A policy analysis of United States transportation

¶ … Privatizing China's Transportation Infrastructure

The 21st century has been called the "Century of Asia" and China is clearly leading the way. Over the past 30 years, China has increasingly shaken off its state-controlled economic model in favor of a free market approach. As a result, China has experienced an unprecedented period of economic growth that has been met with a corresponding increase in the need for an efficient transportation infrastructure that is currently straining under the pressure. Economists have consistently cited the need for an efficient transportation system as part of a country's overall economic development needs and China is certainly no exception. Indeed, the need for an efficient and modern transportation infrastructure has never been greater than today, and policymakers in China are struggling to identify ways to keep pace with demand while providing the maintenance needed for the country's existing vast, but unconnected network of highways, waterways and railways. Some authorities argue that a national transportation infrastructure should be funded by governments, others advocate a privatization approach, and still others recommend a combination of these approaches. In this environment, identifying opportunities for using scarce resources more effectively in developing a nation's transportation infrastructure represents a timely and valuable enterprise. This study provides a review of the relevant literature to determine the pros and cons of a privatization approach to the development of China's transportation infrastructure, followed by a summary of the research and salient findings in the conclusion.

Table of Contents

Introduction

Background

Pro-Side of the Arguments in Favor of Privatization

Con Side of the Argument against Privatization

Conclusion

The Pros and Cons of Privatizing China's Transportation Infrastructure

Introduction

Although there is widespread agreement among economists that a modern transportation infrastructure is needed as part of a comprehensive economic development approach, there is less agreement concerning how the resources needed for such an infrastructure should be acquired and managed, particularly in newly industrialized nations such as China. While China has increasingly embraced free market economics in recent years, much of the country's economic development remains state-controlled and progress in some areas has been slower than in others. Some analysts have suggested that privatization represents a viable alternative to governmental development of a nation's transportation infrastructure through the use of private ferries, toll roads, toll bridges and so forth while critics argue that privatization opens the door to favoritism in contracts and the location of new construction projects. Whatever the source of the resources needed for the continued expansion and modernization of China's transportation infrastructure, it is clear that the country is already bursting at its transportation seams and an enormous amount of investment is going to be required in the near-term in order to keep pace with the other economic and infrastructure developmental initiatives taking place across the country. To determine the pros and cons of a privatization approach to the development of China's transportation infrastructure, this paper provides a review of the relevant peer-reviewed, scholarly and governmental literature followed by a summary of the research and important findings in the conclusion.

Background

Wherever the resources come from for it development, a modern transportation infrastructure is an absolutely essential element that is needed for economic development [11]. Given its sustained and rapid economic growth in recent years, the need for a modern transportation infrastructure in China has never been greater. Over the past three decades or so, China's economy has undergone a transition from a centrally planned system that was mostly closed off from international trade to a more market-oriented economy that has helped create a burgeoning private sector and the country has emerged to become a major actor in the global economy and international community [2].

The economic reforms that began during the late 1970s have helped fuel the need for an improved and expanded transportation infrastructure throughout China but there has been a dearth of uniform planning involved that has resulted in some parts of the country receiving the lion's share of transportation funding while less accessible regions of the country remain underfunded [2]. Even the economic reforms that are not directly tied to the country's transportation infrastructure have created a new need for an expanded and improved system of roadways. For example, U.S. government analysts emphasize that China has managed to weather the recent global economic downturn better than most other countries, there has been a cost involved: "The Chinese government faces numerous economic development challenges, including sustaining adequate job growth for tens of millions of migrants and new entrants to the workforce [and] reducing corruption and other economic crimes" (p. 3) [2]. These two constraints to economic development have direct implications for the direction and approach that will likely be required to achieve the country's goals in the future. In this regard, analysts with the U.S. government add that, "Economic development has been more rapid in coastal provinces than in the interior, and approximately 200 million rural laborers and their dependents have relocated to urban areas to find work" (p. 4) [2].

While the national Chinese government managed to weather the recent economic storm better than others, the country has not been immune to its lingering effects. In response to a downturn in the demand for the country's exports in 2009 that has driven its economic growth in recent years, Chinese policymakers have established a high priority goal of improving domestic consumption among the country's growing middle class to lessen dependence on foreign exports as a component of its GDP in the future [2]. Clearly, an improved and expanded national transportation infrastructure is imperative for this goal to be achieved.

Although China's transportation infrastructure is vast and the country features the largest system of waterways in the world and a national highway system second only to the United States, other aspects such as the nation's highways remain underdeveloped [2]. This lack of adequate highways in particular has hampered China's efforts to modernize its economy and provide more equitable opportunities for all of its citizens [7]. Indeed, in some ways, China's current efforts to modernize its transportation infrastructure are analogous to those that took place in the United States in the years immediately preceding and following World War II when the nation's need for an interstate highway system, a growing middle class and inexpensive automobiles created a demand that had to be filled in some fashion. According to Mackenzie (2002), "As funding for China's urban health care system continues to be linked to the official urban population level, the floating population lacks access to the cities' hospitals, doctors and pharmacies. One consequence is that many migrants are not immunized against infectious diseases, so worksites and living areas populated by migrants are susceptible to frequent epidemics. Only those fortunate enough to land jobs with state-owned enterprises are likely to have any form of health coverage" (p. 306) [6]. The lack of inexpensive transportation, though, has also adversely affected the ability of migrant workers to gain access to more meaningful employment opportunities that may exist in more distant parts of the country [6].

