one of the highest in the world and overloading of trucks, resulting in accelerated road damage, is commonplace. The causes are many but include ineffective enforcement of regulations governing vehicle and driver safety standards, vehicle weight and dimensions (VWD) limits and truck loading. MOC and provincial/county highway authorities have no powers to enforce on- the-road safety and loading standards; this is done by security authorities which often lack the resources and incentives to carry out the task effectively. Moreover, existing vehicle safety regulations and enforcement procedures are not sufficiently well detailed to allow enforcement officers to verify compliance in an objective way; operators and drivers are able to circumvent them by informal payments. The same is true of VWD and loading standards, which also tend to discourage the use of larger, more efficient types of truck and to encourage trucks that are more easily overloaded and capable of inflicting greater road and bridge damage per tonne of payload.. There is a need for MOC to update its on-the-road vehicle safety, VWD and loading standards so as to encourage safer and more efficient road transport. In conjunction with efforts to improve compliance through a performance-rating system and strengthened enforcement procedures (see Appendix 8), a critical first step will be to update the minimum on-the-road standards that are expected to be checked by enforcement officers at roadside checkpoints. Objective The objective of the VWD and Safety Standards Study would be to establish an updated set of on-the-road vehicle safety, VWD and loading standards that are capable of being enforced effectively and that would help maximize the economic benefits achievable by modern truck technologies in the context of an economically optimal strategy for road and bridge development, upgrading and maintenance. Tasks The main tasks would be to: • review studies of vehicle safety, VWD and loading limits carried out in China and other countries and identify the relationships between vehicle and loading characteristics and the unit costs of road transport; the costs of developing, strengthening and repairing road pavements and bridges; the incidence, severity and costs of accidents; the marginal costs of road traffic congestion; and the costs of widening or realigning roads to accommodate larger vehicles • review trends in vehicle technology in China and overseas and develop a set of scenarios for fleet development ranging from existing vehicle types to the largest types of vehicle in use in North America, Europe and Australia • analyze the economic trade-offs between the safety-related performance of different truck configurations, their contribution to the costs of road traffic congestion, the costs of providing and maintaining roads and bridges to accommodate different vehicle sizes, weight limits and loading restrictions, and the economic benefits to road users of larger, more economical vehicles

164 Appendix 7

• on the basis of this analysis, develop a detailed set of vehicle, loading and road/bridge standards designed to deliver the scenario that would minimize the combination of road user costs and road agency costs • in conjunction with a proposed Vehicle Safety Compliance Project (see Appendix 8) check that the identified standards can be verified objectively through on-the-road inspection, whether at random locations or in fixed inspection facilities, and develop a set of procedures for carrying out and reporting the results of such inspections • draft the necessary changes to the national regulations governing on-the-road vehicle safety standards, dimensions, weights and loading limits and their enforcement. The study would be supervised by a committee comprising representatives of the MOC (Chair), the Ministry of Public Security, the National Development and Reform Commission and associations representing provincial governments, the vehicle manufacturing industry and state- owned and private freight transport operators.

Appendix 8 165

OUTLINE TASKS FOR VEHICLE SAFETY COMPLIANCE PROJECT

Background MOC intends to strengthen the incentives for road users to comply with improved on-the-road vehicle safety, VWD and loading standards, as well as improving the effectiveness of enforcement. With the cooperation of the Ministry of Public Security, it plans to establish: • updated and improved minimum on-the-road vehicle safety, VWD and loading standards capable of being checked at roadside checkpoints (see Appendix 7) • the facilities, equipment and procedures needed to verify compliance with these standards • trained, committed and honest inspection staff, with incentives to achieve effective enforcement • a tamper-proof procedure for marking and identifying vehicles that have recently passed inspection and been found to comply with minimum standards • a system of monitoring by independent third parties, including where appropriate weigh- in-motion equipment or other remote sensing equipment, to ensure that the enforcement system is working effectively • a structure of fines designed to deter non-compliance • a system for identifying and recording the holders of the vehicle and operator permits, and procedures for rating their performance in complying with the safety, VWD and loading regulations, linked to the system for renewing vehicle and operator permits; permit holders failing to maintain a threshold rating will have their permits revoked • close cooperation between the provincial highway authority and security authority in preparing, establishing and operating such a system. A key feature will be the proposed performance rating system, based on each operator’s compliance with safety and vehicle standards. Renewal of an operator’s permit would be conditional on maintaining a threshold rating score. Non-compliance, determined by roadside inspection, would result in graduated fines and a lowering of the operator’s rating, and, if persistent, suspension or confiscation of the operator permit. Objective The essential objective of the study is to raise standards of road safety and protect road infrastructure by improving operator compliance with updated on-the-road vehicle safety, VWD and loading standards, and to strengthen on-the-road enforcement of those standards. Tasks The main tasks will be to: • review options and develop detailed proposals for strengthening the effectiveness of vehicle safety and loading inspections and enforcement procedures; this would be linked to proposals for revised vehicle safety, VWD and loading standards (Appendix 7) and would involve the specification and design of facilities, equipment and procedures for carrying out inspections at random or fixed locations, to be implemented initially on a pilot basis (see below) with the cooperation of the relevant enforcement agencies, and for independent monitoring of the effectiveness of enforcement efforts

166 Appendix 8

• consider options and prepare proposals for outsourcing the vehicle inspection task to independent contracting organizations under competitive tender; this would involve drafting appropriate procedures for pre-qualifying contractors, specifying the services to be provided, designing an appropriate performance-based system for payment, designing an automated, fool-proof system for inspection/testing and identifying the permit holder, specifying the inspection reports that must be provided for each inspection, applying on-the-spot fines or other penalties when minimum standards have not been met, linking the system of reporting to the planned performance rating system and marking vehicles that have completed the inspection; it would also involve specifying arrangements for independent monitoring and verification of inspection performance • based in part on a review of systems and procedures used in other countries, design a performance rating system to be used as the means of monitoring the compliance of individual operator permit holders with safety, VWD and loading standards; this would include procedures for applying fines or other penalties for infringements, recording details of non-compliance in a database system accessible to all relevant enforcement and licensing agencies, incorporating other relevant data as necessary (e.g. the permit holder’s involvement in traffic accidents and other offences), storing and retrieving the data, incorporating the data in a compliance performance rating system, and linking the rating system to procedures for renewing operator permits • develop proposals for revising the procedures governing the issue and renewal of freight transport operator permits, with the issue and renewal of a permit made conditional on acceptable performance in compliance with safety, VWD and loading standards as measured by inspections and the performance rating system • draft any changes to laws, regulations and model contract documents needed to implement the above systems and procedures, and prepare plans for any necessary institutional changes and staff training • prepare a detailed plan to implement and test the proposed vehicle standards and inspection facilities and procedures in a pilot Demonstration Project, including a trial comparison of arrangements based on inspection being done by government enforcement staff and by outsourced contract. Demonstration Project The procedures developed under the project should be trialed, evaluated and refined in a Demonstration Project carried out in a selected province where both the highway administration (PCD) and enforcement (PSD) authorities have agreed to cooperate in strengthening vehicle safety and loading enforcement procedures. The Demonstration Project would involve: • specifying, developing and installing the integrated database system and associated data capture, storage, access and communications systems to maintain records on the results of on-the-road vehicle inspections and the performance of individual transport operators in complying with safety, VWD and loading regulations • specifying, procuring and installing the necessary equipment at selected inspection sites (including automatic axle weighing scales and other measuring and testing equipment, printers and communications facilities) and in the offices of the PCD and PSD • developing, testing and refining procedures for carrying out inspections by enforcement staff, initially with PCD staff in attendance, and preparing standard operating procedures and manuals

Appendix 8 167

• trialing and evaluating the use of independent contractors to operate inspection stations, and drafting appropriate performance-based contracts and operating and monitoring procedures • implementing and testing procedures for independent monitoring of the effectiveness of the enforcement task • trialing the operation of the performance rating and license-renewal systems, initially in parallel with existing procedures for imposing sanctions on offenders • evaluating the benefits of the trial and making any adjustments that may be necessary. On successful completion of the Demonstration Project, the procedures would be incorporated in a Joint Decree of the Ministers of Communications and Public Security authorizing implementation in other provinces. Note that, because traffic on the roads of any province might include vehicles from other provinces, the database systems must be capable eventually of being interrogated by the licensing and enforcement agencies in every province and autonomous region. At the national level, the project would be supervised by a committee comprising representatives of the Ministry of Communications (Chair), the Ministry of Public Security, the National Development and Reform Commission and associations representing provincial governments, and transport operators. At the provincial level, a Pilot Project Implementation Committee comprising representatives of the PCD, PSD and local transport operators should be established to supervise the Demonstration Project.

