China’s Ministry of Transport (MOT) recently made an announcement that it will encourage more private investment in the transportation sector. Given the funding gap in transportation projects in China, this regulation appears to be a wise move, but more aggressive actions are required.
Ambitious Plans but Weak Capacity
According to China’s 12th Five-Year Transportation Plan, in the next five years China will build 34,000 kilometers of new expressways and 500,000 kilometers of new roads, improve subways and city railway systems, and build about 100 new transportation hubs. Realizing this plan requires huge investments. It is estimated that there will be more than 30 cities with metro projects underway in the next 15 years, and the necessary investment required would surpass 600 billion yuan ($95 billion).
Under the current administrative structure, local governments are responsible for funding most of these transport projects. For example, metro projects are funded solely by direct public funds with only a few exceptional cases like Beijing’s Metro Line 4 (30 percent of the investment comes from the private sector.) However, the unbalanced fiscal arrangement in China places great pressure on being able to provide continuous transport development in the future. In 2010, local governments accounted for more than four-fifths of public spending, but collected just 45 percent of the country’s tax revenues, leaving a gap amounting to 600 billion yuan.
The MOT’s recent announcement encourages the participation of private investments in highways, ports and waterway construction, maintenance, operation and management, as well as projects like integrated transport hubs, logistics parks and transportation stations. Private capital is also encouraged to fund the research and promotion of new transport technologies, processes, materials and the development of transportation logistics public information platforms, public transportation information service systems, highway electronic toll collection system, and urban traffic intelligent systems. Various forms of financial participation, including wholly-owned holding companies, equity participation and shareholding are recommended.
The announcement also requires local transit authorities to provide service, guidelines and regulations to facilitate private capital investments.
The introduction of private capital will surely reduce the financial burden on the government. At the same time, the entrepreneurial spirit might also accelerate transportation technology innovation and application, especially in new fields, and increase the total efficiency of the system. If well-guided, the private sector might even create new transport funding models through integrated development between transport and surrounding land, like land-value capturing seen in private railway projects in Japan.
The private sector has been involved in funding toll roads in China through the transfer of operation rights. Although there have been doubts on toll road transparency, this type of public-private partnership does provide an important funding stream for toll expressway projects in China. The announcement will give the private sector more space in funding public transport in China.
However, under the “harmonious society” political ideal, the construction and operation of public transport will continue to be heavily subsidized by the government. The transportation plan states clearly that the government should support public transport, a philosophy also reflected in the joint statement by the Ministry of Construction (MOC), National Development and Reform Commission (NDRC) and Ministry of Finance (MOF), which said that the government should establish a sound mechanism for public subsidies, considering urban mass transit as an economic and social benefit.
Increasing financial liability over time has posed a great challenge on already in-debt local Chinese governments. How can local Chinese cities get out of debt to fund transport projects sustainably? The World Bank just released a report on sustainable low-carbon cities in China. It calls for a fundamental rethinking on urban finance.
In the past 15 years, Chinese municipal governments have been filling the public financing gap mainly through two sources: Urban land concession and borrowing. Neither source is sustainable. The heavy reliance on land acquisition revenues makes local governments launch overly ambitious city master plans, and they are now building cities that can house not only current but also several future generations. (Research shows that the previous round of master plans of 99 major cities projected a total urban population of 2 billion by 2010, while the total population of China now is 1.3 billion.) At the same time, the increasing amount of local debt raised concerns about regulating the local fiscal system. In 2009, local debt reached 7 trillion yuan ($1.1 trillion.)
To address this challenge, the World Bank report suggests that the central government strengthen its role, and it urges local governments to take comprehensive actions and introduce more stable local revenue taxes, such as property taxes and land-value incremental taxes. To implement the plan and sustainable transport projects, filling the finance gap is a pressing issue that requires a series of reforms. China will have to take action sooner or later.