Traveling through the sword to engage in military industry

#407 - Debt-for-equity swaps drive development

Issuing bonds is nothing new, but in the past, they were issued in the form of national bonds. Issuing bonds specifically for the construction of several railways is a new thing.

"Issuing several hundred million in bonds each year will indeed greatly reduce the burden," Chief of Staff Ye calculated. "However, issuing railway bonds is unprecedented. We've never done this before. Can it be done?"

Chief of Staff Ye was worried that government bonds, with their national guarantee, always sold well. In the past, almost every issue was sold out.

However, the annual amount was controlled, generally within 3 billion. For the current domestic situation, this amount of government bonds didn't present much difficulty.

But railway bonds don't have the same national guarantee as government bonds. Of course, Chief of Staff Ye could give these bonds the attribute of a national guarantee.

However, these bonds are ultimately different from government bonds. Using a national guarantee is somewhat inappropriate. Otherwise, once this precedent is set, who knows who might issue highway bonds, airport bonds, or urban construction bonds in the future? Having participated in national affairs for over a decade, Chief of Staff Ye has learned a lot of economic knowledge and can be considered a semi-expert in economics among the higher-ups.

It's not difficult to extrapolate from this kind of thing.

"Actually, we can add a condition, and these bonds will be very easy to sell," Ren Zhong smiled. "We only need to state in the bond issuance announcement that if the full amount isn't redeemed upon maturity, bondholders have the right to convert the bond's face value into railway shares. We'll price it in yuan, and the face value of the bonds will be divided into 100 yuan, 200 yuan, 500 yuan, and 1000 yuan denominations. Assuming our construction expenses are 3.25 billion yuan, then we'll set the total number of shares to 3.25 billion. The railway company will be established with national investment as the initial founding shareholder. According to our budget, we'll invest 40% of the funds into the railway company's account. That way, even if all the railway company's bonds are converted into shares, they'll still be minority shareholders, while the railway company, with its 40% shareholding, will naturally be the largest shareholder, without changing the identity and control of the state-owned enterprise."

When Ren Zhong said this idea, Chief of Staff Ye's eyes lit up.

Mixed ownership of railways didn't start now, but rather from the beginning of large-scale railway construction. It's just that traditionally, the backbone railway lines connecting provinces were wholly state-owned, while branch lines within provinces were used for mixed ownership. Back in Qilu, they pioneered a line where several large private capital firms, along with a foreign steam locomotive manufacturer, jointly engaged in the entire railway chain of buying and selling.

The foreign company used steam locomotive technology and factories as equity. Originally, Ren Zhong wasn't optimistic about their backward technology, thinking these companies would lose money. Who knew that once the iron and coal mines along the line were developed, the railway transformed into primarily freight transport with passenger transport as a supplement, and the business was revitalized? Starting with this railway line, they earned back their capital within the second five-year plan, prompting this consortium to start expanding. Of course, Ren Zhong didn't give them any more opportunities to profit handsomely after that.

He set aside the railway lines with more mineral resources and gave this consortium some bone-gnawing railway lines. These lines weren't necessarily without opportunities for profit, but they clearly needed to rely on large-scale urban passenger transport development after the economic development of the next decade to have a chance to profit.

That way, even if they saved money on construction, they couldn't expect to break even without more than twenty years of painstaking operation.

However, in any case, with the rise of Dongda, these local branch lines located in the densely populated east will eventually become busy transportation hubs. According to the current extremely low construction costs, with only a few hundred thousand yuan per kilometer to build a railway, they will earn good profits from passenger transport in the future.

For stimulating private capital and accelerating local construction, this is a win-win solution.

Ren Zhong isn't afraid of these private capital firms making too much money and becoming arrogant. The maximum price limit for railway passenger and freight transport that he previously advocated for is nationally unified!

If the Railway Commission adjusts the maximum price limit after a hearing, then all subsequent railway lines must follow the price limit confirmed by this hearing. You can charge lower, but you can't charge higher.

This ensures that the common people can truly enjoy the benefits of national development.

