11.165/11.477J/1.286J

Infrastructure and Energy Technologies, 2011

Professor Karen R. Polenske

China’s Expressway Planning and Development: Service Level and Economic Efficiency

Yongjian Xu

Humphrey Fellow at DUSP, Massachusetts Institute of Technology

Introduction

Highways are crucial to China in fighting inequality and poverty of the rural areas (Fan Shenggen and Zhang Xiaobo, 2004). Over the past two decades, China has embarked on an ambitious program of expressway network expansion, which is also known as the National Trunk Highway System (NTHS). Of all the literatures on the China’s expressway, most notable are those on its institutional and financial arrangements and its spatial economic impacts (Thomas White Global Investing, 2011; World Bank, 2007; World Bank 2010a; World Bank, 2010b). This research identifies potential operational risks in expressway sector of China from the perspective of service level of the network and economic efficiency of the sector The hypothesis is that, in a country like China where most expressway projects have a strong backing and support of the

1

government, operational risks may pose challenging issues for toll expressways. Neglect of service efficiency in network planning may increase such risk. Since it is evident that, highway has been identified as a major economic sector to offset the negative effects of the Asian financial crisis, against the macro-economic effect picture which is best reflected in the rise of China’s expressway total fixed investment, the service level of expressway was examined and the economic efficiency of China’s expressway sector is investigated to identify the possible risks.

1. A glance at the short history 1.1 Pace of Development

The rocketing growth of foreign trade coupled with the booming domestic economy has generated great pressure for improvements to China’s domestic transportation system. Roadway systems have played the most important role in container transportation. It is estimated by MOC that 84% of China’s containers for shipment (or from shipments) at major ports are transported by roadways.

By the end of year 2010, the highway in China totaled 4 million kilometers. The mileage of highway of and above class-4 increased significantly to reach 3.3 million kilometers, adding 240, 000 kilometers on that of the previous year and accounted for 82.4% of the total. When compared with that of 2005, the ratio of highway of and above class-4 raised by 18.5 percentage

2

points. To increase land utilization efficiency and ensure fast traffic, China has placed expressways at the core of roadway network construction.

Source: Website of the People’s Republic of China’s Ministry of Communications (MOC), 2011

Expressway construction in China only gained momentum in 1989. Between 1990 and 2005, China invested approximately US$600 billion, or US$40 billion per annum, to upgrade its road system (World Bank, 2010b). The centerpiece of this massive infrastructure program was the building of a National Expressway Network. Expansion of the network has since continued, with its current length standing at around 74,000 km (see Fig. 1). The scale of the project can be seen by the fact that on January 1, 1989, the PRC had 147 km of expressways, but by end of 2007, it had 53,600 km of expressway, about 8,000 km of which were built in 2007. More than 20,000 kilometers mileages were built in the 2008-2010 period. In

3

2010 alone, 9,816 kilometers (6,099 miles) of expressways were added to the network. The density of expressway in China is 0.77 km/100 km2, which is 72% of that of USA (1.07) and 41% of that of Japan (1.87). In the past decades, highways especially expressway has played an important role in facilitating population floating, raising productivity and integrating the small town and village into national economy.

1.2 Financing of development

Source: Website of the People’s Republic of China’s Ministry of Communications (MOC), 2011

As to financing, the provinces typically finance 66–90% of the capital cost through their own budgets and through debt (See Fig. 2). MOC sets policies, standards and provides investment support toward the construction cost.

In the process of expanding its NTHS, the government of China decided to adopt a toll-based network, and to use debt as a key financing vehicle for such development. Once the expressways

4

are constructed, they are managed by the Provincial Transport Departments through an operating company or other authorized entities. The private sector provides finance on a limited scale through different types of concession schemes. Private investment accounted for about 7 per cent of expressway financing in china (World Bank, 2010a).

2. Expressway Planning in China2.1 Plan goal constantly updated at the national level

Originally, China had been carrying out a plan to build up a 35,000 kilometer national trunk highway system (NTHS) with 70% of the trunk roads being expressways. The year 2005 witnessed China resetting the NTHS goal as 85,000 kilometer by 2030, which is a network composed by 7 expressways from Beijing, 9 North to South and 18 East to West expressways. Of the 85,000-kilometer network, 55,000 kilometers are to be completed by 2010 (P. R. China Ministry of Communications, 2005).

5

Source: P. R. China Ministry of Communications, 2005

According to the 12th-Five-Year Plan(P. R. China Ministry of Communications, 2011), by 2015, about 83,000 kilometers (53,000 miles) of national expressways will be completed, which means the updated NTHS goal set in 2005 will be achieved 15 years ahead of schedule (be completed in 2015 instead of 2030). As to the total mileage of expressway, an increase of 34,000 kilometers is expected in the 2011-2015 period. It is predictable that there will be many selected sub-national expressway projects developed concurrent with the NTHS projects, since there will be 25,000-kilometer sub-national expressway and 9,000-kilometer national expressway to be constructed respectively. Also, it should be noted that, China has come to a point that 80 per cent of the cities with

6

population over 200,000 have been covered by expressways. Is it efficient to raise the coverage level to over 90 per cent by adding new expressway of 36,000 kilometers in the coming five years? The efficiency of expressway coverage will be discussed later.

