China Road Tolls Policy: Past Achievements and Future Directions

June 14, 2013

Binyam Reja, Paul Amos, Fan Hongye China Communications News

China is a global leader in building a modern, high-standard national road network to promote economic development, regional integration and social cohesion. Road transport forms a vital and fast growing sector of the transport sector, supporting trade and growth through the movement of goods and people, allowing economic specialization, spreading skills and enhancing productivity. Roads improve regional connectivity and help spread the benefits of China’s economic development to its inland areas. Roads also reduce rural isolation and improve citizens’ access to jobs, health facilities, education and social services.

Creating China’s National Trunk Highway System has been an outstanding national achievement. Launched in 1990, the program to build the NTHS has delivered an Expressway network of nearly 85,000 km, Class-I highway of 68,000 km, and Class-II highway of 320,000 km, Expressways are multi-functional facilities, used by private cars, public buses and coaches, taxis, paratransit services, own-account goods transport, commercial road haulage services and emergency vehicles (ambulances, police vehicles, fire trucks). The Expressway network has transformed the efficiency and effectiveness of inter-regional road transport in China.

Road tolls are critical for the success of the expressway program

China’s decentralized institutional and funding mechanisms for delivery of the Expressway network have been instrumental. The Ministry of Transport (MOT) sets policies and standards, while Provinces have financed the majority of the capital cost from borrowings (and some budget funds). Special purpose companies are formed or selected by Provinces to construct and operate the roads, usually on a case-by-case basis (that is with each company responsible for a specific Expressway section). The companies have also raised capital through direct investment, public listing and securitized lending. Road tolls have been widely used to help contribute to or to recover financing costs (and costs of operation and maintenance). As a result, most Expressways are tolled.  

As the development of the Expressway system reaches a more mature stage (a total of about 108,000 km is targeted for 2015) some voices in China have been raised against either the principle of road tolls, or their practical application, or both. Common arguments are: that roads constitute essential social infrastructure and should be provided free to users; that no other country has so many tolled-roads; that as soon as the loans for construction have been repaid tolls are no longer justified; that tolls are expensive to collect; that after the roads are built they should be used to divert the maximum traffic from existing lower-standard roads; that toll-rates are sub-optimal with great variability even over a single interconnected route. How well do these arguments stand up against the real and enduring achievements of road tolling policies?

User-pays is better than everyone pays

First, what of the idea that Expressways and other high standard roads are a social good and should be provided free of charge, paid out of taxes?  There is no commonly accepted economic definition of a social good but the term is generally used to refer to goods that have high social benefits and are often provided by the public sector from general revenue free of charge or at minimal cost (such as, in many countries, basic health care and primary education). A highway network certainly has very high social benefits.  But most other infrastructure networks also have high social benefits, such as the railway networks, pipeline networks, power grids, water, broadcasting and broadband networks. Many of these infrastructure networks are also provided in China and elsewhere by the public sector but it is not presumed that users should not pay for using these networks.  Two very important economic principles argue for charging for the use of high-standard roads. The ‘user-pays’ principle recognizes that those responsible for the expenditure of scarce resources should bear at least part of the costs they impose; if not, there will be a tendency to over-utilization and hence over-provision The second principle, of ‘competitive neutrality,’ argues that making the use of the trunk road network free will create a distorted traffic allocation away from railways to roads.

China’s adoption of toll roads is good international practice

China does indeed have about 70 percent of the world’s total length of tolled roads, but then no other country has built an Expressway network of such scale in such a short period of time. Indeed its construction has been an impressive road-building initiative unmatched since the building of the U.S. Interstate Highway System, which, though of similar scale, was delivered without tolls only over a much longer time-frame. Use of tolling to help pay for Expressways is being increasingly adopted in countries whose highway capital and operating expenditure requirements outstrip public resources to pay for them. Countries as diverse as Australia, Brazil, France, Germany (goods vehicles) India, Italy, Japan, Mexico, Switzerland and others have widely adopted road tolling (through various means). Even in the USA, more than 4,000kms of the Interstate Highway system are tolled. New legislation (2005) encourages states to construct new Interstate Highways through innovative financing by easing the restrictions on state or private toll roads.  