For example, after railway development, the ratio of passenger ticket prices and transport prices per hundred kilometers compared to actual income will become lower and lower. When people generally earn tens of yuan a month, the passenger price may be 4 yuan per hundred kilometers, and the freight price may be 1 yuan and 50 cents per ton per hundred kilometers. After economic development, when people's wages start to be 200 yuan or 300 yuan, the passenger price may not only not increase with inflation but may even be discounted to 3 yuan and 50 cents.

In this way, the common people can truly enjoy the convenience of economic development and road transportation construction.

Such low transportation costs will greatly promote the mobility of the entire society.

In the past, people might only visit relatives once a year due to transportation costs, but now there's no need to haggle over it anymore, and visiting two or three times a year becomes natural.

Chief of Staff Ye can't think of these things now, nor will he think so much. He's pondering Ren Zhong's debt-to-equity swap idea, and after thinking about it, it doesn't seem to have any major problems.

Raising funds to build railways was done in the previous dynasty. Now, turning it into a shareholding system is actually not much different in meaning.

As the scale of national construction becomes larger and larger, everyone is actually clear that it's impossible for the state to bear all the infrastructure construction.

Even though the country's strength is now much stronger than in the past, even more than ten times better than the best years in history.

But now that everyone's starting points are different, their aspirations are also different. They are all aiming at the foreign powers and trying their best to catch up.

After thinking for a while, Chief of Staff Ye said, "I don't see any major problems in principle. According to Ren's idea, are we establishing a railway company for each railway to operate, or are we establishing one railway company to operate them all?"

"Let's establish one Western Railway Co., Ltd. to operate them. This way, we can operate more conveniently, and it's not just limited to these three railways. From my estimate, it may take a long time for these three railways to become profitable. Fortunately, if there are no loans and no interest, then after we build them, this railway will never lose money, it's just that it won't earn much in the first ten years. After all, it takes about 5 years to build. We can construct in stages and operate in batches to reduce operating costs," Ren Zhong had obviously given this work a lot of thought.

"In addition, in the future railway construction in some areas with good potential in the west, we can also package some high-quality lines into this company to make the company's operating income look better, so that everyone can enjoy 3% to 5% dividends every year at least after ten years. That way, we won't ruin our reputation the next time we issue similar debt-to-equity swaps."

Ren Zhong considered it very carefully. The current bond interest rate is probably between 3% and 5%. Because of the good fiscal revenue, the redemption of public bonds has never been delayed. In the past, the interest rates for public bonds with terms of 3 years, 5 years, and 10 years ranged from 3% to 5%.

Therefore, the dividend from the railway shares must reach at least this figure for everyone to feel they have made a profit.

Of course, if the time horizon is extended to over 30 years, they will definitely make a huge profit. The book value of these three railways alone will exceed 100 billion, which is equivalent to an asset expansion of over 30 times!

So, those who choose debt-to-equity swaps will not lose out either, as they can pass this down through generations.

For the country and ordinary investors, this is definitely a win-win situation.

"Okay, since you, Ren, have thought this through, then please go ahead and come up with a concrete plan. We'll just follow the list and get things done," Chief of Staff Ye said with a relaxed smile.

The economic benefits of these three railways are not as compelling as their role in consolidating national defense in the west.

Being able to build them smoothly with the state investing 40% is worth more than its weight in gold. Chief of Staff Ye hopes there will be more such good things.

Of course, since Ren Zhong's sudden emergence, Chief of Staff Ye has seen too many such good things.

Unsurprisingly, Ren Zhong's suggestion was approved. Western Railway Co., Ltd. was quickly established. When the Western Railway construction bonds were issued, seeing that everyone also had the option of debt-to-equity swaps, the already enthusiastic private investment suddenly boiled over. The first tranche of 500 million was almost sold out on the same day. Many who didn't manage to get their hands on it strongly appealed for the remaining construction bonds to be issued together in advance.

Although this would be a bit of a waste of capital, the senior management of Western Railway Co., Ltd. were not stupid. Getting the money in hand was the best option, so they issued the remaining 1.95 billion bonds in one go, completing the sale in less than a month.

With such ample funds, the state's 40% investment was no longer urgent, because the construction cycle was as long as 5 years, and the annual investment was only 650 million. The revenue from the bonds issued now was enough for 3 years of construction needs, and the state's investment could be injected later.

