PROBLEM ANALYSIS AND SUGGESTION FOR CHINESE HIGHWAY
PROJECTS FINANCED BY STATE CORPORATIONS
Xiangrong DU1, Tsunemi WATANABE2
Jimei University
Kochi University of Technology

12

ABSTRACT: In China, road had been developed with fiscal budget until 1988. From then on highway
projects were allowed to be built via the use of loan by state corporations. Although foreign companies are
permitted to invest in highway projects since 1995 and domestic private companies are also encouraged tofund for highway projects since 2001, most of highway projects in China have been developed and managed
by state corporations.
In practice, problems occurred in many highway projects financed by state corporations. The paper exploredand classified these problems by case studies. These problems mainly focuses on defective project planningand improper government intervention, which include: inaccurate traffic volume forecast and premature
construction, lack of reasonable toll pricing and adjustment mechanism, lack of planning of reasonable toll
duration, excessive government obligation, lack of strict financial supervision of toll revenue, lack ofeffective administrative supervision, direct authorization of concession right to state company andinexperience of regulation on concessionary projects.
The investigation revealed that the basic reason of these highway projects lies on the imperfect current
administration system of highway projects in China, i.e., the executive andsupervisory of development andoperation of highway projects has not been separated clearly. Therefore, the authors propose that theimperfect legal framework shall be also amended and the government shall separate the affiliation between
the competent highway authorities and state highway corporation.
KEYWORDS: China, Highway Project, State Corporation

1. BACKGROUND

the necessary construction fund (Five 2004).

1.1 Insufficient fiscal fund for highway projects
The construction cost of expressway is estimatedto be approximately CNY 35 million in China (Five

1.2 Introduction of project financing for state
highway companies

2004). From 2000 to 2005, the total demand ofSince the current fiscal budget is unable to meet

construction fund of highway is predicted be CNY

such a large amount of fund demand for highway

784.6 billion; however, the governmental fundconstruction, governments have to withdraw frombudget of highway construction is expected to be

direct investment, construction management, andonly CNY 175.9. The gap of construction fund shall

operation of partial highway projects. It is necessary

be CNY 608.7 billion, which accounts for 77.58% offor government to seek other financing methods tosatisfy the necessary construction of highway

sector of power, water purification andprojects.

treatment, and waste treatment.

Since 1988 the central government has stipulated③ Highway projects involve the troublesomethat the highway projects (including high levelprocurement of land usufruct (urban land

highways (Level 2 or above), large size bridges andownership remains with government andtunnels) that have been built or rebuilt via the use ofsuburban and rural land ownership remains

loan by state corporations may impose toll onwith villager committee). However, local statepassing vehicle to reimburse the highway project

corporations are easy to get government

loan under the approval of the competent provincial

assistance in handling of such issue.

all④ By introducing project financing for state

ownerships of companies are encouraged to raise thecorporations, local governments not only

development fund of highway projects based on its

legally

predicted operation revenue, e.g. toll income, whichgovernments are forbidden to issue bonds orshall recoup its development funds (NPC 1998).

borrow

government(MOT1988).

Since

1998,

shun

the

loans,

prohibition

but

also

that

local

overcomethedeficiency of highway development funds andTherefore, the project financing method may beintroduced by state corporations for highway

stillmaintaindevelopment. Local governments may establish

highways.

administrative

controlofspecific highway companies and permit them tocharge toll on passage vehicle. The toll revenue of

1.4 Research purpose

highway projects may be used as the guarantee for

In practice, problems occurred in many highway

state corporations to obtain funds by issuing bondprojects financed by state corporations. The paperand borrowing loan.

shall explore and classify these problems by casestudies. The reason of these problems shall be also

1.3 Advantages of state highway companies ininvestigatedproject financing

administration system of highway projects in China.

