Tuesday, 2 August 2011

Big money in Chinese toll roads

A report in Chinese based website Global Times reports on the substantial profits being made in operating toll roads in China.  China has been building a nationwide expressway network based on toll roads, as part of its infrastructure development policy.   It already claims to have the majority of the world's toll roads, which it may do by measure of distance.

The report notes the profitability of publicly listed toll roads:

According to the 2010 annual financial reports of the 19 A-share Shanghai listed expressway companies, their total net profit last year rocketed to 12 billion yuan (US$1.84 billion), an increase of 16 percent year-on-year. And their revenue soared by 19 percent to 33.99 billion yuan (US$5.28 billion).

Given this is profit, it suggests that motorists are willing to pay for the massive improvement in travel times offered by the new expressways.  It's worth bearing in mind that in China, these expressways are sometimes replacing single carriageway (one lane each way) at grade highways, with intersections, traffic signals and few opportunities for traffic to pass.  The expressways can effectively halve road travel times, making the roads competitive with the railway for the first time.  The report also claimed that between 50-70% of logistics costs are the tolls paid for using these roads.

Their annual reports also showed that 15 companies' operating margins were over 50 percent. And the highest operating margin was 88.26 percent, achieved by Chongqing Road & Bridge Co.

The benefit of such high margins for China is that it is encouraging investment and further development of toll roads by the private and state highways companies.  China's highway network is being built by commercial means with the private sector, an interesting stark contrast with the similar highway networks built in the United States (Interstates), Germany (Autobahns) and the UK (Motorways).   It puts paid to the idea that such roads must be built by the public sector on a not-for-profit basis.

The report continues:

Wang Xiaoyan, an industry analyst at China Minzu Securities, told the Shanghai-based Oriental Morning Post that the main reason why expressway companies' operating margins are so high is that their expenditure basically goes to depreciation of assets, labor costs and facilities maintenance, which add up to a relatively small amount, compared to revenue. 

Indeed, with relatively cheap land and labour costs, the actual construction costs of these expressways is rather easy to recover.

An interesting development is the increased used of contracts and the legal system to address issues in this sector, suggesting China's legal system is maturing considerably:

"some companies have cooked up a new idea, which is known as 'unified operating,'" said Wu Chaohua, a lawyer at Beijing Hengde Law Firm.

He said that the companies claim that if they have at least one valid contract, they should still be allowed to operate all their other toll roads, even if their operating contracts have expired.

Wu helped a client to sue the Beijing Capital Highway Development Group in 2007 for continuing to collect fees 15 years after its contract to operate the tolls had expired.

The Chinese Government vehemently defends the use of tolls as a way of facilitating development of the country's highway network.   The key goal of tolls being to recover the loans taken out to build infrastructure.  However, some steps are being taken to soften the hardened money-making angle to toll roads:

Last month, Feng Zhenglin, a deputy minister of transport, said that the ministry and other relevant government agencies would initiate a campaign to lower some of the higher toll fees, as well as shutting down some toll gates that are too close to each other or that are being operated under expired contracts.

Finally, the report noted:

the case of Henan driver Shi Jianfeng, who was sentenced to life for evading 3.68 million yuan in tolls by using military vehicle license plates.

Now that's a deterrent to evading tolls, although I suspect the life imprisonment is more to do with stealing military licence plates than evading tolls!

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