China is encouraging more private sector involvement in the transport sector. Photo by Thomas Stellmach.

Our monthly China Transportation Briefing shares interesting news and noteworthy research related to China's transportation and urban development. The goal is to help people who are interested in solving China's urbanization and transportation problems understand relevant Chinese policies and trends. Each issue revolves around a particular theme, with content summarized from recent newsletters and magazines. If you have any questions, feel free to contact Research Assistant Heshuang Zeng at hzeng [at] wri [dot] org.

China's Ministry of Transport (MOT) recently announced 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 and Weak Capacity

According to the 12th 5-Year Transportation Plan, in the next five years, China will build 34,000 kilometers of new highways 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 (US$95 billion)—more than 10 percent of national GDP.

Under the country's current power structure, local governments are responsible for funding most of these transport projects, but 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 (US$95 billion.)

Going Private – A Wise Move

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 networks, and urban traffic intelligent systems. The announcement encourages various forms of financial participation, including wholly-owned holding companies, equity participation and shareholding. It 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.

Game-Changer?

The private sector will play a more important role in funding public transport in China. However, transport infrastructure projects usually require very large investments, which is hard for the private equity sector to dominate. What is more, under the "harmonious society" political ideal, the construction and operation of public transport will continue to be heavily subsidized by the government. The 12th 5-year Transportation Plan states clearly that the government should support public transport. This philosophy was 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.

Fundamental Rethinking

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 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 to build cities that house not only current but also several future generations in China. (Research shows that the previous round of master plans of 99 major cities projected a total urban population of 2 billion by 2010.) 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 (US$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 to introduce more stable local revenue taxes, such as property taxes and land-value incremental taxes. To implement the 12th 5-Year Transportation Plan and implement 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.