However, a bad precedent should not be set. Having sufficient funds is not a bad thing. After completing the fundraising in advance, and after carrying out geological surveys and design, the three railways were divided into a dozen sections and construction began simultaneously. Given that half of the construction period in the snow-covered area is not very suitable, the main battlefield for railway construction was first placed in the surrounding areas.

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However, Ren Zhong did not let Tibet stand still. In the Shiquanhe area of western Tibet, the Dangqu-Nianting area along the Qinghai-Tibet Railway, and the western Kunlun area, there are tens of billions of tons of iron ore in long-term resource reserves, and many of them are rich iron ore areas, with easily mined iron ore resources exceeding 100 million tons.

If all the steel resources needed for railway construction now are transported from the mainland, the transportation cost will not be small, which is quite unfavorable for controlling railway construction costs.

Therefore, Ren Zhong suggested building iron ore mines and steel plants in these areas first.

If it were in the main world's timeline, Ren Zhong's idea would not be feasible because the economic cost-effectiveness would be too low and temporarily very uneconomical. Therefore, even in the 21st century, Tibet's steel industry still does not exceed one million tons.

However, now that the Bright Sword world has miniaturized nuclear power plants, it is possible to build 50MW-100MW small nuclear power plants at a relatively low cost, so that power plants can be built close to the iron ore mines to provide ample energy support for the steel metallurgy industry.

This only requires being close to a river to meet the basic requirements. After nearly a few years of research, not only has nuclear reaction been realized on submarines, but the power generation cycle water mode and reclaimed water reuse mode designed according to the inland miniaturized nuclear power plant model have greatly reduced the demand for cooling water for steam turbines in nuclear power plants.

Making it no problem to build nuclear power plants in the mainland.

In Dangqu, there is Namtso lake water available, while in the Shiquanhe area of western Tibet, there is the Shiquanhe River water to build reservoirs. In the main world's timeline, the Shiquanhe Reservoir has a capacity of up to 120 million cubic meters, which is completely no problem for the cooling water source for two small nuclear power plants.

Therefore, while building the early roadbed of the railway, iron ore mining and two steel plants and two miniaturized nuclear power plants in Tibet also began construction simultaneously.

According to the construction plan, the track steel and car steel produced by these two steel plants will meet the needs of the entire Tibetan steel rails. According to the calculation of 55 tons of steel rails per kilometer, these three railways alone will need more than 370,000 tons of steel rails. In addition to a large number of tunnels and bridges, especially tunnels consume as much as 2,500 tons per kilometer, and possibly nearly two-thirds of the railway are mainly bridges and tunnels, requiring more than 10 million tons of construction steel bars and steel!

The sheer size of this quantity is obviously not a small number if it is all pulled from the mainland to the construction site.

Therefore, Ren Zhong's solution is to build two steel plants in Tibet with a total annual output of about 1.5 million tons in more than 2 years, so that when steel is used on a large scale in the next three years, locally produced steel will be the main source, providing about 50% of the steel supply for this huge project, which will also promote local economic development.

At the same time, it will also provide relatively sufficient steel resources for the next step in the large-scale development process in Tibet.

Not only steel, but also building materials industries such as cement are now being planned, using the energy provided by two 100MW nuclear power plants to give priority to the production of materials for this world-class huge project.

In this way, Ren Zhong not only solved the financing problem for this project, but also laid the foundation for supporting construction and the future further development of Tibet.

Building roads alone cannot make you rich. Ren Zhong is very clear about this. As long as the opportunity of road construction is used to release local resources to form a new industry, and then bring a new service industry from this industry, like a snowball, the local economy will be driven up.

Although it is not as large-scale as the mainland, it is definitely much better than it is now.

Moreover, after the industrial chain is formed, and after having a good relationship with neighbors such as Nepal and Pakistan around, exporting to these two places is also a considerable market. For Tibet, a sparsely populated place, it is obvious that this road to prosperity does not need to go too far to reach a well-off world.

What's more, after the opening of the three major railways, and then the opening of Tibet's tourism industry, the future development will be even more limitless.

After all, this snowy plateau is an extremely rare special landscape in the world. (End of this chapter)