Tab. 1 Expressway Development Goal for 2015 in China2010 Goal of 2015

Total mileage of expressways(kilometers)

74,000 108,000

Mileage of national expressways (kilometers)

58,000 83,000

Coverage ratio of expressway to cities with population over 200,000 (%)

80 Over 90

Source: P. R. China Ministry of Communications, 2011.

2.2 Two-tier system and the efficiency of the provincial network

It is evident that China has a two-tier system when planning and development of expressway are concerned. The MOC is responsible for overall planning and standards definition, together with concurrent Provincial Transport Departments being in charge of the detailed planning, engineering design and building of the selected expressways. The fast-paced expansion of the road network in China, especially expressways, over the past decades has partly been the result

7

of the government’s systematic tiered approach (World Bank, 2007).

Fig. 4 Coverage level of the National Fig. 5 Coverage level of the AggregatedExpressway Network Plan of China Provincial Plan of Expressway in ChinaSource: Wang Chengjin, Ding Jinxue and Yang Wei, 2011.

In 2011, all inland provinces of China approved their updated provincial network of expressway plans. By aggregating all these plans, the total mileage reached 174,000 kilometers by 2030 with Hong Kong, Macau and Taiwan included, nearly 90,000 kilometers longer than the state network. Such ambitious targets greatly challenged the national network plan in scale and it means massive investment. Although such enthusiasm may contributed to the large-scale implementation capacity allowing the construction of many parallel expressway projects, the service level and service efficiency may be neglected and sacrificed.

8

A comparison between the two networks is carried out. In the aggregated provincial plan, 99% of the municipal-level units and 87.5% of counties are covered. Except in Heilongjiang and Tibet, all the provincial capital cities are connected with prefecture-level cities. In contrast, the national network only covers 93% of the municipal-level units and 61% of the counties (Wang Chengjin, Ding Jinxue and Yang Wei, 2011). If the national network is “grid” in spatial pattern, the aggregated provincial plan can be best described as “spider web”. More detailed comparison in service efficiency between the national plan and the aggregated provincial plan is shown in Tab. There is coverage rate improvement since 69.2% of the territory and 95.0% of the population are covered by the aggregated provincial network in contrast with 44.3% and 73.4% coverage in the national network plan. However, the territory coverage efficiency and population coverage efficiency decreased from 51.3 km2/km and 1.09 10000 person/km to 39.3 and 0.69 respectively, which indicates that coverage improvement is realized in a comparatively inefficient way. Mere contraction between the sub-national and national expressway reveals inefficiency in service. More analysis of alternative options in terms of alignments and phrases may be needed to rather than rushing to conclusion that all these expressway should be completed, especially at the sub-national level.

9

Tab. 2 Comparison between Territory and Population Coverage Level: National network and aggregated provincial network in China

Territory Covered (%)

Population Covered (%)

Non-agricultural Population Covered (%)

National network 44.3 73.4 82.1

Aggregated provincial network

69.2 95.0 96.0

Coverage level improved

24.9 21.6 14.1

Source: Wang Chengjin, Ding Jinxue and Yang Wei, 2011

Territory Coverage Efficiency (km2/km)

Population Coverage Efficiency (10000 person/km)

Non-agricultural Population Coverage Efficiency (10000 person/km)

National network 51.3 1.09 1.38

Aggregated provincial network

39.3 0.69 0.77

Tab. 3 Comparison between Territory and Population Coverage Efficiency: National network and aggregated provincial network in China

Source: Wang Chengjin, Ding Jinxue and Yang Wei, 2011

3. Expressway Economic Efficiency

3.1 Construction cost

10

There is no statistics at the national level on construction costs of expressway. Instead, evidences are cited for different projects in different provinces of China (Han Qicheng and Wang Liyan, 2011). For example, Guangdong Province, coast averages by 51.7 million Yuan per kilometer, with three expressways built at the cost over 100 million Yuan. In several neighbor provinces of Guangdong, the costs are respectively 29 to 30 million Yuan (Fujian Province), 28 million Yuan or so (Hunan Province), 19 million Yuan (Guangxi Province) and 20 to 50 million Yuan (Jiangxi Province).

3.2 Traffic Volume

Fig.6 Growth Rate of Freight and Passenger Traffic Volumes of Highways in China: 2009-2011

Source: Website of the People’s Republic of China’s Ministry of Communications (MOC), 2011

Traffic volumes are highly sensitive to domestic as well as international macroeconomic conditions. The traffic volume for the newly built expressways is dropping when compared to the

11

part built in earlier period (Zhang Shiwen and Liu Xiaoming, 2008). Due to the difference between the eastern, western and middle part of China concerning development stage, economic growth pattern and the demand generated, the growth potential of highway traffic volume is quite different. By the National Network Plan, 32,000 km of expressway are to be built in central and western regions, which may face traffic volume growth pattern quite different from that of the eastern China. In order to finance network expansion to the central and western regions where traffic levels are expected to be low, China may consider the options of a national toll policy (World Bank, 2007). Its main objective would be to divert a portion of the toll revenue from the mature highways to the development of lower volume and non-remunerative roads in less developed provinces. The approach would be to bridge the revenue shortfall until the debt has been retired on all roads.