Although foreign companies are permitted toinvest in highway projects since 1995 and domestic

throughtheanalysisofcurrent

Finally the suggestion shall be provided for the
improvement of highway project management.

private companies are also encouraged to fund for5thhighway projects since 2001, most of highway

2.

projects have been developed by local state

PROJECTTHE

BEIJINGRING

HIGHWAY

corporations, for which have more advantages thanThe 5th Beijing Ring Highway Project and theprivate companies to finance for concessionary

nonprofit highway project in Guangdong province

highway projects for the following reasons:shall be used as the examples to introduce the① Local state corporations may obtain implicit

problems and analyze the reason of these problems

guarantee of the local government to raiseofconstruction funds for highway projects

corporations.

tollhighway

projects

financed

by

state

mainly through the security issuance and loanborrowing.
② Highway

2.1 The Beijing Capital Highway Development
projects

don’t

concernhightechnique so much as those projects in the

Corporation
The Beijing Capital Highway Development

Corporation was officially established on September

billion on May 29, 2002, which is the first public

16, 1999, and its superior authority shifted from theoffer of bond to raise fund for the purpose of

Beijing Municipal Transportation Bureau to theinfrastructure construction.

Beijing Municipal Government (Yuan 2004). On thesame day the deputy executive of Beijing Municipal

Construction

Transportation Bureau (BMTB), Mr. Yuxi Bi, was

The length of complete and newly initiatedappointed as its chairman of board of director—the

highway reached 100 kilometers respectively insame administrative rank as the chief executive of

Beijing, which approximately equaled to the total

the Beijing Municipal Transportation Bureau. The

length of previous 14 years. The construction of

establishment of the Beijing Capital Highway

highway in Beijing was expedited in 2002. It showed

Development Corporation was considered as thethat with adequate financing capacity the highway

breakthrough of the investment and financing regime

company could develop projects far more quickly.
The Beijing Capital Highway Developmentof urban infrastructure and the reform of enterprise

Corporation sponsored the 5th Beijing Ring Highway

management regime in Beijing.
The Beijing Capital Highway Development

Project, which is summarized in Table 1. The Beijing

Corporation was charged with the responsibility of

Capitaldesign, construction, operation, financing and debt

successful raised necessary development fund of 5th

repayment of highway projects in Beijing (Yuan

Beijing Ring Highway Project by project financing.

2004).

However, the project still encountered problems.

Decisionundertaken

by

of

major

highway

projects

theBeijing

CapitalHighway

Development Corporation was directly submitted to
the Beijing Municipal Government instead of the
Beijing

Municipal

Transportation

Bureauforapproval.
FinancingWith the intention of raising money the Beijing
Capital Highway Development Corporation onceplanned to issue stock publicly in a stock exchange,
however, the intention was stopped by the listing
requirement that the company must have been inbusiness for three years or more and have madeHighway

Development

Corporation

Table 1 Brief introduction of the 5th Beijing Ring
Highway Project
Project
The 5th Beijing Ring Highway
The Beijing Capital Highway
Project sponsor
Development Corporation
Length
98.58 kmTechnical
2 direction, 6 track, 100km/h
indicator
Total investment
CNY 13.64 billion
budgetBank Loan
CNY 11.63 billion
Commencement
November 2000
date
Duration
3 years (Nov 2001 – Nov 2004)
Average daily
117 thousand vehicles
traffic volume

profits for the past three consecutive years (NPC
1999).
By the end of 2001 The Beijing Capital Highway
Development Corporation had signed loan contractof more than CNY 14 billion with the Industrial and

2.2 Problem introduction of the 5th Beijing Ring
Highway Project
Easy financing under low ratio of equity to debt
The lower the ratio of equity to debt is, theCommercial Bank of China via project financing
method. The Beijing Capital Highway Development
Corporation offered Highway bond of CNY 1.5

riskier the project is. The ratio of equity to debt in
the

5th

Beijing

Ring

Highway

Projectislowerthe expected operation revenue according to thecompared with the minimum requirement of 25/75

statistics taken by the Beijing Capital Highway

for foreign concessionaires (SPC 1995). In general

Development Corporation (Yuan 2004).

approximately

15/85,

which

is

much

condition, such a low ratio of equity to debt causes
difficulty for project financing. However, the Beijing
Capital Highway Development Corporation gained
loan easily.