168 Appendix 9

ACTION PLAN WORKSHOP

A workshop was held in Beijing on September 8th and 9th, 2005, to discuss a draft of the consultant’s report and its Action Plan proposals. Attached are (i) the material presented by the consultants and (ii) the minutes of the workshop discussions. This final version of the report incorporates amendments made to the draft in response to these discussions and subsequent comments received from the ADB, MOC and other stakeholders.

Policy Reform in Road Transport ADB TA 4351-PRC

Stakeholder Workshop – September 2005

Draft Report Summary and Workshop Resource Material

Asian Development Bank Ministry of Communications, PRC

CPCS Transcom CPCS Transcom CPCS Transcom CPCS Transcom

China Academy of Transportation Sciences

11

INTRODUCTION

1 Context, Objectives and Output

• Background – Rapid growth in China’s economy, trade and transport demand – MOC Strategy for Transport Development, 2001-2010 – NRDC Logistics Development Strategy 2001-2010 – WTO commitments to opening up markets • Objectives of the project – Help the Government improve the performance of road freight and passenger transport through further policy reforms • Output – An action plan for policy and regulatory reform for the sector

3

22

CHINA’S ROAD TRANSPORT

2 The National Transport System

• The road transport system – 1.9 million km public road network (1.46 km per 1,000 people) – 34,000 km expressway network, newly-built, mostly tolled; plans for 50,000-55,000 kms by 2010 – Network of bus/truck terminals and logistics centres being established • Other transport modes – 73,000 km railway network: state-owned, mostly carrying passengers and strategic/bulk goods – Extensive inland waterway transport system, also mostly carrying low- value, bulk goods; growing private sector but competition with road transport is limited – Ports and shipping: ports state-owned, improving in efficiency; rapid growth in throughput; major expansion of capacity underway

5

Road Transport’s Share of Transport Demand

Passengers Aviation Passenger-Km 0.6% Aviation Waterway Railway Waterway 9.1% 1. 1% 6.1% 0.5% Railway 34.7%

Road Road 55.7% 92.2%

Tonnes Aviation Pipeline Tonne-Km 1. 4 % Pipeline 0.0% Aviation Waterway Railway 1. 4 % 14 . 2 % 0.1% 10 . 1% Railway 32.0%

Waterway 53.3% Road Road 74.3% 13 . 2 %

6

3 Growth in Demand 300 250 Tonne-kms

200 • Average annual growth Railway Road 150 Waterway rates, 1993-2003: Pipeline

– Road tonne-kms: 5.7% Index (1990=100) 100

– Road passenger-kms: 50 7.6% 0 – Civil fleet: 11.3% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 – Private fleet: 22.8% 350 Passenger-kms 30 300

25 250

20 200 Railway Other Road Waterway 15 Freight 150

Passenger (1990=100) Index 10 100 Vehicles (million) Vehicles

50 5

0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 1998 2003

7

Road Infrastructure

Total: 1.87 million kms

Access National 88,424 129,815 Provincial 5% 7% 227,871 12% Expressway Class I 34,288 33,522 Class II Unclassified 2% 2% 231,715 354,835 12% Township 19% 945,180 County 50% 479,372 Class III 26% 335,347 18% Class IV 880,954 47%

8

4 The Role of Road Transport

• Road transport’s role in non-bulk markets is increasing due to: – Inherent flexibility in adjusting to customers’ needs – Deregulation and competition – more service providers, better range of services, lower costs – High-quality highway and expressway network being developed – Shortcomings of other modes • Railway: limited capacity; lack of commercial management; low efficiency • Inland waterway transport: some efficient services, but suited to bulk traffic • Coastal shipping: delays and additional costs at ports • Air transport: Small market share limited to urgent, high-value shipments • Changing needs of customers – Growing competition between transport customers – New markets: higher-value imports/exports, consumer goods – Premium on speed, reliability and security; just-in-time delivery

9

The Road Transport Industry

• Road freight transport – Largely deregulated and competitive; intense price competition among small-scale operators – SOEs in transition to joint-stock enterprises and privatization – Relatively low efficiency and service standards, but improving; some world-class services • Road passenger transport – Wide variety of mostly high quality services: inter-provincial, inter-city, inter-county, within county; sleeper, luxury, medium, standard – Combination of state-owned and private services – Operator, route, vehicle licensing and fares closely regulated – Routes focused on stations/terminals • Vehicle assembly and manufacturing – World-class quality of manufacturing/assembly – Wide variety of technologies available; relatively low costs

10

5 Road Safety and the Environment

• China’s high accident rate – 4.38 fatalities per 1,000 vehicles – one of the highest in the world • Causes of accidents – Vehicle and loading standards – ineffective enforcement – Driver standards and education/training – Ignorance of safety risk by pedestrians and other road users • Concerns about air quality and noise in congested corridors and urban areas – Area-wide monitoring but ineffective enforcement of emissions and noise standards for individual vehicles

11

Issues Addressed by the Project

• Market entry and industry structure – Do licensing arrangements encourage an efficient road transport industry? • Quality, capacity and responsiveness to demand – Are competitive services of the right kind available when needed? Are they capable of adjusting to the requirements of customers? • Efficiency, competition and technology – Do regulations encourage efficiency, innovation and effective use of technology? • Safety and environmental performance – Are regulations effective in protecting public safety and the environment? • Road infrastructure, stations and terminals – Do regulations adequately protect roads and bridges from damage? – Do regulations encourage efficient interchange facilities for users?

12

6 Assemble Information on Assemble Information on Assemble Information on Sector Characteristics & Institutional & Regulatory Sector Policies & Plans Project Performance Framework Approach Identify Critical Issues & Prepare Work Plan

Discuss Issues & Work Plan with Stakeholders Discuss Operations with Selected Service- Providers Discuss Policy & Case Studies in Selected Regulatory Issues with Provinces Provincial Agencies Discuss Logistics Arrangements with Selected Customer/s Identify Shortcomings & Policy/Regulatory Options

Review International Evaluate the Impacts of Review Performance Regulatory Experience & Policy/Regulatory Options Benchmarks Achieved in Benchmarks & Prepare Action Plan China

Discuss Results of Evaluation & Action Plan Proposals

Finalize Action Plan for Policy Reform

13

33

POLICY AND REGULATORY FRAMEWORK

7 Institutional Arrangements

• Responsibility for road transport administration – Delegated to municipal/provincial and county road transport authorities – Subject to SC/MOC policy framework and overall development strategy • Responsibility for road infrastructure – Also delegated to regional authorities – Most projects funded by municipal/provincial and county administrations • MOC contributes to funding of major national projects • Responsibility for safety and environmental protection – Delegated to regional road transport administration, public security and environmental protection authorities – Public security responsibilities include vehicle and driver testing and inspection, as well as on-road enforcement of safety and loading regulations

15

Policies and Plans

• Reorganize and restructure SOEs: privatize or move towards joint- stock companies; consolidate to improve market concentration and quality • Capacity restructuring: modernize vehicle technologies; improve efficiency while raising environmental and safety standards; better balance between capacity and demand • Operational restructuring: integrated, inter-modal logistics solutions (freight); coordinated network of affordable, high-quality services (passenger) • System restructuring: better integration through terminals and inter- modal interchanges; better use of IT; market-based reform of traditional forms of transport organization • Supported by NDRC Logistics Development Strategy (2001-2010) and current 5-year plan

16

8 2004 Road Transport Ordinance

• Emphasizes key principle of fair competition • Delegates road transport administration authority to county level or higher • Conditions for freight/passenger operators’ permits, vehicle permits, bus route permits • Certain safety requirements: drivers’ hours; load and VWD limits; vehicle maintenance standards; plans for accidents, emergencies etc; liability insurance • Conditions for management and operation of freight/passenger terminals • Conditions for cross-border transport • Arrangements for supervision and enforcement • Foreign investment and recovering the costs of permits

17

2003 Road Traffic Safety Law

• Rules for operating vehicles on highways • Traffic signs, road markings and signals • Traffic speed limits • Responsibilities of pedestrians • Procedures in the event of traffic accidents • Compulsory wearing of seat belts • Security of truck loads • Enforcement arrangements and penalties for violation

