Summary：The country's Ministry of Railways (MOR) should work out a detailed plan to encourage private investment into the railway sector to address the urgent issue of tight cash flow and introduce full competition in railway operations.

The country's Ministry of Railways (MOR) should work out a detailed plan to encourage private investment into the railway sector to address the urgent issue of tight cash flow and introduce full competition in railway operations, in order to achieve breakthroughs in the sector's long-awaited reform and sustainable development, analysts said yesterday.

"The key challenges facing the railway ministry now are the lack of sufficient cash flow and inability to repay its huge debts. There is also a problem of inefficient operation of high-speed railways, which added to the ministry's non-performing assets and pushed up its already high debt ratio," said Zhao Jian, a professor specializing in railway economics at Beijing Jiaotong University.

"To address the immediate lack of cash flow, the ministry should work out a detailed plan to encourage investment of private capital into the sector and introduce full competition in railway operations," he said.

The MOR reported a loss of 7 billion yuan ($1.1 billion) in the first quarter, according to an audit report published Wednesday on the website of China Foreign Exchange Trade System under the central bank.

The figure is almost double the 3.8 billion yuan loss reported in the same period of 2011.

It posted cash flow of 177 billion yuan as of the end of March, a decrease of 23 billion yuan from the end of last year.

The ministry also reported an outstanding debt of 2.43 trillion yuan as of the end of March and debt ratio of 60.62 percent, almost the same ratio as at the end of last year.

"The ministry's existing debt ratio is still at a normal level compared with other sectors with high levels of fixed asset investment, such as the air transportation sector which has a debt ratio of almost 80 percent. The real problem facing the railway ministry is its inability to repay the debts which are mainly borrowed from banks," said Li Lei, an industry analyst with China Securities Co.

The debt issues and tight cash flows have slowed down the ministry's investment in new projects, Li said.

The fixed assets investment of the railway sector reached 60 billion yuan in the first quarter, down 51 percent from the previous year, while investment in infrastructure stood at only 43 billion yuan, down 60.9 percent from a year earlier and accounting for only 10 percent of the full-year target of 406 billion yuan, data released last month by the MOR showed.

"All these problems are eventually attributed to the existing system of the ministry which features a mix of government administration and enterprise management system," Zhao said.

In March, the State Council said the government is working on a reform plan for the railway sector which will focus on the separation of the functions of the government from those of enterprises and State assets management authorities. The plan is also intended to ensure the participation of private capital in this sector.

"Diversifying financing channelled by introducing private capital could ease the sector's cash strain. But it will be hard for the ministry to attract private capital unless it introduces market-oriented operational mechanism to improve its profitability," Li said.