Annulment of highway toll
The levy of toll on users of the 5th Beijing Ring
Highway was improperly annulled by the Beijing
Municipal Government only after two months ofoperation on January 1, 2004 (Significant 2004). The

Increased construction cost
For winning bids a number of construction

Beijing Municipal Government unreasonably took

companies offered kickback, which was finallyover the responsibility of debt repayment which

offset by using inferior construction material. Suchshould be undertaken by the Beijing Capital

practice negatively impact project function and

Highway Development Corporation, and would pay

quality to a certain extent. For example, construction

it back by the fiscal revenue of Beijing government

contractors used the inferior bitumen to save(Yuan 2004).

construction

cost,

which

inevitably

decreasehighway lifecycle (Bi 2005). At the completion of

2.3 Reason analysis of project problems

construction, the defective works had been accepted

Lack of effective administrative supervision

under the solicitude of Bi, the chief of Beijing

Bi resorted to the disclosure of the maximum

Capital Highway Development Corporation. In thebudget for awarding contract to bidders as a means

procurement of signal lamp, though the offer of

to gain kickback, i.e., bribes. By this way Bi had

signal lamp was several times of market price thetook bribe of more CNY 2 million (Bi 2005). Sincebidder won the bid under the Bi’s solicitude (ItNovember 2002, the commencement of construction2004).

of the 5th Beijing Ring Highway, Bi had been

Because punctual operation is political task and

impeached many times by the failed bidders ofearly operation of projects is beneficial for

projects for suspecting him of taking bribes.

concessionaire to gain profits, the defective works

However, the bidding process was not suspected andth

was rectified quickly. The 5 Beijing Ring Highway

inquired and he still kept his position. Until April

opened to traffic as scheduled.

2004, he was officially confined to the designatedplace to confess his illegal behavior (It 2004). By theway, this confinement is different from arrestment

Low toll revenue
Based on the prediction that the daily toll revenue

executed by policeman; instead, it is a discipline

was CNY 1.2 million, at the end of 30 years ofpunishment executed by the discipline commission

operation,of the Chinese Communist Party and only awarded

Development

theBeijing

Corporation

Capitalcould

Highway

recovertheto senior fellows of Chinese Communist Party before

investment in the 5 Beijing Ring Highway and earnbeing impeached of guilty and arrestment. Bi wassurplus revenue. However, since the 5th Beijing Ring

finally sentenced to death penalty for taking bribe

Highway was completed and put into operation onand embezzling state capital. However, the execution

November 1, 2003, the actual daily toll revenue was

was reprieved for two years.

th

only approximate CNY 0.15 million, one eighth of

Not only did corruption occur in the 5th Beijing

Ring Highway Project, Up to now, 16 executives ofguarantee of loan for the project and thus involves

province-level transportation bureau in 10 provinces

the Beijing Municipal Government in the entire debt

(orpayment

provincial

administrative

regions),i.e.

obligation.

Inaddition,theBeijing

approximate one third of 31 provinces in the

Municipal Government arbitrarily annulled the toll

mainland of China, have been arrested, inspected, orright of 5th Beijing Ring Highway Project andsentenced for economic crime committed during

directly took over the 5th Beijing Ring Highway

their administration of highway project construction

Project.

(Bi 2005).

Government undertook all obligation of the 5th

This

means

that

Beijing

Municipal

Beijing Ring Highway Project.
Lack of reasonable toll pricing and adjustment
mechanism

Inexperience

Based on the prediction that the daily toll
revenue was CNY 1.2 million, at the end of 30 yearsofoperation,

Development

theBeijing

Corporation

Capitalcould

Highway

recoverofregulationonconcessionary

projects

Even though the average daily revenue is lower
than the expected one, such lower revenue onlytheoccurred in two months of operation, which is ainvestment in the 5 Beijing Ring Highway and earnshort period compared with the 30 years of

surplus revenue.

concessionary

th

term.