Tolls are justified even after loan is repaid

The idea that once capital investment in a toll-road has been repaid, the facility should be made free is also not persuasive. Road infrastructure has a very long life if maintained properly. If maintenance is inadequate it can deteriorate quite rapidly, particularly in adverse climates or with high axle loads. This is particularly so in countries like China which can anticipate continuing strong traffic growth for the foreseeable future, particularly in the flows of heavy freight trucks which are one of the main contributors to road ‘wear and tear’. Deterioration is usually costly to current users in the form of higher vehicle operating costs, and higher social and environmental costs in the form of lower safety and higher vehicle emissions. It is also costly to Provinces in the imposition of prema­ture reinstatement or replacement costs. Yet many countries, probably the majority, have found it difficult or impossible to provide from general budget sources sufficient resources for the optimal maintenance and rehabilitation of roads.

Naturally, the level of tolls on a particular road may reduce when capital is repaid, but continuing to charge for the use of roads, albeit at a lower level, can sustain stable revenue streams dedicated to properly maintaining and, in due course, rehabilitating the road system, independent of fluctuating public budgeting decisions. Maintenance and rehabilitation costs in China will inevitable increase over time and it is important to recognize that the Expressway system will face a big financial challenge when the concentration of road building in the last 20 years generates a corresponding spike in renewal needs in the future. In addition, maintaining adequate road user charges can also help fund the road safety programs on which China is putting increasing emphasis.

Tolls are becoming cheaper to collect

Collection of tolls is a significant part of the cost of operating an Expressway, particularly as each new section involves a different company. However, electronic tolling systems, inter-operable between different toll-roads within a Province (or between different Provinces) should reduce the absolute cost of collections (and reduce leakages of revenue). Additionally, growing traffic levels will anyway reduce the average cost of collection per vehicle. Use of a common tolling system by Provinces may also have some advantages, and cost-effective to administer.

Financing Expressways is currently the policy priority

Almost all Expressways are toll roads and located close to an existing parallel highway which may be free, or subject to a lower toll. The amount of Expressway toll charged therefore affects the traffic level on both roads. From an environmental and safety viewpoint it is logical, after an Expressway is built, to wish to see maximum transfer of traffic from existing roads that may be less safe and intrude on local communities. In economic terms a similar argument can be made;  after an Expressway has been built, the capital cost of construction having been ‘sunk’ (and irrecoverable) it can be argued that it makes sense to set tolls equal to short-term marginal cost only and maximize use of the new infrastructure. However, both these arguments rest on the statement ‘after the Expressway has been built’. The fact is that without the stream of revenues promised by a long-term tolling commitment, it may not be possible to service the loans that make the building of the Expressway possible. Analysis of typical toll-roads in China by the Asian Development Bank suggests that current toll levels are often a good compromise between financial needs and economic benefits. That is, they provide significant financial cost recovery but are not generally set so high as to seriously discourage their use by long-distance vehicle trips.

For a country such as China, with annual transport demand growing in double digits, a rapidly growing fleet of road vehicles, but a road network that is far from being complete, the critical policy focus is finance. As noted, once capital is repaid, other priorities may have more weight. However, any excess revenues from a specific Expressway can find good use in building new Expressway capacity elsewhere, recognizing that as Expressway development gradually extends and brings economic benefit to more mountainous central and western regions, average traffic density will be lower but the higher proportion of bridge and tunnelling works will increase average construction costs. Some degree of support for cross-funding can also be justified by ‘network benefits’ which arise from the fact that as the network is extended, the range of origins and destinations that can be effectively served is increased throughout the network, generating benefits on existing routes, and not just on the new sections.

Toll rate structures may be improved without dropping the tolling principle

As noted, toll collection is currently decentralized based on the tolls established of individual companies or in some cases based on a provincial system under which tolls are collected by the Province and reallocated to the companies operating in the Provinces.  Toll rates are set provincially by each Provincial Pricing Commission based on applications submitted by toll companies.  Toll rates typically take into account the rates in adjacent Provinces.  However, because of the large number of Provinces and companies involved, there is considerable variability.

