How Much Are China’s Railroads Worth?
The big news out of the United States this week was the $26.6 billion bid by Warren Buffett’s Berkshire Hathaway for the 77 percent of the stock of Burlington Northern Sante Fe Corp. that it doesn’t already own. Taking into account Burlington Northern’s debt of $10 billion, Buffett’s offer values the company at $44 billion.
The billionaire investor called his bid for Burlington Northern, one of America’s largest railroad companies, an “all-in wager” on America’s economic future. It’s also a bet that upcoming Washington policies to improve infrastructure and combat climate change will be a boon to the freight-railroad industry.
President Barack Obama has said railroad investment will be a cornerstone of his transportation policies, given the environmental benefits and improved mobility that come with taking cars and trucks off roads. According to The Wall Street Journal:
The White House set aside $8 billion in the economic-recovery act to improve passenger railroads–money that will directly benefit freight railroads since they own almost all of the lines used by Amtrak and regional commuter-rail operators.
Another $1.5 billion in discretionary spending in the stimulus is expected to finance many rail projects, including a plan to reduce congestion in Mr. Obama’s native Chicago, the nation’s busiest freight-rail hub. That project has already won $322 million in funding from Illinois that is expected to attract federal dollars.
Mr. Obama has also said he would seek to budget $5 billion over the next five years for high-speed rail projects and to set up a national infrastructure bank to finance regional projects like rail improvements.
The Obama Administration’s policies towards railroads prompted Patricia Reilly, spokeswoman for the Association of American Railroads, a trade group representing the four major freight-rail operators, to say, “I haven’t seen an administration as enthusiastic about expansion of the country’s rail network” as the Obama White House. “The administration has put its money where its mouth is.”
Reading the news about Burlington Northern, I couldn’t help but wonder how much China’s railroads might be worth. Granted, the country’s railways are now managed by China’s Ministry of Railways with all of the inefficiencies that implies, such as overstaffing and underpricing of tickets. But, the significant investment that China is making in its railroad infrastructure is creating a potentially very valuable asset for the country.
As much as the United States is investing in its railroad infrastructure, it pales by comparison to what China is spending, particularly when the greater purchasing power in China is taken into account. China’s investment in its railroad infrastructure got a big boost as a result of the global economic crisis. As much as 38 percent of the 4.0 billion yuan ($585 billion) stimulus package that Beijing put in place last November is being spent on infrastructure, particularly railways.
China’s investment in rail transport during the first eight months of this year more than doubled from a year earlier to 311billion yuan ($45.7 billion), and the rail ministry says it will spend another 700 billion yuan ($102.9 billion) in each of the next three years. This investment will increase China’s total rail network from 80,000 kilometers at the end of 2008, to 110,000 kilometers by the end of 2012. China will overtake India in 2009 as the country with the second-largest network after the United States.
A key part of the railway expansion underway in China is its high-speed rail network. In the coming years, China will purchase 1,000 high speed trains at a cost of $73 billion. The government’s plan is to increase high speed track from about 6,000 kilometers presently to more than 16,000 kilometers by 2020. At that time, China will have more high-speed railway track than the rest of the world combined.
When I first began investigating China’s auto industry in the early 1990s, I was encouraged by the fact that the government already had plans in place to build a national highway system, not dissimilar to the road network that President Eisenhower put in place in the United States in the 1950s. In the years since, we’ve seen how China’s massive investment in its highway infrastructure has improved transportation in the country and contributed to the growth of China’s auto industry.
The obvious question until now has been whether China was planning to build its transportation system almost entirely around the automobile, as was done in the United States, or whether mass transit would also play a significant role. With its massive investment in railroad infrastructure, it is now clear that China is taking a more balanced approach to moving people and goods around the country.
If Burlington Northern is worth $44 billion, how much might China’s railways be worth some day? The investment bankers are undoubtedly already salivating over the potential fees to be earned on the IPO.