18

9 Implementation & Enforcement of Regulations

• Licensing regulations – Authority delegated to regional transport authorities • Safety and environmental regulations – Role of transport authorities: vehicle, loading and maintenance stds – Role of public security authorities: driver and vehicle inspections; on- road inspection/enforcement – Role of terminals: vehicle safety inspections – Role of environmental authorities: monitoring noise and emissions • Effectiveness of implementation – Bus licensing rules: enforced through control at terminals – Vehicle and driver safety and loading rules: not effectively enforced; overloading commonplace; illegal payments – Environmental protection: no effective enforcement – Few economic incentives to encourage compliance 19

44

THE CHANGING ROLE OF ROAD TRANSPORT

10 China’s Role in International Trade

• Economic and trade growth – 6.6% p.a. rise in export volumes since 1994 – Rapid economic growth linked to international trade growth – Rising incomes and consumer demand • China’s role in international trade – China an increasingly important source of manufactured goods – WTO membership will accelerate this trend • Changing patterns of trade – Vertical integration of industries – Competitive, quality-conscious markets – Increased pressure on reliability of delivery, security

21

WTO and Other Trade Commitments

• WTO commitments – Road transport services, infrastructure and stations/terminals open to foreign investment • Impacts of trade liberalization – Competition in global markets will increase pressures for higher-quality, more reliable transport services – Foreign participation in road transport most likely through alliances with established operators – Increased outsourcing of logistics functions – New management methods and technologies

22

11 The Changing Role of Road Freight Transport

• Pressures from customers – Greater premium on speed, reliability, security – Closer customer relationships; longer-term contracts/partnerships – Increased outsourcing and use of 3PL service providers – Road transport performance judged in terms of overall logistics costs • China’s logistics performance – China’s logistics lags behind Europe/North America but is catching up – Logistics make up 30-40% of total costs, maybe 5-20% in US – Local restrictions delay development of national logistics networks – Little inter-modal transport • Changing requirements for road transport – Greater reliability; performance guarantees; minimal damage/losses – Better vehicle and handling technologies; information systems – Trickle-down effect into other road freight markets

23

The Changing Role of Regulation

• Growing importance of competitive markets – Beneficial changes brought by market pressures: greater flexibility; more customer orientation; higher-quality services; greater productivity – Possible negative impacts: cost pressure on safety and environmental standards • Changing role of transport regulations – Minimum intervention necessary to facilitate the positive market-based changes – Some controls needed to protect safety of road users, the environment (noise and emissions) and keep order in certain markets – Greater focus on maintaining effective competition and strengthening safety and environmental controls

24

12 55

ISSUES IN CHINA’S ROAD TRANSPORT PERFORMANCE

Overview

• No single best measure of performance: price/affordability, availability, quality, timeliness, reliability, safety, security, efficiency and customer-oriented service are all important • Shortcomings in China’s performance: slow pace towards – – meeting adequate safety and environmental standards – leveling the playing-field between SOEs (including military enterprises) and private operators – leveling the playing-field between modes, and establishing efficient inter-modal services – increased productivity of vehicles, equipment and staff – curbing truck overloading – innovation and experimentation in passenger transport markets – reducing over-manning – consistency between national policies and implementation in regions – weighing the full costs and benefits of regulatory intervention

26

13 Licensing and Safety Issues Common to Road Freight and Passenger Transport

• Licensing procedures and criteria – Mostly satisfactory for freight transport, but bus operator licence conditions unnecessarily restrict new entrants – Bus and route licensing impose unnecessary restrictions on operations • Safety and environmental issues – Raising vehicle standards by regulating maintenance is not effective – On-road vehicle and driver safety standards inadequately specified – Lack of effective on-road enforcement of vehicle, driver and loading standards – Impractical to make terminal operators responsible for enforcement of safety and loading standards – No link (as in other countries) between safety/environmental performance and licence renewal

27

Issues in Road Freight Transport

1. Industry Structure 2. Licensing Procedures 3. Operator Performance 4. Cost Structure and Freight Rates 5. Competition, Productivity and Technology 6. Road Freight Transport in the Logistics Chain 7. Protecting Infrastructure 8. Vehicle weight and dimensions (VWD) limits

28

14 Issues in Freight Transport: 1. Industry Structure

• Fleet structure – Many small owner-operators (lower tier); middle tier of medium-sized firms, many ex-SOEs; small upper tier of high-quality logistics service providers • Role of SOEs – Proportion of own-account operators declining; some cosy relationships between state-owned customers and transport enterprises, but increased use of outsourcing; competition from military enterprises is a problem in some areas • Government policy to promote market leaders – Leads to industry consolidation (positive) but discriminates against competitors, potentially suppressing innovation • Role of private operators – Smaller in scale with limited access to capital; intense price competition at lower service quality

29

Issues in Freight Transport: 2. Licensing Procedures

• Operator licensing – Relatively easy market entry and licence renewal • Vehicle licensing/standards – On-road safety standards not specified in sufficient detail, and not enforced effectively • Vehicle weight and dimensions limits – Overly simple; little encouragement for larger, more economical trucks; legally-loaded trucks have relatively heavy axle weights; heavy loads permitted over short distances between axles • Links between licensing and safety – Vehicle standards enforced mainly through maintenance regulations – Vehicle/driver inspection is a source of corruption – No link between operator’s licence and safety performance

30

15 Issues in Freight Transport: 3. Operator Performance

• Vehicle productivity – Productivity improved since deregulation but still low: < 40,000 kms per vehicle p.a. in case studies (cf. >200,000 in Australia, North America) – Smaller vehicles, more intensively loaded • Driver productivity – Most vehicles have single driver; little double-shifting • Overloading and back-hauls – Overloading is very common; significant incentives to do so – High proportion of empty running; problem of securing backloads; major delays for small operators seeking loads at plazas • Financial performance and management – Varies; many unable to provide for fleet renewal/expansion – Relatively low standards of management (with notable exceptions); little use of information and other technologies

31

Issues in Freight Transport: 4. Cost Structure and Freight Rates

• Critical cost items – Taxes and tolls account for up to 20-50% of direct operating costs • Freight rates – Yunnan/Gansu/Heilongjiang: Yuan 0.11-0.48 per tonne-km – High-quality carriers (TLI-AP, 2004): Yuan 0.36-1.17 per tonne-km (higher than North America) • Differences in freight rates between operators – Higher-quality services are more expensive, but customers achieve inventory and other savings in the logistics chain – Trade-off between price and quality becoming recognized by Chinese shippers; likely to lead to shaking-out at lower end of the market

32

16 Issues in Freight Transport: 5. Competition, Productivity and Technology

• Impacts of competition within the industry – Resulting in low rates and thin margins – good for customers – Putting pressure on productivity – eventually this will improve – Encouraging upgrading of vehicle technology and equipment – already being seen in companies with logistics subcontracts – Helps improve safety standards (in conjunction with better roads) – newer vehicles, better load security (covered trucks, containers), better drivers • Impacts on industry structure – Top-tier firms continuously searching for improvements for customers – Shaking out of lower-tier, small-scale operators – would be hastened by better enforcement of safety/environmental regulations – Middle-tier firms under pressure – need to improve service standards and efficiency to survive

33

Issues in Freight Transport: 6. Road Transport in the Logistics Chain

• Pressures for change from logistics providers – Service quality/cost trade-off – higher transport costs but better reliability, fewer losses and lower inventory costs – Constant pressure to improve productivity and efficiency – key problem is filling backloads – Customers require better vehicle and handling technologies – Alliances and changes in management of transport companies • Road freight sectors affected by logistics reforms – Top-tier firms competing on quality for premium customers – Trickle-down effects through subcontractors and competitors – Consequences for regulatory changes: less concern about capacity, quality, efficiency; more concern with safety and environmental issues • Management issues – Lack of commercial and technical management skills

34

17 Issues in Freight Transport: 7. Protecting Infrastructure

• Consequences of overloading: higher axle loads (4th power law), exacerbated by common use of short-heavy trucks • Why are trucks overloaded? – Competitive pressure on costs: up to 40% savings per tonne-km – Tolls: lower toll costs per tonne carried – Ineffective enforcement of loading regulations • Structure of road user charges doesn’t encourage multi-axle trucks that do less road damage per tonne of payload – little incentive to replace uneconomic vehicles • No linkage between overloading compliance and operator licensing

35

Issues in Freight Transport: 8. VWD Limits

30.0

25.0 24.0 24.0

20.0 20.0 20.0 18.0 18.0 17.0 16.5 15.4 15.0 11.5

10.0 9.1 9.1 9.0 Max Axle MassMax Axle (tonnes)