The

Beijing

Municipal

During the two months of operation as from

Government may suggest the Beijing Capital

November 1, 2003, the actual daily toll revenue ofHighway Development Corporation to lower the tollth

the 5 Beijing Ring Highway was only approximate

price and may even provide necessary subsidy for

CNY 0.15 million, one eighth of the expected

the 5th highway. However, the Beijing Municipal

operation revenue. The reason may be the inaccurate

Government arbitrarily annulled the toll right of theprediction of demand on traffic volume or high toll

Beijing Capital Highway Development Corporationfee.

and directly took over the operation of the 5th Beijing
Following the toll annulment on January 1, 2004, Ring Highway Project. Such a practice discloses thatthe daily traffic flow reached 117092 vehicles on thegovernment resorted to the administrative means tofirst day of free passage (Significant 2004). This

manage infrastructure projects. This also exposes

result manifested that that the toll price was higherthat government lacks of experience and theory tothan the expected one and the Beijing Capitalmanage the concessionary projects sponsored by

Highway

state corporations to a certain extent.

Development

Corporation

had

not

prepared the toll pricing and adjustment mechanism.
Direct authorization of concession right to state
Excessive government obligation

corporation
thThough the capital structure of the 5 Beijing

The Beijing Municipal Government directly

Ring Highway Project was unreasonable and theawarded the 30 years of concessionary operation

ratio of equity to debt was low, the Beijing Capitalright of the 5th Beijing Ring Highway Project to the

Highway Development Corporation gained projectBeijing Capital Highway Development Corporation.

thloan. The reason is that the investor of 5 Beijing

The lack of competitive selection of concessionaire

Ring Highway Project is the Beijing Municipal

had leaded to increased construction cost and poor

Government, which provided the implicit credit

operation performance.

3 TOLL HIGHWAYS FINANCED BY STATECORPORATIONSINGUANGDONG

3.2 Reason analysis
The author summarizes the three main reasons ofthese tollway projects:

PROVINCE
3.1 Problems introduction
The Guangdong Province is the first province todevelop tollways in China. This practice of financing
highwaysbyfranchised

operationhas

Inaccurate traffic volume forecast and premature
construction

been

The toll revenue of some tollbooths was too low

popularized all over China. The relevant departments

to reimburse construction loan within the plannedof Guangdong Province Government investigated 74

periods, which originated in inaccurate traffic

tollbooths (i.e., tollways), which are financed andvolume forecast and premature construction. For

operated by state corporations affiliated to theexample, because the traffic volume of many

Guangdong Government.

highway projects in Guangxi Municipal Region was
so inadequate that the toll revenue was too low to
repayHigh operation and maintenance cost
The investigation showed that the operation andmaintenance cost is unreasonably high. For example,

loaninterest.

The

Guangxi

Municipal

Government had to raise approximate CNY 200
million every year to disburse annual loan interest.

the total maintenance cost and overhead of Huaxi
Tollbooth of Guihua Tollway reached CNY 63.72

Lack of planning of reasonable toll duration

million, accounting for 74.95% of the total toll

The Announcement of Toll Period of Highway

revenue of CNY 63.71 million. In another case, theTollbooth (Xiang 2005) stated that the detailed

monthly salary of toll collector in Jiangsu Province

scheme of certain tollway projects had not been

was approximate CNY 8 thousand, 4 times of the

prepared in 2005 regarding the transfer of toll

averagetransportation

highways from state corporations to government. If

companies in Jiangsu Province. Both these facts

the debt of toll highway cannot be repaid within the

manifest that the cost control is loose in theprescribed period, the toll period shall be extended.

operation state of toll highways

In this case, the users of the highway shall have tosalaryofstate-owned

pay the additional cost.
Long toll period
The investigation of Guangdong Province

Lack of strict financial supervision of toll revenue

Government also reveals that the predicted loan

The toll revenue of some tollbooths was

repayment period of 33 nonprofit tollbooths exceeds

appropriated for other purpose other than the loan

30 years based on the factual loan repayments inreimbursement. For example, the revenue of Huaxi