Economists have consistently cited China's enormous size and rugged geographic terrain as being ponderous challenges that are daunting in terms of the amount of money that is going to be involved in expanding the country's transportation infrastructure as well as how such initiatives are going to be funded. In this regard, Frewen (1999) emphasizes that, "With more than one fifth of the world's population and vast stretches of inhospitable terrain, China poses a complex distribution challenge for today's business managers. Estimates suggest that poor transportation links contributed to the loss of nearly one percent of China's gross domestic product (GDP) each year" (emphasis added) (p. 12) [4]. These estimates, of course, do not take into account the developmental opportunities that were lost because of a paucity of an adequate supporting transportation infrastructure nor do they take into account the effects of the continuing underemployment of tens of millions of the nation's migrant working class.

While there remains a dearth of relevant studies concerning ongoing efforts to modernize China's transportation infrastructure, some indication of the priorities that are involved can be gleaned from some recent reports. For example, according to Crawford (2009), much of the transportation infrastructure development taking place in China is directly tied to fossil fuel-based transportation such as automobiles and trucks that require an efficient network of interconnected highways, a feature that has not been lost on climatologists who cite the energy-hungry needs of the growing Chinese economy as contributing to the piecemeal fashion in which the transportation infrastructure is currently being developed [3]. In this regard, Crawford notes that, "China has been among the loudest 'developing' nation voices insisting that 'developed' nations should not be allowed to inhibit their carbon emissions until they reached a comparable stage of development, even as their carbon emissions soared. However, such emissions come at a cost, typically for the most politically, socially and economically disenfranchised members of those societies" (p. 212) [3]. As noted above, this category of citizenry in China includes a significant percentage of the country's migrant workers who are hampered in their ability to relocate to find meaningful employment because of a lack of inexpensive and accessible transportation. Despite these constraints, China does in fact have an impressive transportation infrastructure already, and China's rankings relative to the rest of the world in various transportation infrastructure categories is provided in Table 1 below.

Table 1

Current Status of China's Transportation Infrastructure

Infrastructure Category

Statistics/Current Status

World Rank

Airports

15

Railways

77,834 km

3

Roadways

3,583,715 km (includes 53,913 km of expressways)

2

Waterways

110,000 km navigable

1

Merchant marine

1,826

3

Ports and terminals

Dalian, Guangzhou, Ningbo, Qingdao, Qinhuangdao, Shanghai, Shenzhen, Tianjin (see map at Appendix a)

Source: China, 2010

The network of paved highways and roads that extends throughout China, though, is not the same type of national and unified transportation system that exists in the U.S., Japan and Europe that are characterized by uniform standards and regulatory guidelines and many of the roadways are in bad condition [10]. Notwithstanding the current state of the roadways throughout China, Tian and Wang (2010) indicate that the network is most likely adequate to satisfy China's current transportation requirements in the near-term but given the explosion in growth of the middle class and the prodigious rate at which personally owned vehicles are being purchased, these experts project a concomitant increase in the demand for highways in the future [10]. In this environment, it would appear that any solution that contributed to the improvement of the nation's transportation infrastructure would be a good idea, but there are some different opinions concerning how China should proceed which are discussed further below.

Pro-Side of the Arguments in Favor of Privatization

From a strictly pragmatic perspective, it just makes good business sense to allow the invisible hand to help a country develop its transportation infrastructure. After all, entrepreneurs are not likely to make significant economic investments in highway construction, for example, unless they are reasonably assured that there is a sufficient demand to ensure a satisfactory return on their investment, and allowing private enterprises to recoup their investment and a profit over the course of say, 20 years, whereupon the highway reverts to the state appears to represent a win-win approach that have proven effective in other parts of the world. For example, according to Pagano (2009), "Recent road leases are part of a much larger privatization trend that has expanded from the 1980's through today. Governments now look to the private sector to provide a wide range of goods and services that government itself used to provide" (p. 351) [8].

Indeed, the move to privatization has expanded to include activities that were formerly the purview of government entities alone such as investments in transportation infrastructure development. As Pagano points out, "In the face of a widely-recognized need for enormous infrastructure repairs and the fact that toll roads are ready income-producing assets capable of attracting investment, it is natural that states would turn to toll road leasing as one of the next large-scale moves in privatization" (p. 351) [8]. Indeed, throughout the United States, toll roads have proven to be an effective way to provide the transportation infrastructure framework for further development by municipalities, states and the national government. For example, Gutfreund (2004) reports that, "Before the United States entered World War II, a handful of important toll roads opened, laying the groundwork for a postwar boom in turnpike construction" (p. 37) [5].

