The Sydney Morning Herald, 16 November 2010

It was promoted as a commercial construction deal, but an 18-kilometre railway has cost Chinese taxpayers $605 million.

THE Chinese state goes to great lengths to stop Uighur Muslims in the country’s far west from taking part in the great hajj pilgrimage, denying passports to most and forcing others to travel in tightly controlled groups.

But more than 2 million Muslims from the rest of the world who are now converging on Mecca have reason to thank Beijing.

Specifically, they can thank the huge, rapidly growing and grossly inefficient mix of opaque politics and state-dominated business known as “China Inc” which has just delivered a dual-track monorail linking Mecca to the holy sites of Mina and Mount Arafat.

The 18-kilometre line opened at the weekend in time to ease the massive transport bottleneck that begins each year on the eighth day of the Muslim calendar month of Dhul Hijja. Construction took just 16 months.

Capacity will soon rise to 72,000 passengers an hour.

Saudi Arabian taxpayers have paid a big discount to what they would to any non-Chinese builder, thanks to a hidden $US600 million ($A605 million) subsidy from the Chinese contractor.

But the best part about it, certainly from Saudi Arabia’s point of view, is that there are no strings attached.

All this Chinese largesse was never meant to be a gift.

It was a politically driven stuff-up, from beginning to end, in what was advertised as a commercial deal.

China Railway Construction Corporation was once the railway arm of the People’s Liberation Army and it now builds more than half of China’s railways. In 2008, it listed $US5.7 billion worth of shares in Hong Kong and Shanghai, in a float that was jointly managed by Macquarie Group (it put the Australian investment bank on the map in China).

But a majority of its shares and all of the ultimate control remains in the hands of the state.

The Mecca monorail deal was negotiated at the political level and it doesn’t appear that the company had much say in it, before being announced by China’s President Hu Jintao and Saudi Arabia’s King Abdullah in February last year.

Reporters from the Economic Observer, an independently minded Beijing newspaper, have revealed the limitations of the “China Inc” model in uncomfortable detail.

“Zhao Guangfa, president of China Railway Construction, said internally that this project was more a political mandate than a commercial project,” says the Economic Observer.

“Failure was not an option.”

The Mecca railway was not the company’s first political project.

But previous ones had all been with weak states, where China had all the bargaining power to insist on importing Chinese labour, appointing Chinese subcontractors and using Chinese-style measures to push through regulatory problems and community objections. Saudi Arabia took advantage of China’s political need to be seen to be delivering a service to the world’s Muslims, and it drove a hard bargain.

It insisted on developed world standards, nominated its own subcontractors, dragged its feet on relocating residents and constantly shifted the design parameters.

The amount of earth to be shifted in the construction of the railway crept from 2 million cubic metres to 5 million.

Company insiders blamed the capriciousness of their Saudi client and also Beijing’s political insistence to get the project done, on time, at any cost.

But they also conceded that practices that make money for the company in China and in Africa don’t work everywhere.

“The core reason still lies in the CRC’s inadequate evaluation of potential risks,” says the Economic Observer.

“But the root of the failure lies in the crude organisation and working habits the CRC formed when constructing railways at home.”

The Economic Observer says this is the worst loss incurred by a Chinese company going abroad.

More accurately, it’s one of the worst losses that have been transparently disclosed. Others are in worse financial trouble, including in Australia.

China Railway Construction’s prospectus lists the usual palaver about possible risks – “inclement weather, technical difficulties…” – and contains the usual silence about risks that really matter to Chinese state-controlled enterprises.

Nowhere does it mention the risk of incompetence, or corruption, or the occasional need to implement “political” decisions regardless of commerciality.

Perhaps that’s why Hong Kong investors were taken by surprise when China Railway Construction revealed on October 25 that its flagship $US1.8 billion Mecca railway project was likely to suffer a $US600 million loss.

They stripped 14 per cent off the company’s market capitalisation in one day.

To be fair, the burden that state-control can impose on investors is vastly outweighed by the benefits.

The political side-deals and cheap credit flowing from Beijing’s backing have led to China Railway picking up hugely profitable contracts all through China, Africa and other markets that lack the transparency of open competition.

And when a state-owned company takes “a hit” for the national team, the state usually stands by to bail it out.

The real losses, of course, are incurred by ordinary Chinese citizens who subsidise China’s state-controlled enterprises.

For these billion-plus consumers and taxpayers, paying a $US600 million subsidy to one of the world’s richest societies is just another version of a scenario that gets played out in China every day.

http://www.smh.com.au/business/chinas-gift-to-mecca-20101115-17ui5.html