Privatizing China's Transportation Infrastructure: Pros and Cons

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 straining at its transportation seams and an enormous amount of investment will be required in the near term to keep pace with the other economic and infrastructure development 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.

A modern transportation infrastructure is an absolutely essential element needed for economic development. 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, 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. The country has emerged as a major actor in the global economy and international community [2].

Background: China's Economic Growth and Infrastructure Needs

The economic reforms that began during the late 1970s have fueled the need for an improved and expanded transportation infrastructure throughout China, but a dearth of uniform planning has resulted in some parts of the country receiving the lion's share of transportation funding while less accessible regions remain underfunded [2]. Even economic reforms not directly tied to transportation have created new demands on the system. U.S. government analysts emphasize that China managed to weather the recent global economic downturn better than most other countries, but at a cost: "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 constraints have direct implications for the direction China's transportation policy will need to take. As U.S. government analysts add, "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].

In response to a downturn in export demand in 2009, Chinese policymakers 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 GDP [2]. An improved and expanded national transportation infrastructure is imperative for this goal to be achieved.

Although China's transportation infrastructure is vast — the country features the largest system of waterways in the world and a national highway system second only to that of the United States — other aspects such as the nation's highways remain underdeveloped [2]. This lack of adequate highways has hampered China's efforts to modernize its economy and provide more equitable opportunities for all of its citizens [7]. 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 demand that had to be filled. According to Mackenzie (2002), the lack of inexpensive transportation has also adversely affected the ability of migrant workers to gain access to more meaningful employment opportunities in more distant parts of the country [6].

Economists have consistently cited China's enormous size and rugged geographic terrain as ponderous challenges in terms of both the cost of expanding the country's transportation infrastructure and how such initiatives will be funded. 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" (p. 12) [4]. These estimates do not take into account the developmental opportunities lost because of inadequate infrastructure, nor the effects of the continuing underemployment of tens of millions of migrant workers.

According to Crawford (2009), much of the transportation infrastructure development taking place in China is directly tied to fossil fuel-based transportation — automobiles and trucks — that requires an efficient network of interconnected highways [3]. 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]. This category of citizens in China includes a significant percentage of the country's migrant workers, who are hampered in their ability to relocate because of a lack of inexpensive and accessible transportation.

Despite these constraints, China already has an impressive transportation infrastructure. The table below summarizes China's current status in key infrastructure categories.

Table 1: Current Status of China's Transportation Infrastructure

Airports: World rank: 15. Railways: 77,834 km; World rank: 3. Roadways: 3,583,715 km (including 53,913 km of expressways); World rank: 2. Waterways: 110,000 km navigable; World rank: 1. Merchant marine: 1,826 vessels; World rank: 3. Major ports and terminals: Dalian, Guangzhou, Ningbo, Qingdao, Qinhuangdao, Shanghai, Shenzhen, Tianjin. (Source: CIA World Factbook, 2010)

The network of paved highways and roads throughout China is not the same type of unified national transportation system that exists in the United States, Japan, and Europe, characterized by uniform standards and regulatory guidelines, and many roadways are in poor condition [10]. Notwithstanding the current state of China's roadways, Tian and Wang (2010) indicate that the network is most likely adequate to satisfy current transportation requirements in the near term, but given the explosion in middle-class growth and the rapid rate at which privately owned vehicles are being purchased, they project a concomitant increase in the demand for highways in the future [10].

The Case for Privatization

From a strictly pragmatic perspective, allowing market forces to help a country develop its transportation infrastructure makes good business sense. Entrepreneurs are not likely to make significant investments in highway construction unless they are reasonably assured of sufficient demand to ensure a satisfactory return on investment. Allowing private enterprises to recoup their investment and profit over the course of, say, 20 years — whereupon the highway reverts to the state — appears to represent a win-win approach that has proven effective in other parts of the world. According to Pagano (2009), "Recent road leases are part of a much larger privatization trend that has expanded from the 1980s 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].

The move toward privatization has expanded to include activities formerly the purview of government entities alone, including investments in transportation infrastructure. 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]. Throughout the United States Interstate Highway System, toll roads have proven an effective way to provide a transportation infrastructure framework for further development. 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].

The unprecedented growth of China and many of its neighbors means there are few comparable models available to 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 political ideology and culture between the U.S. and China, the American model may provide useful insights, particularly given China's increasing reliance on a free market economy and the swelling middle class demanding more access to efficient transportation. Pagano (2009) observes 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, traditional approaches to state-funded highway construction in China may well be relics of the past as increasing demand outpaces the government's ability to respond. In such an environment, China may find itself in the same predicament as many Western nations: "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 U.S. national government has incrementally expanded the degree to which states are allowed to construct toll roads, and privately operated toll roads are becoming an increasingly popular alternative. While some pilot programs allowing states to incorporate toll roads into the Interstate Highway System itself were discontinued in 2007, in the years following the Federal Highway Act of 1956 a number of other programs were launched allowing states to collect tolls on federal-aid highways. 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].

There have also been concrete efforts by the Chinese government to promote the use of toll roads. Hong Kong-based Road King currently operates toll roads in eight Chinese provinces, with plans for further expansion [6]. According to the Road King corporate website, the company 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 People's 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" [11].

Alling (1999) also emphasizes that China already heavily relies on outside investments for its public and private ventures, and suggests that the major winners in the privatization of transportation development in China will be average Chinese citizens, while the major losers will be those who have long enjoyed a patronage system that directed where infrastructure investments 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].

Conclusion

The research showed that China has emerged in the early 21st century as an economic juggernaut that will, in time, achieve the modernization and expansion of its transportation infrastructure, with the only question remaining being how the country is going to achieve it. If national policymakers remain tied to the old guard politics that characterized the original construction of the country's transportation infrastructure, little will change in terms of how funding is provided or who benefits from transportation-related construction projects. Conversely, if the Chinese leadership simply abandons any responsibility for transportation infrastructure in favor of privatization, it is reasonable to conclude that only the highly profitable and rapidly growing sections of the country will be serviced by toll roads, bridges, and ferries, while less desirable regions and municipalities will be left to fend for themselves.