5.0

0.0 Canada USA Australia CHINA

Single axle Tandem axle (truck) Tandem axle (trailer) 3-axle groups

China’s axle-load and GVW limits discourage large, economical, multi-axle trucks and allow high axle loads, resulting in greater pavement damage

36

18 Issues in Road Passenger Transport

1. Range of Bus Services 2. Service Licensing and Competition 3. Terminals/Stations 4. Flexibility in Responding to Demand 5. Services to Isolated Communities 6. Operator Performance

37

Issues in Passenger Transport: 1. Range of Bus Services

• Strict definition of types of service and types of bus limits choice and innovation • Types of Service: inter-province, inter-city, inter-county, within county • Types of Bus: sleeper, luxury, medium, standard

38

19 Issues in Passenger Transport: 2. Service Licensing and Competition

• Limited competition between larger operators • Competition from smaller operators is much fiercer • Little evidence of quality competition, particularly on shorter routes • Unnecessarily restrictive licensing conditions on market entry and route capacity • Operators have little control of schedules • Control of fares by authorities • Many small operators fail to comply with regulations

39

Issues in Passenger Transport: 3. Terminals/Stations

• Policy: passengers may only board or leave long-distance buses at stations • Five categories of station; several stations in each city • Most are owned by bus operators but open to other operators • Few private-sector stations • Location determined by authorities – strict planning controls • Few stations between towns but most buses stop illegally

40

20 Issues in Passenger Transport: 4. Station Characteristics

• Most large stations have good passenger facilities • Layout of vehicle circulating and parking areas usually poor, sometimes unsafe • Large parking areas required due to poor bus utilization and over- supply • Small operators use stations as their depots • Station operators determine bus schedules • Many stations over-staffed • Station charges controlled by authorities • Station operators responsible for enforcing safety inspection, maintenance and load standards

41

Issues in Passenger Transport: 5. Flexibility in Responding to Demand

• Licensing regulations limit operators’ ability to respond to changes in demand • At times of peak demand, operators may not provide additional buses without authority • The addition of only one bus to a route involves a complex bureaucratic process • Operators should be allowed to deploy any available buses without delay – Including buses licensed to operate on other routes • Operators are best placed to make operating decisions and should be allowed to do so

42

21 Issues in Passenger Transport: 6. Services to Isolated Communities

• Low demand, low revenue often cannot support formal bus services • Government subsidies for infrastructure such as bus stations, but not for bus services • Some operators cross-subsidize rural services • Many rural transport services are provided illegally by informal operators • Many use vehicles such as tractors and trailers • Informal operators meet a demand that would otherwise not be met without subsidy • They should be permitted to operate, provided that basic standards of safety and insurance are met

43

Issues in Passenger Transport: 7. Operator Performance

• Low bus productivity • Quality of maintenance varies, despite regulated maintenance standards and frequencies – large operators are better than small • Financial performance varies – some operators more successful than others • Management systems weak

44

22 Issues in Passenger Transport: 8. Bus Productivity

• Operators achieving only 150-360 kms/bus/day – 500-700 kms/day should be possible for most long-distance routes • 13-65 passengers/bus/day suggests low utilization compounded by low load factors • Inefficient scheduling – not under operators’ control • Low driver:bus ratio (typically 1:1) – Bus hours limited by drivers’ working hours • Increased utilization would reduce fleet requirements by up to 30% • Further reductions possible by efficient scheduling to improve load factors • Less parking space would be needed at stations and depots • Cost savings, mainly in depreciation and maintenance, of up to 10% • Fares could be reduced to reflect cost savings

45

Issues in Passenger Transport: 9. Bus Maintenance

• Procedures specified in government regulations • Facilities at most bus terminals for routine safety inspections and minor repairs • Some newer facilities incorporate sophisticated equipment – But most depot and workshop facilities are relatively basic • Compliance with maintenance regulations by large operators appears to be good • However, some vehicles are not maintained to an acceptable standard – mainly smaller operators

46

23 Issues in Passenger Transport: 10. Financial Performance of Operators

• Incomplete/incomparable cost data from surveys • Some direct costs, including fuel, maintenance and road tolls, paid directly by sub-contract or setoran drivers • Some companies burdened with high cost of pensioners • Some large companies barely break even; others are profitable (profits >10% of revenue) • Some companies are unable to raise finance for new buses, so rely on sub-contract drivers

47

Passenger Transport: Overall Assessment

• Bus services in China are generally very good • Shorter-distance routes and small operators are less satisfactory • But operators lack flexibility to adapt services in line with requirements • Routes, schedules and fare levels are fixed by the PCDs and CBs • Inefficient utilization of vehicles • Modern technology but inefficient management procedures • Constraints imposed by regulations • Lack of awareness of industry best practices • Difficulty in raising finance, particularly for SOEs

48

24 66

ALTERNATIVE APPROACHES TO REGULATORY REFORM

Applicability of International Experience

• Arguments for a unique approach in China – Highly-developed, decentralized administrative system – In transition from “managed” system; SOEs still play an important role – Fastest-growing economy; rapid change could lead to instability – Freight transport: deregulation has led to some market disorder; greater control might be needed; without consolidation, management skills, access to finance might inhibit benefits of investment and competition – Passenger transport: low level of car ownership; demand for bus services growing; bus services potentially more commercially attractive than in most western countries • But China could benefit from lessons of other countries – Using competition to achieve policy goals of quality, efficiency, flexibility, customer-orientation – Greater use of incentives to achieve compliance with regulations

50

25 Worldwide Trends

• Trend is to reduce state intervention, letting markets work effectively • Focus is mainly on safety and environmental standards – Vehicle standards (type approval, on-road standards, compliance monitoring); driver working hours; emissions/noise monitoring • Greater use of economic incentives – Structure/levels of road user charges/taxation; monitoring of safety compliance; links between compliance and licence renewal • Freight transport – Markets allowed to drive quality, efficiency improvements; no controls over rates (but monitoring of competition) • Passenger transport – Services fully deregulated in many countries; franchising common in urban areas; common problems include gross over-capacity but under- supply, and poor safety standards

51

South-East Asian Countries

• Comparable countries: Indonesia, Philippines, Malaysia, Thailand – high demand, incomes can justify economic fares • Freight transport – Licensing controls unnecessarily restrict market response – Main interest in minimizing costs – but growing awareness of total logistics costs – Ineffective enforcement of vehicle/driver safety, overloading and environmental standards; corruption a common problem • Passenger transport – Regulatory systems fail to produce efficient, convenient public transport: services regulated and subject to route licensing; fares usually set by regulatory authorities; buses often restricted to one route; no effective restriction on numbers of vehicles on any route, leading to considerable excess capacity – No means of ensuring services provided on routes with low demand

52

26 Europe, North America and Australia

• Freight transport – Competition regulated mainly through national competition laws/policies – Larger vehicles permitted, but not higher axle loads – Recovery of attributable costs through user taxes/charges – Main concern is with safety and environmental compliance • Passenger transport – No regulation of routes, schedules or fares except for subsidized services; sometimes operators must register service details and give notice of changes – Commercial and contracted services; franchised systems in some cities – UK deregulation increased innovation but led to instability – need planned, phased approach – Problems with anti-trust regulations inappropriate to bus industry (coordinated schedules, ticketing or pricing)

53

Changing Role of Regulation

• Common priorities – Allow operators to adjust services, vehicles, prices to meet needs of customers; maintain and monitor effectiveness of markets – Use limited, incentive-based controls where markets fail – Maintain safety and environmental standards • Road freight transport – Vehicle standards: detailed performance-based standards; effective on- road enforcement; compliance monitoring/rating – Road user taxation: structure related to attributable costs • Road passenger transport – Close supervision of operations mostly discarded – Greater emphasis on achieving quality and safety targets

54

27 Change in Emphasis

• Road freight transport – Let the market determine industry structure and performance – Setting vehicle and driver performance standards; monitoring compliance with those standards; penalties linked to licensing – Economic incentives through structure of user charges/taxes • Road passenger transport – Setting and enforcing specific standards, but making operators responsible for deciding how to achieve those standards, would eliminate the need for much regulation – Industry would become more responsive to changing circumstances – Administrative burden would reduce, with resources released to strengthen enforcement of remaining regulations – The defining of standards is critical; safety standards are of greatest importance – Also: professional competence of transport operators

