China needs sustainable funding for urban transport infrastructure boom
Zhirong Jerry Zhao says too much emphasis has been on 'innovative' financial tools at local level
China's economic take-off has been accompanied by a dazzling growth in transport infrastructure. There were a staggering 4.2 million km of highways by 2012, expanding from just 126,000km in 1949. Railroads in operation increased from 22,900km in 1952 to 98,000km in 2012, including more than 9,300km of high-speed rail.
In the subway boom, meanwhile, not only are megacities like Beijing and Shanghai adding new lines and extensions but smaller cities are also racing to open their first lines. The central government has given approval to 38 cities for at least one line by the end of the decade.
Behind this expansion, however, lie some serious concerns about China's transport infrastructure investments and whether these are sustainable. More studies are needed to examine the funding mechanisms, decision-making processes and policy effects. It is not clear whether the huge amounts of investment can be justified by economic gains, compared to alternative ways of spending in other policy areas.
Attention should also be paid to how the benefits are distributed to different groups and across different areas.
Finally, there are increasing concerns that China lacks reliable funding sources to pay back capital borrowing and sustain operating costs for transport facilities.
Indeed, China needs to get back to more "conventional" funding approaches that align with basic public-finance principles. Its urban infrastructure finance and transport investments in the past few decades may be characterised as a "government-led market operation", which has relied heavily on borrowing and fuzzy guarantees against future revenues at the local level. Beijing should gradually reduce its reliance on borrowing and financing, use more direct fiscal revenues (including central subsidies and earmarked local taxes and fees), and ensure investment decisions are made through more participatory, transparent and deliberate budgetary processes.
Beijing faces several distinct challenges in sustaining its investment boom in highways, high-speed rail and urban transit.
