Tag Archives: toll roads

Road To Ruin

China may be looking at spending 600 billion yuan on extending its already over-indebted toll road network. This is another sign, to this Bystander’s eye, that an economic stimulus package in the form of transport infrastructure spending is in the making, but it also raises a red flag about tackling slowing growth this way.

Caixin quotes transport ministry spokesman He Jianzhong saying that the country’s toll roads’ aggregate debt, at 2.32 trillion yuan in 2011, was equivalent to 64% of its accumulated investment of 3.65 trillion yuan, still well short of the 80% he said banks use as a red line when determining whether to grant loans. He says that means toll-road building “still merits bank lending” — 600 billion yuan-worth by our back-of-the-envelope calculation.

Setting aside the thought that there is more sophistication to Chinese banks’ credit risk analysis than that calculation (not something we do with full confidence, it is true), we are surprised that toll roads, some of which are not even earning enough from tolls to cover their existing debt service, would be the recipient of such new investment. The whole system is troubled. Recent political pressure has been to cut the cost of tolls, which are expensive and unpopular with drivers, and to crackdown on illegal toll taking. All this puts further financial pressure on toll-road builders and operators.

Some new toll-road lending has already gone to refinance old loans incurred in the three-year road building frenzy that followed China’s post-2008 global crisis stimulus spending. It is a microcosmic warning of the long-term dangers of relying on fixed-asset investment to generate growth, as China has done. In the end the debt becomes unsustainable.

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Debt Takes Its Toll

Vehicles wait at the Langdong Tollgate on the Guilin-Beihai Highway in Nanning, capital of the Guangxi Zhuang autonomous region, October 2011

Yet another rumble of local-government debt trouble. After a three-year highway building boom across China, outstanding debt for toll-road construction is 2.2 trillion yuan ($346 billion), according to numbers compiled by Caixin. That is much higher than the 1.3 trillion yuan outstanding at the end of last year counted by an official audit published earlier this year covering 16 of China’s 29 provinces. Banks have provided 90% of the lending. Toll roads in Guangdong account for 10% of the total, at 227 billion yuan, with another eight provinces collectively accounting for a third more, the Caixin report says.

The danger lies in tolls barely raising sufficient revenue to service the debt. China’s toll roads account for 95% of the country’s 74,000 kilometres of highways, such as the Guilin-Beihai Highway shown in the Xinhua picture above. Yet the audit found that they generated only 170 billion yuan in revenue last year, with just four provinces and municipalities a profit at the tollgates. Guangdong, Caixin says, collected 789 million yuan in road tolls last year and had to use all but 19 million of that on debt repayment. Other provinces are having to take out new loans to pay off old ones.

The audit found that more than half of new highway loans were being used to that end. That is getting more difficult for provinces to do as Beijing tightens the liquidity spigot, leaving some highways uncompleted as construction comes to the same dead stop as their funding. Meanwhile, other political constraints don’t give provinces much if any scope to raise tolls.

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