55

Levelling the Playing-Field

• Between transport modes: – Consistency between modes in taxation, user charges, investment criteria and licensing – to let each mode to find its economically optimum role – Often involves bringing modes under one administrative/policy unit • Between transport operators: – Road freight transport • In western countries the state has got out of the road transport industry • In China there is some residual discrimination in favour of SOEs; competition and customers’ changing needs will help overcome this – Road passenger transport • Categorization of bus operators favours larger operators • Not all operators are treated equally in application of regulations or charges • Some terminal operators give preference to their own vehicles

56

28 Industry Structure

• Freight transport – Policies in western countries allow industry structure to develop in response to demand – only control is over anti-competitive behaviour – China “manages” its industry structure more: efforts to consolidate and establish market leaders; concern about small private operators • Passenger transport – Categorization of enterprises designed to encourage operators of appropriate size – but unnecessarily rigid – Industry structure also influenced by SOE structure: conglomerates with subsidiaries for each activity

57

The Importance of Competition

• Freight transport – Other countries rely on competition to establish efficient, demand- responsive services – In China, competition has already resulted in significant improvements – this process needs to be allowed to take its course • Passenger transport – Competition usually results in improved services – Entry to the market should not be unduly restricted, but don’t allow too many small operators competing on one route – Franchising normally effective for urban areas – On long distance services, 2-3 competing operators is usually appropriate – Anti-trust legislation must not prevent co-operation between operators if in the public interest

58

29 Emphasis on Safety and Environment

• If markets work effectively, the main concerns are with – – Setting and monitoring vehicle and driver safety standards: type approval, on-the-road safety standards, loading standards, driver training and testing – Setting and monitoring on-the-road noise and emissions standards • Considerable effort in other countries is put into enforcement – Specialised traffic police; roadside checks; greater use of technology (monitoring drivers’ working hours, automatic weigh-stations, police vehicles, communications, radar traps, speed cameras, noise and emissions testing equipment etc) • Greater use of incentives/disincentives – Risk of losing operator or driver licence; heavy fines reflecting social costs of accidents; risk of criminal prosecution; structure of taxation

59

Observations on China’s Current Approach

• Freight transport – Deregulation has been effective; benefits still emerging – Industry consolidation policy makes sense, but discriminates against innovative private-sector providers – Some control over small-scale, low-cost operators is needed to provide some order and reduce over-capacity – User taxes/charges do not encourage optimal fleet investment and operating decisions – Safety and environmental regulations are ineffective – Trends in logistics will bring pressure for more efficient, better-quality services through competition and a trickle-down effect • Passenger transport – Extensive controls applied to establish an ordered market. Result: high- quality services (except at lower end) but low productivity, lack of innovation and higher costs than necessary – Restrictions on innovation limit scope for better rural services 60

30 77

FREIGHT TRANSPORT: REFORM OPTIONS AND IMPACTS

Road Freight: Competition and Industry Structure

• The policy of allowing competition to determine industry structure and performance is the right one and should not be changed • Industry consolidation will happen of its own accord – it is not necessary to intervene to develop market leaders • A weeding-out of inefficient, unsafe small-scale operators is inevitable without government intervention – but could be hastened through better-specified and more effectively enforced safety, loading and environmental standards

62

31 Road Freight: User Cost Recovery and Taxation

• The present structure of cost recovery – mainly through tolls and the highway maintenance fee – does not make users face their attributable road costs • An appropriately restructured system of user cost recovery would: – encourage fleet restructuring and the use of more economically efficient vehicles – remove distortions in demand (for road transport, and between road transport and other modes) caused by infrastructure subsidies • A preferred system would combine charges/taxes based on road use (tolls, fuel tax) and charges related to the vehicle (annual fee, structured according to ESALs) • Issue of collection and allocation: regions incur expenditures but might not collect the tax/fee

63

Road Freight: Compliance

• Standards – It would be better to specify the safety and loading standards required to be met on the road, rather than maintenance standards – enforcement agencies would then have clear objectives for their inspections • On-road inspection and compliance monitoring – Technology could be used more effectively to ensure objective monitoring of compliance and reduce opportunities for corruption – Operator permit holders could be made responsible for compliance; their safety/loading performance could be monitored; they could be made to risk fines and loss of licence if they fail to comply • Information systems – Better cooperation, communications and information flows between enforcement agencies and regulatory agencies could facilitate monitoring of compliance by permit holders

64

32 Road Freight: VWD Limits

• China’s axle-load and GVW limits discourage large, economical, multi-axle trucks and allow high axle loads • Revision of the regulations would require careful analysis of costs and benefits – Benefits of lower transport costs due to larger vehicle loads – Benefits resulting from improved vehicle technologies – Impacts on safety performance of vehicles – Costs of road and bridge damage – Costs associated with upgrading road/bridge construction and maintenance standards • Would also need coordinating with structure of road user charges and taxes

65

Road Freight: Industry Associations

• In other countries, industry associations play a key role in helping to formulate practical policies, regulations and standards • Greater consultation with operators, road users, customers and all other stakeholders would help improve regulatory outcomes • The Government should encourage the development of independent industry associations

66

33 Road Freight: Operator and Vehicle Licensing

• Other countries allow a licensed operator to operate any number of trucks • Vehicles only have to be licensed; no link with operator permit • The operator is responsible for the truck while operating on public roads and risks losing his operating licence (not just his load or his truck) in case of non-compliance with regulations • These systems rely on information systems linking the operator, the licence, the truck and the truck’s safety performance • A similar system in China would require coordination and close cooperation between the regulatory authorities and the enforcement authorities

67

Road Freight: Maintenance and Inspections

• Regulating maintenance practices is not the most effective way of ensuring on-the-road vehicle standards • Better to set specific performance-based standards to be met by all vehicles operating on public roads • It would then be up to the owner to ensure that his vehicles meet those standards, using whatever maintenance practices he deems appropriate • The inspection process would verify compliance with on-road standards. This requires: – adequate resources and facilities for inspection – incentives to ensure effective inspection – appropriate penalties for non-compliance – central monitoring of compliance performance

68

34 Road Freight: Regulatory Priorities

• Continuation of present policy of market liberalization will ensure greater efficiency; remove any discriminatory practices • Setting and strictly enforcing more specific on-the-road vehicle and loading standards would weed out unsafe and overloaded vehicles • Compliance could be linked to a system of incentives and disincentives – penalty points, fines, loss of operator permit • User charges and taxation could be restructured to reflect the attributable road-related costs of each vehicle • VWD and loading regulations could be updated to reflect trade-off between economies of scale in vehicle choice/operation and the cost of accommodating larger, heavier vehicles • Independent industry associations could be encouraged to help develop and review policies and regulations

69

88

PASSENGER TRANSPORT: REFORM OPTIONS AND IMPACTS

35 Passenger Transport: The Role of Regulation

• Regulatory system should: – create the environment for operators to provide optimal services, in line with government policy, with minimum intervention by the authorities – encourage operators to develop as appropriate • Some intervention will always be necessary • Market forces also have a role • Must find right balance between market forces and regulation • The degree of regulation should be kept to a minimum

71

Passenger Transport: Quality Regulation

• Quality regulation is necessary: – to ensure the safety of road users and protect the road system and other infrastructure from damage – to protect the environment • Setting and enforcement of standards – Safety, reliability, management competence • No barriers to entry to the industry would be necessary for operators who meet these standards

72

36 Passenger Transport: Quantity Regulation

• Concerns the extent of the services provided • Control of routes, numbers of vehicles and frequency of journeys • Restricts market entry and protects established operators • To prevent “wasteful competition” • To prevent imbalance of supply between busy routes and less profitable routes • May be used to encourage cross-subsidy • Protected operators may abuse their position • Requires regulatory authority to have full knowledge of market requirements

73

Passenger Transport: Regulation of Bus Fares

• Often justified on the grounds that it ensures “affordable” fares • To prevent the abuse of monopoly powers • To ensure that fares are consistent • To prevent stronger operators from forcing weaker ones out of the market by undercutting • May distort the market to the passengers’ disadvantage • When fares have been kept too low this has bankrupted many bus companies • Should not be necessary in a competitive situation

74

37 Passenger Transport: Improving Productivity

• Currently there is up to 600% excess capacity on some routes • Improved scheduling would minimize vehicle idle time • Operators need flexibility to schedule buses to operate on any route • Schedules should vary in accordance with demand • Operating and maintenance schedules could be coordinated to help adjust available capacity • Larger buses would be more efficient on busy routes

