At the end of February 2008, Indian railway minister Lalu Prasad announced an intention to invest the equivalent of $63bn/€42bn over the following five years for expansion and modernisation of the country’s rail network. In the same month, the China Railway Construction Corporation attracted $420bn in a Shanghai-based share sale that was reportedly over-subscribed by 135 times.
These events are indicative of a boom times for railway development in two of Asia’s largest economies, but similar forces are evident on a wider front in the continent which stretches from the Mediterranean to the Pacific.
Many parts of Asia, notably India and south and south-eastern Asia, are alive with rail development. The continent has spawned its own world giants in the supply field such as Kinki Sharyo, Hitachi and Kawasaki Heavy Industry of Japan, and Hyundai Rotem of South Korea.
Such is the volume of business and the thirst for leading technology, demand continues to draw in leading players from elsewhere such as Bombardier, Siemens, Alstom and General Electric, also in specialised fields such as communications, rails, signalling and for consultancy services. For many years, underpinned by worldwide success in automotive and consumer goods innovation and production, Japan’s national economy was close to the worth of the rest of the continent combined.
INVESTMENT PROSPECTS FOR ASIAN RAIL
In the present century Asia’s two most populous countries have begun to release their latent power and the relative situation is much changed. The gross domestic product of both China and India is expected to overtake Japan by 2020. It is the economic clout, business confidence and stability that count for investors – need or sheer size are not enough.
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Asia’s next largest country in population terms, Indonesia, and notably its capital of Jakarta with a population of 12 million, would clearly benefit from a modern rapid transit system. However, uncertainty of returns and such circumstances have led its projected APM monorail to remain unfinished and inoperative, making it less enticing for potential investors and business partners.
The vastness of some Asian rail operations continues to remain a magnet for the world’s rail industry suppliers. Built by foreign interests, China’s first line opened in 1876. It now has the world’s third-largest network at 76,000km (45,600miles) and its own thriving domestic railway manufacturing industry.
Instigated by the British colonial power for strategic and trade purposes, by 1880 India had around 14,500km (9,000 miles) of railways. Indian Railways, the country’s largest employer, has now grown to become a cornerstone of the state and its economy.
That both rail systems are well established is at the same time an advantage and a challenge for these countries, for much of the infrastructure was created to meet a very different set of needs and priorities, and overall not to the scale implied by current and forecasted demand for freight and passenger traffic. For example, the rebuilding of narrow gauge lines to broad for higher speeds of heavier freight will call for huge investment.
LAND VALUES AND IMPORTANCE OF RAIL
It is in the inherent nature of railways that investment needs to be substantial, especially if the setting is already developed, with high land values and the added cost of changing site use. Unlike with roads or airports, the required vehicles are not normally supplied by the customer/carrier and are part of the set-up cost.
In finance terms, railways are not only capital intensive, they are heavily front-loaded as all elements need to be in situ when services begin. Systems can expand, but for a given service, track, signalling, stock and principal stations are needed from day one. Boom economies result in boom cities, with the expanding workforce usually drawn in from rural areas and smaller towns. This in turn rapidly increases the urban sprawl and the numbers needing to travel, thereby choking the road infrastructure.
The greater the spread, the more a rail-based urban mass transit system becomes the best means of transporting the workforce. Metro systems are therefore one of the most buoyant areas of the market, with many metropolitan areas needing a level of urban mobility that only rail systems can deliver.
Japanese finance is largely behind the creation of Vietnam’s first metro, a 20km line in Ho Chi Minh City (formerly Saigon), and German interests are also involved in building other lines.
It is commonplace for financing packages from a given country to tie in with the eventual supply of hardware and expertise by companies from that same country. More able to fund their own future facilities, as part of the forward planning for economies that will eventually not be able to rely on oil reserves, countries in the Gulf region also represent opportunities for urban and light rail systems, as with the Dubai Metro project launched in 2005.
The obstacles to attracting finance on the international open market for railway purposes are not fundamentally different from for other industries. Paramount is the perceived safety of the investment in terms of creating sustained asset value. Coupled with this are rates of return relative to alternative investments and the duration of the investment.
National and regional stability are factors that would-be investors will take into account, especially where capital is committed to foreign soil. The practice of co-operation with locally based partners is well established, not least because of the frequent requirement (a long-standing feature of suppliers gaining access to the US market) for local content and labour being deployed in manufacture.
This is exemplified by Vossloh‘s plant which opened in late 2007 in cooperation with the Nanjing Iron Steel Co. Similarly, Siemens has worked with its Chinese partner Tangshan Locomotive & Rolling Stock Works for the supply of the Velaro-based CRH 3, with only a relative handful to be produced in Germany.
SHIFTING INTERNATIONAL MARKETS
For suppliers of rail products and services, the early years of the 21st century are turning out to be a time of great opportunity. With international trade tonnages and values at high levels and fuel costs rising as a proportion of the total, rail is an increasingly attractive option in the freight market.
In the passenger sector, the fuel cost aspect is joined by the appeal and capability of high-speed rail. Recognised as being popular with users and highly competitive with air travel over distances that hitherto gave airlines a clear advantage, the off-the-shelf systems established in the domestic markets of Japan, France and Germany are attractive to customers and to suppliers like Siemens, Mitsubishi and Alstom.
The rise of a domestic rail industry may mean that the commitment in an overseas market needs to be carefully judged by foreign suppliers. Of some concern is that expensively researched technologies may in part be replicated with little respect for intellectual property by manufacturers elsewhere.
What may begin as an international opportunity with initial start-up costs could soon give way to protectionism that closes down that market for the future. Monitoring of the political scene will also seek to detect risks of enforced nationalisation, potentially cutting off a supplier from the real value of their outlay.
Outside of lines dedicated to freight flows such as those which facilitate access to bulk natural reserves, railway operation is unlikely to yield the returns an investor would be able to get on the open market. Covering operating costs from the passenger fare-box is not that common, let alone going far in servicing loans on a scale needed to create or substantially re-equip a railway.
Consequently, the opportunities in Asia, as elsewhere, mainly lie with the supplier entering an agreement with a public sector body for a contractual reward, whether fixed or variable.
As widely forecast for the wider context, the 21st century looks set to become a time of shifted emphasis in railway activity from Europe and North America to the Asia Pacific zone. Equally clear is that the world’s supply industry seems set to be confronted with meeting the challenge of several decades of rising demand.