There is nothing intrinsically inefficient in having different roads with different toll rates, indeed may be more efficient if the disparities were cost-reflective, though this is probably not the case in China. However, in many instances, ‘lower than forecast’ traffic on Expressways has been caused by overestimating the transfer or diversion of traffic from a no-toll or low-toll alternative. This has been partly offset by ‘higher than forecast’ traffic growth rates. However, these are all arguments for a more scientific and market-sensitive basis for setting tolls and not arguments against road tolling itself. Expressway feasibility studies should estimate a matrix of traffic levels, traffic diversion and toll income at various toll rates taking account of elasticity of demand to price of tolls relative to specific alternative roads. In that way, financial and other interests can be balanced and the most appropriate toll rates adopted.  

Imbalances may be adjusted to better serve the long-term program

Although the above arguments favor maintaining the principle of road tolling, a number of issues have arisen in the implementation of policy that may suggest improvements in application. In each Province, some toll-roads and toll-road companies are not generating enough toll revenue to cover their debt payments and operating costs.  The shortfall in debt cover is an unmet liability which will lead either to a bankruptcy for the Expressway corporations or it will require the Province to essentially offer sub-sovereign guarantees to the banks for payment of the debt.  Many countries who have used tolls as a means of developing a high-capacity toll road system have found that a degree of cross-subsidization of revenue from mature roads to the lower-traffic roads or to new roads was necessary.  Similarly,  a Province faced with a range of poorly and better performing Expressway companies could undertake such rebalancing and even use any net surplus revenues for system extensions in that Province. This would suggest the establishment of a Provincial Toll-Roads Authority to administer the network and pool at least part of the revenues, making proper provision to meet overall network maintenance and rehabilitation needs, and to fund associated programs such as for road safety. Strengthening the governance structure in this way, and matching tolls to identified long-term needs in a transparent way, might also increase the public acceptability of road user charges. Japan went through similar process in developing its toll road system [See Box].

Moreover, a Province could also consider transforming its tolling system to a “vignette system”, which is an access payment system for the whole Provincial toll road system, such as is used in countries like Austria and Switzerland. The vignette revenues would be consolidated into a pooled revenue at the province level and to support network-wide maintenance and rehabilitation, as well as use the excess funds to cross-subsidies network expansion. The pooled revenue will also be used to repay loans and  expansion support for allocated to the Province’s toll road operating companies on a formula basis developed to reflect the legitimate rewards for investors in those companies promoting more successful Expressways but sufficient to sustain others at least in a good state of repair and maintenance, even if investors bear some losses. A vignette system may offer other advantages: it may be economical to administer; it would help overcome the criticism of toll variability by automatically equalizing the cost of accessing Expressways across a Province;  it would provide an incentive to users to maximize utilization of the Expressways rather than use less safe and more congested parallel roads .

Finally, Provinces that have a number of soundly-performing toll roads, but faced with demands for other new roads to meet growing traffic needs, might wish to consider concessioning existing roads for a period of time to private companies. Under a properly regulated regime that would protect public interests against pricing abuses or under-maintenance of assets, such a policy could exploit the value of such roads in the form of current public capital, available to extend the network. For the most of congested Expressway corridors, particularly in urban and peri-urban areas, it would be wise to maintain also the option of additional congestion pricing, whether as part of the road tolling system or supplemental to a vignette system, as the function of such a charging system is not just to recover construction loans but to manage traffic levels and reduce congestion. Again, in a decentralized system this should be a decision made at Provincial levels though central government can assist through a supportive policy framework, requisite delegation of powers and technical guidance and standards.

Road tolling is a productive and beneficial policy and should be retained

Gaps remain in the Expressway network and continuation of the NTHS program is both sustainable and desirable. The historic high reliance on debt finance from State and commercial banks is risky given the likely volatility of interest rates and the large debt-carrying burden which results.  More innovative financing methods accessing private investment may be sought, though is not a full solution for funding Expressways where there is lower traffic density and/or more costly terrain, where financial returns may be lower and more risky. However, whether financed through Provincial debt and equity, or through more private finance, the revenue from road tolling will remain critical for network construction for the foreseeable future.  Thereafter, it will form a critical source of funds for operating and maintaining these most valuable assets in good repair and rehabilitating them when it becomes necessary, as it certainly will.  It is not difficult to predict the consequences of removing tolls from expressways after the loans are repaid: premature road deterioration, worsening safety, congestion, and complaints from non-users.  This is not a good scenario for both users and non-users.