August 14th, 2012 | Caixin How Dangerous Liaisons Led to Massive Corruption
An inquiry into former railways minister Liu Zhijun has yielded a document that exposes the evolution of a complicated web of graft
A graft investigation into former railways minister Liu Zhijun that started in February 2011 has concluded with the ministry issuing a document on August 3 that lists six disciplinary violations Liu committed.
The internal ministry notice sheds light on the complicated network of graft that functioned in China’s Ministry of Railways. The charges against Liu include corruption and sexual misconduct.
Several of the charges were connected to a close associate, Shaanxi businesswoman Ding Shumiao. Ministry prosecutors say Liu helped Ding secure supply contracts worth 3 billion yuan and allowed middlemen to take kickbacks during contract procurement.
The investigation into Ding, which started in January 2011, is also finished, a source close to the inquiry said. The amount of kickbacks that Liu and Ding shared will be a key factor in determining the money involved in Liu’s graft charges, a source close to the situation said.
Ding also facilitated Liu’s love affairs, the notice said. The investigators found that Liu had sexual relationships with a number of women, some of them introduced to him by Ding.
Prosecutors also suspect Liu took bribes from four railway bureau officials. Over the past two years, five railway bureau heads have been demoted and investigated, including the former heads of railway bureaus in Urumqi, Kunming, Nanchang and Hohhot.
Master and Servant
Ding, 57, is a native of coal-rich Shaanxi Province, in the northern part of China. She got her start in business by running small food booths for drivers, set up a coal transport business, and later expanded to areas including railway equipment, entertainment and advertising. People close to her said say she is very good at cultivating connections.
Ding’s early success in the railway sector was greatly helped by Luo Jinbao, then head of the railway bureau in Datong, in Shanxi Province, and later bureau head in Hohhot, Inner Mongolia; Beijing; and Urumqi, in the Xinjiang region. In 2005, Luo was appointed supervisor of the construction of China’s first high-speed passenger rail line connecting Shijiazhuang, Hebei Province, to Taiyuan, in Shanxi. In October 2010, Luo was removed from his post for corruption and investigated in early 2011. Luo introduced Ding to Liu in 2003 before he became minister, Caixin learned.
Luo also introduced Ding to Zhang Shuguang, an important assistant to Liu in his ambitious campaign to build China’s high-speed railway network. Zhang, the former deputy chief engineer and director of the ministry’s Transportation Bureau of the Ministry of Railways, was suspended from his post and investigated in February 2011.
One episode proved key for Ding in her efforts to win Liu’s trust. It involved Liu’s younger brother, Liu Zhixiang, who was detained in January 2005 for corruption and intentional injury while serving as deputy director of the Wuhan Railway Bureau. In April 2006, Liu Zhixiang was sentenced to death with a two-year reprieve and stripped of his political rights for life.
Under the guidance of Zhang, Ding used her relationships to help Liu Zhixiang. His sentence was reduced to 16 years in prison and he was transferred to a prison hospital because of health problems. He was later allowed to stay in a local hospital.
With Liu Zhijun’s backing, Ding became an important middleman in bidding for railway projects. Investigators found that Ding received 2.4 billion yuan in fees related to projects worth 180 billion yuan. She made 800 million yuan off the Shanghai-Beijing high-speed line alone. Ding also received 600 million yuan in illegal income from arranging coal transport, people familiar with the investigation said.
But Liu was very cautious regarding monetary transactions with Ding. Investors found that he seldom took money from her. Instead, he told Ding to leave a certain amount unused in her account. For this reason, it is still unclear how much Liu’s corruption netted him, sources said.
“Liu didn’t need to take money from Ding,” an official close to the Ministry of Railways said. “He could command Ding to do things for him.”
The Busy Middleman
Ding used her access to Liu to function as a low-profile but well-paid link between the ministry and state-owned enterprises (SOEs) vying for rail projects, prosecutors say.
An executive of a state-owned railway company said that even large SOEs have to rely on middlemen and pay kickbacks to secure contracts for major projects.