75

Passenger Transport: Improving Demand-Responsiveness

• Response to changes in demand is subject to the approval of the authorities • Complex procedure to be followed, including the provision of evidence that the change is required • Bus operators and terminal operators have the information on which to make decisions • They do not need to be instructed by the authorities, or wait for approval to do what they know to be necessary

76

38 Passenger Transport: Raising Safety Standards

• Maintenance standards are monitored through safety checks but enforcement standards could be improved • Inspection facilities at many bus terminals are good, and new facilities are being introduced. • The behaviour of other road users is a problem which may be reduced by training in defensive driving techniques. • More effective enforcement of traffic regulations and vehicle safety and driving standards is essential • Traffic regulations may benefit from review • Greater stringency required in the standard of driving ability required for the issue of a driver’s licence

77

Passenger Transport: Regulatory Priorities

• Regulations should be reduced to the minimum necessary to ensure that an adequate, safe, reliable and affordable service is provided. • Issues to be addressed: – Market Entry – Quality – Quantity – Terminals – Rural Services – Social Issues – Administration

78

39 99

A NEW APPROACH TO ROAD TRANSPORT REGULATION

Basic Policy Objectives

• Efficiency and demand-responsiveness – Ensure the development a range of services that provide the characteristics of price, availability, capacity, security, quality and reliability demanded by customers – Ensure that services provided are as efficient as possible and utilize vehicle and other technologies as effectively as possible • Safety – Set and maintain realistic standards of safety for vehicles and drivers • Environmental protection – Set and maintain realistic standards governing vehicle noise and emissions • Infrastructure cost recovery – Ensure that road users face a level and structure of charges that recover the attributable costs of their road use

80

40 Strategy for Achieving Policy Objectives

• Use market competition as the primary tool for achieving policy objectives – Eliminate unnecessary/ineffective controls impeding efficient markets – Intervene only when monopoly or collusive practices occur or are possible (e.g. with terminals), and when safety or environmental standards are not being observed • Monitor the efficiency of markets – Monitor fares/tariffs and supply/demand balance to identify possible market failure • Focus on safety and environmental standards – Set realistic safety and environmental standards – Provide economic incentives to help achieve those standards – Monitor performance against those standards – Penalise more effectively those operators and drivers who fail to meet the standards

81

Industry Restructuring

• Industry restructuring need not be “managed” – it will occur naturally • Restrictions that prevent restructuring need to be removed • Risk of market instability can be minimized by preventing entry of incompetent, irresponsible new operators

82

41 Quality v Quantity Licensing

• China tries to “manage” services through quantity controls – Controls over who can obtain a licence to operate specific types of bus service – Controls over routes, the allocation of vehicles to routes, and the types of buses on routes – Controls over bus fares – Controls over the location, management and operation of terminals • International practice is to move towards quality-based licensing – Allow markets to set service characteristics, routes, vehicle, schedules and tariffs – Strictly enforce safety/environmental standards – Use incentives and penalties to ensure compliance

83

Fares and Tariffs

• Allow markets to set fares/tariffs • Intervene only when monopoly/collusive practices occur • Intervene by promoting competition, not through price controls

84

42 Safety and Environmental Protection

• Set realistic standards • Expect operators to meet these standards – Don’t specify how (e.g. don’t dictate maintenance procedures) • Monitor their compliance – Focus regulatory efforts on enforcement – Use technology effectively – Hold permit holder accountable for compliance • Penalize non-compliance – Fines appropriate to severity of infringement – Loss of operator licence • Focus on operator • Driver should be held responsible only for traffic violations – Criminal prosecution

85

Stations and Terminals

• Should not be too large • Should be several in larger cities • No restrictions on destinations served by each terminal • Planning should be subject to regulation, but should involve consultation with all interested parties • Bus operators may own their own terminals – Should not be required by law to permit other operators to use them, but may do so if they wish • Operators should decide their own departure times – May be varied slightly by terminal operator to achieve smooth departure flow • Terminal operators should determine charges for their services – To avoid exploitation of local monopoly, there should be a procedure for review by local pricing committee

86

43 Overloading and Road Damage

• Set realistic and enforceable VWD limits • Design road pavements and bridges to cope with VWD limits • Set appropriate structure of user charges – Penalise vehicles with most pavement-damaging potential – Encourage multi-axle vehicles that do less pavement damage • Monitor operator compliance – Permanent and automatic weighbridges, random and fixed – Careful choice of weighbridge locations – Don’t rely on terminal or toll-road operators for enforcement • Penalize non-compliance – Fines appropriate to severity of infringement (cost of road damage + deterrence factor) – Loss of operator licence

87

Road Transport Administration

• A change in the culture of regulation is needed – Less emphasis on “managing” markets, more on safety and environmental protection • Redirect focus on quality licensing and achievement of realistic safety/environmental standards • This can probably only happen through a gradual process – Demonstration project – Evaluation of impacts – Preparation of implementation plan for rest of the country

88

44 Social Issues

• More efficient road transport enhances economic growth and job creation – Protecting jobs through regulation stifles efficiency and innovation • Flexibility in transport markets creates new job opportunities • Identify opportunities for outsourcing of services to provide business/employment opportunities – Vehicle inspection and testing – Freight forwarding – Formation of cooperatives to bid for service contracts – Assistance with retraining and business loans

89

Regulatory Priorities

• Acknowledge the benefits of market competition • Publicize and debate the aims and options • Facilitate greater competition in a pilot project – Remove unnecessary or ineffective controls – Consult closely with the transport industry • Evaluate impacts of the reforms – On service quality, efficiency and costs – On customer satisfaction – On the industry – On those negatively affected by loss of employment etc • Develop procedures for dealing with problems • Develop guidelines for wider application • Identify changes to laws and regulations

90

45 1010

ACTION PLAN

Priority Actions – Road Freight Transport

• Government’s policy and regulatory framework is generally right. Significant benefits are coming from competition. • Road user charges/taxes need restructuring – Road Cost Recovery Study (RCRS) • Vehicle standards: need updated on-the-road standards and VWD and loading limits capable of effective enforcement – Vehicle Standards Study (VSS) • Safety compliance: need strengthened enforcement, better cooperation between authorities and better incentives/disincentives to encourage compliance – Vehicle Safety Compliance System (VSCS)

92

46 Road Cost Recovery Study (RCRS)

• Objective : Develop a restructured system of taxes, charges and tolls to recover attributable road costs from users • Analyze fixed and variable costs of developing, operating and maintaining the road network • Attribute these among user groups in relation to their responsibility for them • Determine the level of marginal and average cost recovery for each user • Estimate the attributable costs of externalities • Identify and evaluate alternative mechanisms for user cost recovery • Evaluate the consequences of each for road sector efficiency – Impacts on funding of road maintenance, unit transport costs, fleet restructuring, demand etc • Recommend a preferred system and staged implementation plan – Need for public/industry consultation; likely resistance from road users

93

Vehicle Standards Study (VSS)

• Objective: Develop updated on-the-road vehicle safety, VWD and loading performance standards capable of effective enforcement • Review vehicle and driver standards in China and other countries • Review VWD limits and vehicle loading regulations • Develop revised standards based on a comparison of costs and benefits, taking into account – – standards used in other countries; trends in vehicle technologies and loads; safety-related performance of different truck configurations; costs of providing and maintaining roads/bridges under alternative VWD/loading restrictions; economic benefits of larger vehicles under alternative VWD options • Develop proposals to change emphasis from regulating vehicle maintenance to regulating on-the-road performance standards • Draft revisions to regulations and standards

94

47 Vehicle Safety Compliance System (VSCS)

• Objective: Improve vehicle, VWD and loading compliance • Strengthen vehicle safety/loading inspections and enforcement – Specify/design facilities, equipment and procedures for inspections; independent monitoring; possible outsourcing of inspection tasks • Rating system for monitoring compliance of permit holders – Specify/design penalty procedures for infringements; communications and information systems for exchanging details between regulatory and enforcement authorities; an operator compliance rating system, linked to procedures for renewing operator permits • Revised procedures for issue/renewal of operator permits – Conditional on acceptable compliance performance • Draft changes to laws/regulations/contract documents; prepare plans for institutional changes and staff training • Implementation, testing and evaluation in a pilot province 95

Priority Actions – Road Passenger Transport

• Demonstration project in reform of bus licensing and regulation. Steps to be followed: – Select trial city with population +/- 1 million – No new operator permits initially; abolish controls over bus fares; remove restrictions on capacity of each route; remove condition restricting buses to particular routes; abolish categorization criteria for existing operators – Let the situation stabilize – Allow existing operators to provide services on other routes, competing with other existing operators – Ease restrictions on entry to the market, but make new licences conditional on certificate of professional competence • Temporary permits for existing illegal/informal operators • Training in best industry practice

96

48 Costs and Timetable

• Road Cost Recovery Study – 6 months duration; US$ 300,000 • Vehicle Standards Study – 6 months duration; US$ 600,000 • Vehicle Safety Compliance System – 10 months duration; US$ 1.9 mln, including implementation and evaluation in pilot province • Pilot Project in Bus Regulatory Reform – 12 months duration; US$ 400,000, including consultations, implementation and evaluation in pilot province

97

49 TA4351-PRC: Policy Reform in Road Transport Workshop on Case Study Results and Draft Final Report September 8th and 9th, 2005 Record of Meeting

1 Purpose, Agenda and Attendance The workshop was to review the TA project’s case studies and Draft Final Report, includ- ing its draft Action Plan, and to agree on steps for completing the project and ensuring implementation of agreed actions resulting from its recommendations. The agenda and attendance list is attached. The workshop was chaired by Xia Hong, Comprehensive Planning Division, Ministry of Communications.