As noted above, the unprecedented growth of China and many of its neighbors means that there are few comparable models that can be used to help guide the process, with the most relevant example being that which took place in the United States during the mid-20th century. Despite the fundamental differences in the political ideologies and culture between the U.S. And China, the model that emerged in the U.S. may provide some useful insights into what can be expected in China, particularly given the country's increasing reliance on a free market economy to fuel its growth and the swelling middle class that will demand more access to efficient transportation services. In this regard, Pagano (2009) observers that, "Today, as the expected useful life of much of the Interstate Highway System approaches expiration, a new set of economic pressures and political assumptions will shape how we address the challenge. State budgets are strained, and the federal deficit is greater than at any prior point in history. The primary sources of highway funding, federal and state motor fuel taxes, are not keeping up with the costs of maintaining roads" (p. 352) [8].

Similarly, the traditional approaches to state-funded highway construction in China may well be a relic of the past as increasing demand outpaces the Chinese government's ability to respond. In such an environment, China may well find itself in the same predicament as many Western nations when it comes to transportation infrastructure development: "It may no longer be wise policy for the government to foot the bill for a road project of such scope, given the consequences of the fuel-intensive, car-centric culture that resulted from the success of the Interstate Highway System" (p. 351) [8].

Based on these factors, the national government in the United States has incrementally amplified the degree to which states are allowed to construct toll roads and privately operated toll roads are becoming an increasingly popular alternative to satisfy the transportation needs of Americans [8]. While there have been some experiments that allowed states to incorporate toll roads into the Interstate Highway System itself in the past, the pilot programs for these initiatives were discontinued in 2007; however, in the years following the enactment of the Federal Highway Act of 1956, a number of other pilot programs were launched that allowed states to collect tolls on federal-aid highways besides the former exceptions such as high-cost projects like bridges and tunnels. In 1987, states were allowed to "establish publicly operated toll roads on federal-aid highways that are not part of the Interstate Highway System. In 1991, the law expanded the program to all states and also began to encourage private investment, permitting the combination of private and federal funds" (p. 352) [8].

In fact, there have been some efforts by the Chinese government to promote the use of toll roads. For example, Hong Kong-based Road King currently operates toll roads in eight Chinese provinces with plans on the table for even more in the future [6]. According to the Road King corporate Web site:

Road King Infrastructure Limited is a leading listed company in Hong Kong with its core business in the investment, development, operation and management of toll roads and property projects in the Peoples Republic of China (PRC). Road King has invested in a toll road portfolio of over HK$5 billion, comprising 18 toll road and bridge projects spanning 1,000 kilometers in eight provinces of China. Road King has commenced the property development business in the PRC since 2004. Projects are located in nine provinces and municipalities." (p. 1) [11]

Likewise, Alling (1999) also emphasizes that China is already heavily relying on outside investments for its public as well as its private ventures, and suggests that the major winners in the privatization of transportation development in China will be the average Chinese citizen while the major losers will be the powers-that-be who have long enjoyed the benefits of a patronage system to help direct where investments in transportation infrastructure would occur: "The major losers from privatization [in China] are operatives of the state apparatus, and the governing class of politicians who use the public sector as a source of patronage and funds" (p. 117) [1]. Given the high stakes involved, though, it is not surprising that there are arguments against the privatization of China's transportation infrastructure development, and these issues are discussed further below.

Con Side of the Argument against Privatization

The importance of an efficient transportation network to a country's development and security has been demonstrated time and again throughout history. The rise of the Roman Empire is attributed by many historians to the excellent network of highways that linked its far flung regions together. This network of imperial roadways facilitated the movement of military forces, international trade and communication. In fact, one of the major driving forces behind the major economic leaps achieved by the United States during the second half of the 20th century was the entirely toll-free, federally funded Interstate Highway System [5]. In this regard, Gutfreund equates the Interstate Highway System with a modern wonder of the modern world and credits it with driving much of the economic growth that took place following the end of World War II. For example, Gutfreund notes that, "Even after the United States entered the war, the surveying and planning efforts [for the interstate system] continued apace, under the rubric of identifying 'strategic highways' with 'defense importance.' During this time, the proposed highway network was often referred to as the 'military system'" (p. 42) [5].

Even while the top secret Manhattan Project was finishing its work on the atomic bomb and a world war was being waged in two theatres of combat, active planning continued for the construction of the toll-free Interstate Highway System that would link the country and by 1944, Gutfreund reports that, "A thirty-thousand-mile network of these new highways had been planned and formally presented to Congress and the President in a report from the National Interregional Highways Committee. This report, Interregional Highways, formed the basis for the Federal-Aid Highway Act of 1944, which created the Interstate Highway System" (p. 42) [5].

Although the Interstate Highway System overcame some truly stupendous obstacles in spanning the American continent, the Chinese are faced with an even more daunting task in improving and expanding its national highway network given the vast geographic distances and hostile terrain involved. Despite these constraints, because of the integral role played by a nation's transportation infrastructure, Whitnah (1998) suggests that the uniformity in laws and administration needed for an efficient transportation system can only be provided by a national government. In this regard, Whitnah writes, "Transportation services provided by interstate motor carriers are an essential element of the national economy. In order to have an efficient, safe, economical and profitable interstate transportation system there must be national uniformity in the laws and regulations applicable to the operating practices of interstate motor carriers" (p. 76) [12].