Kickbacks averaged 2 percent of the total project value of railway construction projects, an industry insider said. Projects that involved fiercer competition, such those for noise barriers, required kickbacks of up to 20 percent of the contract value.
Ding’s misdeeds came to light during a National Audit Office examination of SOEs in mid-2010. The auditor tracked a company that made a 100 million yuan payment termed “consulting fees” to Ding after it had bid on a railway project.
Five SOEs were linked to Ding: China Railway Engineering Corp., China Railway Construction Corp., China Communications Construction Co., China Power Construction Corp. and China Energy Engineering Group. On July 17, the state-owned assets regulator warned the companies to strengthen their internal governance.
In addition to intermediary business, Ding got rich selling railway equipment such as seats, noise barriers and wheels. She controlled Shanghai Tanda Transportation Track Equipment Development Co., a seat manufacturer set up in late 2004. As work on the high-speed railway network went into full swing, Shanghai Tanda’s income grew rapidly. Company documents show it had profits of 8.4 million yuan in 2007, 20 million yuan in 2008 and more than 30 million yuan in 2009.
Ding’s Jinhande Environmental Engineering Co. was once the sole supplier for noise barriers used on the country’s high-speed rail lines.
Additionally, in 2008 Ding established High Speed Railway Media Co., which controls most of the advertising in China’s new railway stations. It is unclear that how much High Speed Railway Media earned from the business. But, in late 2008, the company signed a contract with the new station in Qingdao, in the eastern province of Shandong, to become its sole advertising agent for 20 years. The deal would net the station 1 million yuan per year. From 2008 to 2011, the revenue from print advertising at the station was 5 million yuan per year.
In 2010, the Ministry of Railways made the company the organizer of the International Union of Railways High Speed 2010 Conference in Beijing, and for this it made 120 million yuan, a source close to the situation said. “Originally the organizer was China Academy of Railway Sciences, but it was later transferred to High Speed Railway Media,” one source said.
However, the August 3 ministry notice blamed Liu for only being aware that High Speed Railway Media charged attending companies 10 million yuan for sponsorships.
In July, the national auditor found that a promotional video named “China Railway,” which was screened at the opening ceremony of the conference, cost 18.5 million yuan. A later investigation drew attention to how ad revenues are controlled by a few well-connected agencies in the railway sector.
People familiar with Liu Zhijun see two sides of him. He is, of course, seen as corrupt, but at the same time very talented.
Many said he is a workaholic devoted to his job. One person close to Liu said: “He lived near the ministry and got to his office at 6 a.m. every day, and then had meetings, inspected the operations office and listened to reports from bureau heads. He usually stayed in the office until late night.”
Upon taking office as minister in 2003, Liu suspended railway reform and switched the focus to developing high-speed railways. His tough attitude and iron-fisted methods impressed many people, but lower employees complained about surging workloads and low pay.
Liu took full advantage of the Ministry of Railways’ independence in investment, debt issuance and policy-making. The central government’s 4 trillion yuan stimulus package in response to the 2008 global financial crisis gave him an opening to embark on prodigious development of the high-speed railway network.
By the end of 2011, the country had 13,000 kilometers of high-speed rails. During the five-year plan covering 2006 to 2010, national railway infrastructure investment totaled a whopping 1.98 trillion yuan.
Liu’s campaign changed China’s entire railway industry, but some wonder if this has been for the better. They say the investment surge has been neither economically sound, nor technologically feasible. Many argue it resulted in the fatal Wenzhou crash in 2011 and massive debt. By the end of March, the Ministry of Railways had total assets of 4 trillion yuan and the gross liabilities of 2.4 trillion yuan, a debt ratio of 60 percent.
An official from the National Development and Reform Commission may have summed up the general view of him by saying: “Liu uncovered the potential demand of high-speed railway, which is admirable. However, he made mistakes as he yielded to personal interests. Also, the monopoly of the Ministry of Railways in technology import and order issuance cultivated the conditions for corruption because it used its power to manipulate resource allocation.”
By staff reporters Wang Chen, Gu Yongqiang and Yu Ning