2004, among which, the predicted loan repayment

Tollbooth at Shaoguan City, Guangdong Province

period of 6 tollbooths exceed 100 years. The

was CNY 4.65 million last year, however, the real

predicatedofloan repayment was only CNY 0.42 million,

Heyuan-Jiangmian Tollbooth even reaches 756 years

accounting for 9% of total annual revenue. The(Xiang 2005). This fact shows that the management

revenue of Heyuan-Jiangmian Tollbooth was CNY

of nonprofit tollbooth financed by local state

6.49 million, however, the real loan repayment was

corporations is poor.

only CNY 0.31 million, accounting for 9% of total

loan

repayment

periodannual revenue. These phenomena reveal that there

is no effective financial supervision system of toll

government

(Du

and

Watanabe2005).

The

highway projects financed by state corporations.

management of highway projects financed by state
corporations not only involves planning and4. DIRECT REASON OF HIGHWAY PROJECT

construction, but also includes operation and

PROBLEMS

maintenance. The roles of project participants in

By the study of two cases the author uncovers
the negative influencing factors which caused poor

highways financed by state corporations thus differ
from those in highways funded by government.

performance of toll highway projects financed by① The twofold role of planning authority, i.e.

state corporations. These negative factors caused

administration and owner’s representative has

excessive project cost. Table 2 summarizes thechanges to the sole role of administration.

project performance and negative influencing factors.

② The role of state corporations has changed into

The occurrence of negative influencing factors in thethe owner’s representative, fund raiser andplanning stage of concessionary tollway projects

concessionaire.

reveals that the tollway projects had not been well

The implementation and approval procedure of
infrastructure projects invested by government

planned.

applies to the highway projects financed by state
5. BASIC REASON ANALYSIS OF HIGHWAY

corporations except that the investment program and

PROJECT PROBLEMS

budget shall be prepared and decided by state

The administration system of highway projects

corporations (BMG 1999). In addition, toll pricefinanced by state corporations (shown in Fig. 1)

shall be approved by local price authority (MOT

varies from the traditional project administration

1988, MOT, SPC, and MOF 1994, NPC1998, NPC

system of infrastructure projects invested by

2004, SC 2004).

Table 2 Negative factors and performance of highway projects financed by local state companies
Phase of projectType of tasks
Traffic service planning

Negative influencing factors
Unreasonable traffic volume forecast
Excessive financial responsibility
Government obligation
Unreasonable taking-over of debt payment liability
Project proposal
Lack of reasonable toll pricing and adjustment
Feasibility study Revenue planningmechanism
Lack of planning of toll term
Lower ratio of equity to debt
Financial planning
Lack of financial independence
Selection method of
Direct authorization of concessionary right to state
Construction
concessionaire andcompany
contractors
Corruption in the selection of construction contractors
Construction
Ineffective supervision of construction
Government supervision Ineffective supervision of operation
Operation
Arbitrary annulment of highway toll
Type of problem
Project performance
Punctual completion of construction
Construction
Cost and progress
Increased construction cost
Unreasonable high operation and maintenance cost
Operation
Cost
Low toll revenueProject Participant

Role
Planning, Construction
and Operation

Project Consultant
Engineering Designer
Construction Supervisor
Construction Contractor

Project Subcontractor

State Corporation

Project Concessionaire

Transportation Authority
or Government

The Planning Authority
The Finance Authority
The Transportation Authority
The Zoning Authority

Project Owner

Administration

Dashed line denotes role line and solid line denotes control line
Fig. 1 Role of participants in tollway project financed by state corporations in China

Though the examination and approval procedure

the executing and monitoring power of development

for projects with the investment of state corporations

and operation of toll highway projects was notseems strict (Du and Watanabe 2005), corruption stillseparated. This imperfection in legal regulation may

aroused in the implementation process. The frequent

lead to ineffective supervision of local transportation

occurrence of corruption cases disclosed the illegal

authority, imperfect planning and poor performance

power renting or deal of power for money was graveof state highway corporations, which has been

in infrastructure sector. This manifested that theproved by the occurrence of negative factors listed incurrent administration and supervision system ofTable 2. On the other hand, local transportation

state highway project companies is imperfectauthorities supervise the state highway projects

inherently.