2 Opening and Closing Remarks Pang Song, Deputy Director General, Ministry of Communications, opened the work- shop, noting the long history of ADB support for the sector, outlining the government’s achievements and explaining that their emphasis on physical infrastructure had some- times left policy formulation and management lagging behind somewhat, hence the im- portance of the present project. Yao Licheng (in place of Zhang Zhengwei), Deputy Director, Ministry of Finance, hav- ing also noted ADB support for the sector, commented that the project was a timely and much-needed focus on the “software” side of sector management, in contrast with the familiar focus on the “hardware” side. Makoto Ojiro, Asian Development Bank, made similar comments. He summarised ADB activities in the sector, including activities directed at improved efficiency and safety, and explained that the project arose from concerns that the sector policy and regulatory framework might not be adequate for expected changes and rapid economic growth fol- lowing WTO accession. While complete coverage of this huge country might not be pos- sible, the project’s approach, based on a sample of provinces, was appropriate. He noted that a Draft Final Report had been submitted and had been reviewed by the Bank. It was thought to have highlighted the key issues. The task for the workshop was now to discuss the main proposals and agree on an action plan for implementation, making sure that the agreed measures were practical and had the support of the institutions involved. Xia Hong (MOC) and Makoto Ojiro (ADB) made closing remarks, summarising the re- sults of the workshop and summarizing its conclusions (listed in Section 6).

3 Presentations and Contributions Prepared presentations (copies attached) were made on the first day by: • John Lee, consultant Team Leader, on an overview of the project • Gu Jingyan, Deputy Director, Highway Research Institute, on critical issues and appropriate countermeasures in China’s road transport development

1 • Wang Henghui, Director, Guangdong Provincial Information Industry Depart- ment, on information sharing between road transport administration, public secu- rity and insurance authorities in Guangdong province • John Lee, on developments in logistics and the changing role of road transport in the Chinese economy • Fred Nix, consultant, freight transport specialist, on overseas approaches to policy formulation and regulation in road freight transport • Li Mingli, Board Chairman, Longyun Group, Heilongjiang, on the key issues af- fecting the development of bus passenger transport • Huang Yanqiu, Director, Yunnan Transport Administration Bureau, on road transport issues from the perspective of the provincial regulatory agency • Richard Iles, consultant, passenger transport specialist, on overseas approaches to policy formulation and regulation in road passenger transport • Dr Yanqing Cen, Transport Economist, CATS, on an overview of the project’s case studies in Yunnan, Gansu, Heilongjiang and Guangdong • Liu Gesheng, Lu Aoqing and Dong Jing on the findings and conclusions of the case studies for passenger and freight transport. On the second day, prepared presentations (copies attached) were made by: • John Lee, consultant Team Leader, on an overview of the project’s findings and conclusions • Fred Nix, consultant, freight transport specialist, on the findings and recommen- dations for road freight transport • Richard Iles, consultant, passenger transport specialist, on the findings and rec- ommendations for road passenger transport • John Lee, consultant Team Leader, on the project’s Action Plan recommenda- tions. The conclusions of the Panel of Experts convened to review the project were presented by Dr Zhang Pei Lin, Professor, Department of Transportation, Wuhan University of Technology.

4 Material Presented In his presentation, Gu Jingyan (HRI) noted that, notwithstanding major achievements in infrastructure and fleet development and the adoption of a market-oriented regulatory framework, there still exist many problems, including a fragmented road transport indus- try with many small, weak operators; poor company management; low staff skills; con- straints on reorganization and barriers to further reform; remaining vestiges of state inter- vention; lack of intermodal coordination; poor rural services; unbalanced development between eastern and western regions; inefficient terminal functions; unclear terminal ownership and investment responsibilities; few high-quality or specialized vehicles; inef- ficient freight handling; little effective use of IT and networked administration; ineffec-

2 tive law enforcement; persistent overloading and tax evasion; poor safety management; out-of-date legislation; and poor environmental protection. He recommended: strengthen- ing government administration over market entry and law enforcement; opening up com- petition further and breaking down barriers between market segments; encouraging mod- ern enterprise management and achieving economies of scale through market consolida- tion; applying stricter certification, market entry, safety and financial criteria for licens- ing; developing professional accreditation services; allowing markets to weed our ineffi- cient operators; encouraging intermodal transport; breaking down barriers between re- gions; achieving a better balance between urban and rural infrastructure; taxation reform to reduce the tax burden; better use of IT systems; better enforcement of safety and envi- ronmental standards; and better training of personnel. In his presentation, Wang Henghui (Guangdong IID) explained about a joint information- sharing project underway between Guandong’s road transport administration, public se- curity and insurance supervision agencies. He listed the types of information being shared and explained how shared information would, for example, facilitate the TAD’s licensing approval process by giving it online access to the safety violation and insurance records. These types of information are available in the agencies’ own systems but have not been linked until now. The project is coordinated by a joint committee and has already achieved its Phase I goals of having key systems linked by the end of 2005. Later phases will incorporate additional information and improved data entry and access. Guangdong provincial government hopes that the ADB can provide support in future. (It is notewor- thy that its activities are in line with the project’s proposals for a safety compliance rating system, though the latter would require a national framework to be agreed to help coordi- nate provincial efforts.) Li Mingli (Longyun Group), in his outline of issues from the operator’s viewpoint, noted that: there is considerable overcapacity in the bus industry, with intense competition be- tween operators compounded by additional competition with rail and air transport; al- though price competition may be healthy in the long term, in the short term, with little opportunity to control costs, operators are being severely squeezed financially; the defini- tion of market segments for inter-provincial operators is weak; a lot of unnecessary and unfair competition is generated by the use of poorly-managed sub-contracted drivers; stricter control over market entry requirements is needed; the government should assist with industry consolidation and reorganization to achieve greater economies of scale; in- creased input costs (fuel, road tolls, insurance, labour, parts etc) are cutting margins and putting services at risk under price-cap controls; costs should instead be passed on to us- ers; without this, it’s difficult to achieve reform of traditional management through the use of joint-stock companies (not attractive to investors); existing route licensing regula- tions allow little room for innovation, so operators take no risks and lack competitive, commercial management skills; vehicles are often of poor quality, with low safety stan- dards. A network-wide integration of services and resources is needed, allowing operators to use their resources more effectively and developing more innovative, efficient services. Huang Yanqiu (Yunnan TAB), after reviewing the scope of road transport in Yunnan, outlined four main disparities: between the quality of infrastructure and the quality of transport services; between low service standards and users’ expectations; between ser- vices in urban and rural areas; and between services in developed areas and poor, remote

3 regions. For freight transport, he felt that the main problems arose from: poor quality ve- hicles; poor industry structure; poorly-structured transport movements, with many unnec- essary transhipments; too few high-quality service providers; pervasive and serious over- loading of trucks; and ineffective efforts to encourage the use of containers. Much of Yunnan’s regulatory and enforcement efforts were focused at the “source”: on loading and safety standards at freight terminals. For passenger transport, the main problems were due to: overcapacity on main routes (and lack of capacity on minor ones); low service quality; and unclear ownership of fleet assets. Yunnan is building 100 bus stops in remote areas and developing a rural transport action plan; giving tax exemptions to remote rural transport operators; allowing different, unconventional forms of transport; eliminating low-quality, over-capacity providers on over-subscribed routes through quality controls; strengthening quality and safety monitoring; and assisting industry restructuring to achieve consolidation, economies of scale and better management. The material covered by the presentations made by the consultant team – including the Action Plan recommendations – is summarized in the attachments. The Chairman also presented a summary of the achievements of the training and study- tour component of the project (also attached).

