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High tolls, other roadblocks stymie private investment in expressway
Aggregated Source: Shanghai Daily: Business

FOR decades, China has relied on private investors for money to build roads, but that source of funding may be drying up just as the nation needs it to finance extensions to the highway system.

Private investment has been based on the concept that those who finance projects also get to operate them and collect tolls for a specified period of time to recoup their investment. After the concession ends, toll roads revert back to government control.

The arrangement ends up being a partnership between private investors and the government, which approves land for highway construction and may also hold a stake in the operating company.

But problems with the model have cast doubt on its future. As the number of toll roads increased, high tolls have drawn constant criticism from the public. Meanwhile, rising construction costs and lack of a reliable government framework have damped investor interest.

"Roads are major public infrastructure and the government has to get involved," Vice Transport Minister Weng Mengyong said during a panel discussion last week at the annual summit of the Organization for Economic Cooperation and Development's International Transport Forum in Leipzig, Germany. "But market forces are getting a bit too big. That has led to high tolls, public dissatisfaction and rising logistics costs."

Unhappy operators

Toll road operators, both public and private, weren't very happy when the government arbitrarily stepped in to cancel tolls during national holidays last year and temporarily stopped charging vehicles carrying vegetables during a period of high inflation.

"While the moves benefit the public, they were actually against investors' interests," Zhou Jichang, who stepped down last month as chairman of China Communications Construction Co, a main ports and road builder, said in an interview during the conference. "Many potential investors are shunning highways now."

A better way or proceed, he added, is either for the government to offer subsidies for road operators or for motorists.

The situation puts China in a dilemma. On the one hand, the country has to build more roads to handle burgeoning numbers of cars and connect a large number of villages still without major roads. On the other hand, private financing is indispensable when taxpayer money is more urgently needed in areas such as healthcare and education.

Today, 20 percent of China's 98,000 kilometers of expressways are funded by the central government and the rest by the private sector or local governments, according to Zhou.

By 2030, the nation aims to extend the expressway network to 130,000 kilometers and the combined road network to 6 million kilometers, according to national plans.

The huge expansion means the government has to continue to seek private financing and the government has to ensure no more hikes in road tolls. Budgets are increasingly tight also because maintenance costs on existing roads are now almost close to annual spending on new projects, Weng said.

One option the government is studying is to extend the concession period for the country's toll road operators in an effort to bring down motorists' costs, he said.

Typically, China grants a concession period of 15 years for road operators, though the period is often extended. For example, the concession for the mainland's first expressway, the Hujia Expressway linking downtown Shanghai and suburban Jiading District, which opened in 1988, ended only last year because of the cost of laying off workers.

Expanding high-speed railways could avoid the necessity of having to build more intercity expressways, Weng said.

That solution might be easier now than in the past because the Ministry of Railways has split, lessening its power, said Michael Replogle, founder and managing director for policy at the Washington-based Institute for Transportation and Development Policy. There is always a "lack of coordination" among government agencies with regard to new projects planning, he said at the forum.

The situation may improve with the integration of the scandal-plagued Ministry of Railways into the Ministry of Transport earlier this year. "This allows us to compare the advantages of different transport models more directly," the vice transport minister said.

Global problem

Funding is indeed a global transport problem. During the Leipzig summit, the OECD issued a report calling for urgent private-sector investment in transport infrastructure, especially in rapid transit sectors like railway, metros and express buses to counter growing demand in a time of tight government budgets.

Investment in rapid transit sectors could play a key role in driving long-term economic growth, while addressing issues like pollution and congestion, the international organization said.

"It is urgent that investment in transportation moves towards building right, not just building more," OECD Secretary-General Angel Gurria said. "The private sector has a key role to play in this shift, which will help governments to meet pressing economic, social and environmental challenges."

While China still has many challenges ahead in road construction, "we must adopt a system that not only prevents operators from reaping windfall profits but also protects their interests," Weng said.

China is confident it can develop a model that could set a sample for other developing nations, he added.

"We have many forerunners, but we also have many followers," the vice minister said.

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