invested in by them may results in the unfair

By careful review and analysis of effective legal

treatment of local transportation authorities between

documents of highway projects, the author foundstate highway projects and private highway projects.

that the current legal framework permit the local

Another defect of current legal framework is thattransportation authorities to directly establish andlocal transportation authorities are allowed to

manage state highway corporations which are

directly award franchise to the highway project

directly under their direct administration since 1988

corporations established and financed by them since(MOT 1988, NPC 2004 and SC 2004). In such case,1988 (MOT 1988, NPC 2004 and SC 2004c). It islegitimate for the Beijing Transportation Bureau tojurisdiction of independent state asset management

directly award the 5th Beijing Ring Highway Projectand supervision agencies. Other effective measures

to the Beijing Capital Highway Development

for regulating state corporations include compulsory

Corporation. However, the direct award of franchise

information announcement and report to legislature.

instead of competitive selection of concessionaire

Since people are the nominal owner of state assets

may result in careless project planning, ineffective

including public facilities, they shall have the rightand inefficient selection of concessionaire, which

to know the real business directly and supervise themay cause troublesome project implementation

operation of state corporations through the standing

consequently, such as the case of 5th Beijing Ring

committee of people’s congress. The relation of a

Highway Project.

state corporation to the standing committee of
people’s congress is the similar to the relation of a

6.

IMPROVEMENTMEASURES

FOR

listed company to the board of directors andstockholders. Therefore, a state corporation shall

HIGHWAY PROJECTSThe specific project planning shall be conducted,

regularly

discloseitsfinancialandbusinesswhich mainly include traffic service planning,situations. For example, the financial accounting

construction and operation planning, financial

report shall be publicized every half year of eachplanning,

betweenfiscal year (NPC 1999). A state corporation shall also

government and project company, and government

report to the standing committee of people’s

supervision planning. The key successful issues incongressthe project planning include the feasible project

congressmen.

project

obligation

divisionandanswerthequeriesraisedbyinadequate

fiscalbudgetforplanning and the reasonable obligation division
between government and project companies. The
project

planning

model

of

concessionary

CONCLUSION
Becauseofinfrastructure projects shall be established in theinfrastructure projects, local governments began tolater chapter.

withdraw gradually from direct investment andTheimperfect

legal

framework

must

be

managementof

infrastructure

projects

andamended to prevent the failure of governmenttransferred the responsibility of financing andsupervision of toll highway projects and the unfair

repayment

treatment of local transportation authorities between

corporations.

ofinfrastructure

projects

to

state

state highway projects and private highway projects.

The case studies showed that the poor operation

Competitive selection of concessionaires for toll

performance could occur in the tollway projects

highway projects shall be adopted instead of direct

financed by state corporations because of theauthorization of project concessionaires to state

defective project planning and improper government

corporations and the objective selection criteria ofintervention.

project concessionaire shall be established.

include inaccurate traffic volume forecast andThenegative

influencing

factors

The government shall reform its management

premature construction, lack of reasonable toll

system of state corporations. One measure is topricing and adjustment mechanism, lack of planningseparate the affiliation between the competentof reasonable toll duration, excessive government

highway authorities and state highway corporation

obligation, lack of strict financial supervision of tolland put state highway corporations under therevenue, lack of effective administrative supervision,direct authorization of concession right to statecompany

andinexperienceofregulationonconcessionary projects.
In order to improve the performance of tollway
projects, government shall put more effort on theplanning and implementation supervision of toll
highway projects. The imperfect legal framework
shall be also amended and the government shallseparate the affiliation between the competent
highway authorities and state highway corporation.
In addition, local government authorities shall train
their staff to be familiar with the planning andsupervision of toll highway projects or employ
outside consultants. The highway projects shall be
opened to the private sector to utilize its innovative
management experience and theory as well as
advanced technique and technology.
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