5 Discussion Provision was made for questions and discussions during each day of the workshop. The main comments and observations made in these discussions were: • by the Road Transport Administration Division, MOC: The project was timely and benefited the RTAD. The issues addressed are very important. Problems are recog- nized and overseas advice welcome. Further suggestions: make sure that conclusions reflect practical realities in the Chinese situation (not all overseas solutions may be appropriate), and can be implemented; make sure recommended actions will work; concentrate on the most urgent issues and actions while offering analysis of longer- term issues like fare deregulation; assess all consequences and impacts of implemen- tation; consider implementation in stages, at a rate that allows for adjustment. Sug- gested improvements: make sure the Action Plan conforms with existing laws and regulations; classify actions as short-, medium- and longer-term, depending on ease of implementation and degree of external institutional involvement; set overall targets for the longer term, and steps by which they will be achieved; provide more detail for safety-related issues like drivers’ working hours etc; suggest policies to overcome imbalances between supply and demand. Some errors and omissions were identified, and some cases where content differed from headings; these will be corrected by the consultants. • by the Comprehensive Planning Division, MOC: Policy issues are very important. CPD agrees with the consultants’ analysis of key issues. Most recommendations are suitable and practical (overseas experience is useful and sometimes universal in ap- plicability) but further suggestions include (in addition to some corrections and checking of figures): linking policy objectives and targets more closely with the proc- ess of institutional reform; making more specific institutional recommendations; pro- viding a detailed analysis of the impacts of recommendations on specific stakeholder

4 groups; listing the possible consequences of complete deregulation, where proposed; taking better account of regional differences and impacts; making more specific the way institutional and other resources are to be better integrated; establishing a balance between the various influences over user taxes, charges and toll rates; downplaying environmental externalities in road pricing (the greater concern is with safety, effi- ciency and social stability); including more specific proposals to increase the take-up of IT; making sure the recommendations deal effectively with the problem of many small-scale operators; considering the pros and cons of monopolistic services and ex- amining other countries’ treatment of this issue; considering whether the case studies are truly representative of conditions throughout China; clarifying the role of industry associations in establishing qualifications for market entry; explaining better how IT can assist road administration; proposing implementation of the action plan in stages; clarifying proposals for studying road pricing/taxation and vehicle safety standards, since there may be wide ramifications (eg on the vehicle manufacturing industry) and the involvement of other ministries might slow progress. • by Guangdong PCD: Guangdong is at the forefront of road sector reform. Many of the project’s proposals have been implemented there, including deregulation of mar- ket entry, stricter economic and quality criteria for market entry, and 30% variation in permitted passenger fares (complete deregulation of fares is considered difficult). The focus of government functions has already changed from management/control to monitoring. Considerable road administration work (eg market entry qualifications, safety rating) has been delegated to industry associations; this could be extended to include monitoring of performance measures. Fare increases are based on surveys carried out by road transport associations and relayed to the price control authorities. Performance-monitoring efforts of lower-level governments have been strengthened with PCD assistance. Institutional innovations include integrated enforcement teams within various PCD functions. Coordination meetings are regularly held with other provincial authorities. Remaining shortcomings include: lack of understanding about the role of road transport in the regional economy and how to test the impacts of re- form measures, and about the importance of industry consolidation (should markets decide?); and the lack of economic mechanisms to replace traditional forms of admin- istrative control. Guangdong hopes for support with its integrated, information- sharing approach to inter-agency cooperation. • by Gansu PCD: The study is useful but its proposals are somewhat theoretical. In Gansu, the PCD is concerned with practical issues of market entry qualifications, the issuing of permits, and the need for a more efficient resource allocation mechanism. Progress has been made on removing unnecessary restrictions on free markets, and bus prices are allowed to float within a 20% band. A worry is the difficulty in control- ling prices while input costs (eg fuel) are rising rapidly; consideration is being given to freeing up price controls entirely. Road transport associations are being delegated greater responsibility for road transport administration (eg rating of service levels for terminals). The transport administration fee is no longer collected by the PCD, freeing up resources, but is now paid directly to the Finance Department. Efforts are being made to eliminate barriers between lower levels of government, and to integrate en- forcement efforts with the PSD. The PCD is also trying to attract private investment

5 in terminals; in the past these have been owned mostly by state transport enterprises. Gansu is receiving a World Bank loan to assist with terminal construction, part of a roads project. The strategy is to ease market entry, focusing regulatory controls on terminal operations; Gansu has implemented a pilot project in terminal development, providing airport terminal-like facilities. • by Heilongjiang PCD: The PCD is concerned that the city does not have sufficient authority to implement the pilot project proposed for bus deregulation. It is also con- cerned about how terminal operations would work under the proposed reforms; opera- tors would need right of access to departure slots. [Following this, there was a de- tailed discussion on the level of authority involved and the criteria for selecting the pilot city; the consultants confirmed that they were proposing the involvement of the PCD and were not relying just on the city PCB. The proposal was clarified by the consultants: the pilot would be over a network of routes radiating from a selected city, not a single corridor or multiple cities, except to the extent that cooperation on com- mon routes was needed.] Heilongjiang still felt the need for more careful considera- tion and a step-by-step approach to the proposed reforms, though it also acknowl- edged that the ultimate aim was greater deregulation. • by the ADB: Attention should focus on ensuring that the Action Plan proposals can be implemented, are fully supported and are linked to specific projects with ADB as- sistance. The possibility of Longnam (Gansu) as the pilot project location was sug- gested for Gansu to review. • by the Chairman, Xia Hong: Many of the comments made, and the project’s propos- als, are supported by MOC if they can be shown to lead to greater efficiency, lower costs and better quality for users, to result in a better-skilled workforce and better co- operation and information sharing. There should be an upcoming project pipeline to support their implementation. Time was needed to review the proposals in more de- tail, especially the details in Table 26 of the report. MOC and the provinces would do this and make a decision on needed changes in the report by September 16th. • by the consultants, in response to the questions and comments: It is important to be clear about exactly what is being recommended. For example: deregulation of bus fares in the pilot project would not be done without a corresponding easing of con- trols over route capacity and vehicle allocation; the pilot project would certainly in- volve the PCD, and not just the city administration; errors and omissions would be corrected; safety proposals would distinguish between those proposals under the con- trol of MOC; projects involving other ministries would be proposed in a later phase; all action plan projects would be consistent with existing laws and regulations to the maximum extent possible. At the end of the discussions, the leader of the Expert Group summarized the workshop proceedings; noted that the project was important and timely; confirmed that the report met the requirements of the TOR in terms of objectives, approach and outcomes; noted that the consultants had applied their knowledge of overseas experience in recommending approaches suitable for Chinese circumstances; and confirmed that their recommenda- tions would be useful in guiding the process of reform and progress towards competitive market conditions and enhanced safety. The Expert Group recommended that: the pro-

6 posed Action Plan be implemented in stages, with concrete steps in accordance with ex- isting laws and regulations; there should be further analysis of the impacts on selected stakeholder groups; more information on best overseas practices should be included in the final version of the report; and the Final Report should be completed taking into ac- count the comments and conclusions of the workshop.

6 Conclusions • The consultants’ report is generally accepted, subject to correction, revision and elaboration in the light of comments and suggestions made in these workshop notes and the results of the joint MOC/PCD/ADB review which is to be com- pleted by September 16th • In the meantime, the consultants should make changes to accommodate the com- ments received from the ADB and others that are unlikely to be changed on Sep- tember 16th • The consultants should make their action plan for freight transport more detailed and specific, and should change the emphasis from supporting studies to specific actions made by existing institutions • The Action Plan should distinguish between short-term actions under the control of MOC and medium- and/or longer-term actions that involve inter-ministerial coordination • The impacts of the Action Plan on selected stakeholder groups should be re- viewed and included in the Final Report’s assessment • The consultants should make sure that recommended actions can be implemented under existing laws and regulations • The consultants should prepare an implementation timetable for road freight transport to a level of detail similar to that used for road passenger transport • In framing their Action Plan recommendations, the consultants should consider how they should be packaged for implementation with ADB project support.

7