3.3 Toll tariff

Nearly all expressways charge tolls in China since most Chinese expressways are not directly owned by the state, but rather are owned by for-profit corporations (which have varying amounts of public and private ownership) which borrow money from banks or securities markets based on revenue from projected toll-roads. One reason for this is that Chinese provinces, which are responsible for road building, have extremely limited

12

powers to tax and even fewer powers to borrow. This situation will not change soon because most of the roads on the NTHS/"7918 Network" are toll roads. By World Bank research, expressway tolls in China have been set at levels similar to or higher than equivalent tolls charged in many developed countries due to the fact that the percentage of public investment is relatively low and that loans are a high portion of the total investment. Also, the affordability of tolls in China is among the lowest in the world (World Bank, 2007).

Fig. 7 International Toll Rates Fig. 8 Affordability of Tolls Source: World Bank, 2007 Source: World Bank, 2007

The fact of toll collection against national regulations and high tariff standard has aroused public anxiety in China. Lower toll tariff standard roads are requested. In 2011, the highway charge management supervised by several ministries was

13

recently carried out, and it is hoped that toll collection against rule will be cancelled, and the suspension of the Level-2 highway toll collection will be promoted. However, there is no sign that there would be major adjustment in the expressway toll tariffs. Also, the “innovative” method of extracting certain part of the expressway toll revenues to partially support the financing of other arterial highway development (tongdaitonghuan) has made it almost impossible to lower the expressway toll tariff standard.

3.4 Debt risk faced by Highway Companies

The debt of listed highway companies in China has reached the highest level in the history record and there is rising concerns from credit agencies in China over the companies’ ability to refund the debt (Yang Xi, 2011; Zhanglu and Weng Shiyou, 2011).

The debt of 19 listed highway companies exceeds 100 billion Yuan (US$15.5 billion). Henan Zhongyuan Expressway Co. Ltd. has the highest debt ratio of 77.72 percent and a debt of about 22 billion yuan in the first quarter of 2011. Consequently, on July 8, China Cheng Xin International Credit Rating Co. Ltd. changed the outlook rating for the toll highway sector from "steady" to "negative" because highway companies are having difficulties paying short-term debts.

14

Besides, according to China’s National Audit Office report released in June, local governments will face huge losses if highway companies cannot pay off their debts. Highway companies borrowed about 1.12 trillion Yuan (US$173 billion) from local governments, which also borrowed the money, to build the highways.

Conclusion

The significant total fixed investment of expressway during the past decades has made it effective as an economic development initiative for China. One alarming indicator is that, when China is in the middle of another international financial crisis after the Asian financial chaos, the operational risk behind the investment great leap is now emerging. The provincial ambitious goal of expressway construction contribute to the capacity of developing concurrent projects, yet the low efficiency in the network plan at provincial level may increase the operational risks in the long run. To tackle such risks, the joint work of policy-makers and researchers are required. One thing is for sure: to optimize the investment, there is need for renew efforts to strength economic analysis to tailor investment timetabels and design to expected economic and social benefits, including improved demand estimation and

15

analysis of alternative options in terms of alignments and phrases.

REFERENCES

In English

Fan Shenggen and Zhang Xiaobo, 2004, “Infrastructure and regional economic development in rural China”, China Economic Review, 15: 203 – 214.

Thomas White Global Investing, 2011, “Toll Roads in China: Speeding up Growth”, BRIC Spotlight Report June 2011, Thomas White Global Investing.

World Bank, 2010a, A Review of Institutional Arrangements for Road Asset Management: Lessons for the Developing World, Washington, DC: The World Bank.

World Bank, 2010b, On the Road to Prosperity? The Economic Geography of China’s National Expressway Network, Washington, DC:The world Bank.

World Bank, 2007, China’s Expressways: Connecting People and Markets for Equitable Development, Washington, DC: The World Bank.

Yang Xi, 2011, Highway companies face high debt risk, China.org.cn.

In Chinese

16

Han Qicheng and Wang Liyan, 2011, Illustrated Analysis on Highway construction process, financing sources and the provincial structures of China, Beijing: Guotai Junan Securities.

P. R. China Ministry of Communications, 2005, Plan for National Expressway Network”, Beijing: Ministry of Communications. P. R. China Ministry of Communications, 2011, The 12th –Five-Year Plan for National Transportation, Beijing.

Wang Chengjin, Ding Jinxue and Yang Wei, 2011, “Policy and spatial effect of expressway planning network in China”, ACTA Geographica Sinica, 66(8): 1076-1088.

Zhanglu and Weng Shiyou, 2011, “Debt of expressway sectors”, Finance and Economy, 22: 1-16.

Zhang Shiwen and Liu Xiaoming, 2008, “Assessment on China’s implementation of financing system reform for expressway construction”, Comprehensive Transportation, 6: 26-30.

17