Guest Editor – Mr.Richard Di Bona

July 18, 2012

Richard Di Bona has been a transport planning consultant for approximately 20 years, gaining experience on    projects in over 20 countries. This includes tollway experience in Europe, Australia and across Asia. Originally from the UK, he has been based in Hong Kong for over 17 years and has been extensively involved in tollways in Mainland China in particular. He has advised on traffic and toll revenue projections and demand-side risks variously to advise bidders for BOT concessions, potential lenders, government & development agencies, as well as on Bond Issues, Private Placement and Stock Market listings for tollway operators.

His guest editorial is entitled “Expressway Development in China, Malaysia and Mexico; and Potential Lessons for India”.

Expressway Development in China, Malaysia and Mexico; and Potential Lessons for India

Having been privileged to be invited to write something for I was asked to come up with my own topic for my guest editorial, pulling on my interests and experience with tollways internationally. After some thought, I decided to step back and reflect on the question of why expressway development is important and moreover, whilst learning from overseas experience is important, why it is equally important to consider local conditions; this with reference to the experiences of China, Malaysia and Mexico.

Without a doubt, one of the keys to China’s development has been the development of tollways, specifically inter-urban tolled expressways. These have often reduced round-trip journey times from days to a day-trip for trucks. Moreover, they added capacity to enable factories to develop and expand in the knowledge that they could receive raw materials from and send manufactured goods to ports (which themselves also expanded).  The impact on development in much of China has been evident, since my first visit in 1993.

Meanwhile, across the Pacific at the end of 1992, Canada, Mexico and the USA signed the North American Free Trade Agreement (NAFTA). In the run-up to this, maverick US politician Ross Perot talked of the “sucking sound” of jobs shifting to Mexico as a consequence of NAFTA. And it could be argued that a number of low-end manufacturing jobs did indeed shift to Mexico.

However, this raises a question: why did higher end manufacturing not develop in Mexico to the same extent as China, or even Malaysia? After all, both Mexico and Malaysia were early adopters of private finance into the development of tolled expressways, beginning back in the 1980s. And China only really got in on the act in the mid- to late-1990s.

To a great extent, the answer lies in the development of expressways on a sustainable basis. Where private finance is involved, this requires sustainable returns to investors.Decisions and management of expressway development were decentralised, with the aim of increasing responsiveness. However, local authorities in Mexico by-and-large did not have the necessary skills and capabilities at the time to properly manage expressway development. As a consequence, Mexico’s US$13.3bn 1989-94 toll road programme amassed US$5.5bn in non-performing non-recourse loans. Given this background, it is hardly surprising that infrastructure development in Mexico was less attractive to investors; and it could be argued that this was one reason why Mexico failed to fully reap the opportunities presented by NAFTA.

Malaysia and China in contrast have both developed markedly, both in terms of tollways and of wider industrial and technological advance.

Like Mexico, Malaysia has also been cited as an early adoptor of encouraging private involvement in the provision of highways, most notably with the tolled North-South Highway (or “PLUS”), in the 1980s. This was seen as a highly successful project and became the catalyst for a boom in tollway construction in the country from the 1990s.

However, Malaysia’s experience was not without its problems: whilst the tollway network grew quickly, by the late 1990s questions were being asked regarding the financial prospects of a number of concessions. It was argued that Malaysia built-out its inter-urban expressway network too quickly, resulting in insufficient demand for the capacity offered. In a number of cases concessions were granted which ran parallel to existing tollway concessions. Those identifying schemes could often proceed (subject to financing) without due diligence of impacts on existing Build-Operate-Transfer concessions. This might have helped national development, but it did not necessarily help the fortunes of tollway operators and investors!

China’s embracing of private involvement in tollways began with the Guangzhou-Shenzhen Superhighway, the first section of which opened in 1994. This was a Build-Operate-Transfer concession. However, by the time this opened, China was already developing tollways with its own government financing. But quite often local (initially primarily Provincial-level) government would construct and open the first phase of a tollway and then seek private investment as a Joint Venture, both to take on the management of the completed section and to obtain finance for the completion of subsequent sections. In a number of cases, Provincial governments would set up a company holding the expressway concession rights and then list a proportion of the equity on stock exchanges.

