BEIJING — On June 9, U.S. company XpressWest suddenly announced that it would end the joint venture agreement that it had signed with China Railway International to build a high-speed rail linking Las Vegas and Los Angeles.
The U.S. firm said its decision to terminate the relationship with China Railway International was based “primarily upon difficulties associated with timely performance and CRI's challenges in obtaining required authority to proceed with required development activities.”
XpressWest ended the deal despite China's clear cost advantages in rail construction. According to a 2014 World Bank study titled “China High Speed Rail: Construction Cost Analysis”, the average cost of high-speed rail construction worldwide is about 203 million yuan per kilometer. At 110 million yuan per km, China builds rail at about half the price. This is mainly due to three reasons: the lower cost of civil engineering, the prevalence of high-speed rail network across China that brings about fixed repayment of capital investment and lower labor costs.
So why would XpressWest end the agreement? It could be one of many cases in which non-economic factors played a role. In recent years, political hurdles have repeatedly disrupted Chinese companies' foreign railway construction sales. In the case of the Sino-US rail project, it's most likely the result of a disagreement among America's political parties.
“Do Washington DC policy makers have the courage and vision to support this high-speed rail project?” XpressWest had questioned Republican makers who were against the deal.
In a similar case, Thailand's military government appears to have manipulated the court into ruling that a rail project that had been approved by the country's parliament was actually unconstitutional. In Mexico, opposition party objections brought China's bullet train project to a halt.
China's foreign railway contracts have also frequently encountered complex labor, environmental, cultural and religious issues. In 2015, China beat Japan in winning Indonesia's railway construction project. But the project has never taken off because of resettlement and environmental issues.
China High Speed Railway on Fast Track Exhibition in Jakarta — Photo: Afriadi Hikmal/ Zuma
It's due to such construction delays that the urban light-rail project in Saudi Arabia has cost a Chinese company 4.2 billion yuan in losses. The fact that Chinese contractors do not understand the local laws and customs have doubled the labor cost of this project.
As China's main rival of railway sales abroad, Japan offers attractive deals. For the Indonesian project, for instance, the Japanese company offered a loan at a 0.1% interest rate and a repayment period of 40 years. The Chinese firm won the project by saying the Indonesian government didn't need to provide a credit guarantee. But by doing so, China is running the risk of not recovering the loan if the railway operation is poorly managed.
China couldn't even compete with Japan when it came to India. A Japanese company offered India 80% of the construction loan — about $12 billion — at a 0.1% interest rate with a repayment period of 50 years. It also signed a technology transfer agreement with India. But it's not just these favorable terms that made Japan win the bid.
India is wary of China building strategic infrastructure. The two Asian giants relationship has been characterized by rivalry, not cooperation.
Japan, on the other hand, has a warmer relationship with the country. India is the biggest beneficiary of Japan's official aid. Tokyo set up a $12 billion fund assisting Japanese firms that support and invest in the “Make in India” program and provided $5 billion to push forward 13 infrastructure projects in India.
So although China appears to be the cheap option, it's actual capital cost remains high. It looks like China will continue to face risks and challenges in its high-speed rail ambitions.
*Huang Zhilong is the director of the Macroeconomic Center at the Suning lnstitute of Finance.