Given the pace of development in China, a number of different approaches were used. And each had its advantages and on occasion, its drawbacks also. Jiangsu Expressway Co. Ltd. held not only the rights to the Jiangsu section of the Shanghai-Nanjing expressway, but also a number of connecting tollways. Moreover, the company also operated toll collection systems on the pre-existing parallel National Highway, enabling tolls to be coordinated and helping to ensure that the Malaysian problem, of competing expressways opening before there was sufficient demand for both the old and new expressways, did not arise. Of course, the pace of economic growth in general in China also helped the success of many projects: and expressways meant that for truck drivers on certain inter-provincial routes, what had been up to a one-week round trip previously, could become a two-day or even same-day trip.

There were however problems with some projects. When debt-financing was selected by concessionaires, there were a few instances of too many Bonds being issued, with too large a share of debt repayments being scheduled too early on, leading to the bankruptcy of a small number of private investor-operators.

Other issues arose when city-level government granted rights for a scheme connecting to an adjacent city. (City-level government in China is one tier beneath Provincial government.) For example, when the tolled Humen Bridge in Guangdong was planned and built, it was assumed that the pre-existing ferry service would cease operation. However, being operated by the city government on the other side of the river, not only continued to operate but ensured that ferry tolls for trucks undercut road tolls on the bridge. This issue of “competitive responses” is not new to transport planning: the Channel Tunnel linking Britain to France faced the same challenge from incumbent cross-channel ferry operators. And also in the UK, when the Sheffield Supertram first opened, deregulated bus operators ran parallel to the Supertram and undercut fares.

Particularly in the early days of expressway concessions, in order to attract investors, local governments often offered revenue guarantees to investor-operators. However, such arrangements were outlawed under a 2002 State Council directive. This led New World Development to divest from 13 toll roads and bridges in China.

Contractual guarantees, covering areas such as restricting competition from other roads and even revenue guarantees, though often useful where a project is perceived as potentially high-risk, can prove controversial. The original arrangements for Sydney’s Cross-City Tunnel being a case-in-point (but one which would require at least an entire article to properly elucidate).

Another change in conditions which occurred in China in the mid-to-late 1990s was the maximum tollway length which Provincial governments could be responsible for. The aim was to enable local governments to develop local tollways, but strategic long-distance tollways should be approved by central government, which had previously prepared a National Trunk Highway System masterplan for tolled expressways to link-up the country. However, at least when first introduced, this directive was sometimes bypassed by Provincial governments splitting a tollway concession into a number of contracts, each covering a distance beneath the threshold requiring central government approval. Nevertheless, Beijing’s approval was required for any projects seeking stock market listings.

Despite the success of many tollways in China, it must also be mentioned that not all have been successful. Indeed, it would appear that following the success of many projects, some local governments decided to get in on the act, including promoting schemes which did not have the same demand/ economic/ financial rationale of the earlier success stories. A possible incentive to do this might well have been a common occurrence in China of local governments fixating upon GDP growth figures and using Gross Fixed Capital Formation to boost such statistics.

As stated at the start of my piece, effective highway networks do appear to play a part in assisting economic development; without such transport networks, economic development could well be curtailed. And private involvement can increase the pool of capital available to finance such networks, enabling them to be developed more quickly.  However, there is no single best method. And in particular China’s experience might suggest that approaches, in terms of financing forms and what is allowable under contract, might actually need to evolve over timeframes of just a few years. Early concessions may be seen as riskier, so requiring more favourable terms and guarantees. Thereafter, as more potential investor-operators come forward, terms and conditions might be tightened up. Let me summarise as follows:

  • Accelerating tollway development to link-up key centres would appear to be good for national economic and industrial development (and also can help farmers’ produce reach cities more quickly and thus cheaply, also affording urban consumers fresher produce)
  • However, additional tollways running parallel and effectively duplicating connectivity should only be implemented when they can be justified financially without undermining preceding concessions; such practice also reduces risk for concession-bidders (so ceteris paribus, government should be able to secure more favourable terms)
  • Wherever possible, tollway development should also be coordinated with the broader transport system within the corridors concerned
  • Decentralisation of decision making can help speed-up and arguably, democratise the tollway development process; however, an absolutely necessary pre-requisite is that the necessary skills and knowledge exist within the relevant tier(s) of government to which such authorities and responsibilities are to be devolved.
  • Although not discussed explicitly above, I would also add that given the size of contracts which are associated with these kinds of projects, a good, strong governance system should also be maintained, so as to minimise both the incidence and scale of corruption. (I appreciate that perhaps I should say “eliminate” corruption, but no country in the world has yet managed this, so it would be disingenuous to talk of eliminating corruption outright)
  • Finally and most importantly, learn from overseas but tailor your own approaches to India, and indeed perhaps to each part of India, and then re-tailor your approaches as the sector and the country as a whole, develop.

Richard Di Bona

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