China’s infrastructure investments have been a net negative due to high cost over runs that have overwhelmed returns and the added debt has made the country more exposed to financial shocks, says lead author Atif Ansar in a study published this July in Oxford Review of Economic Policy.
The authors looked at various infrastructure projects, such as rail and road, and assessed the return on investment. Infrastructure projects were on average 30.6% higher than estimated costs. Railways performed the worst. Seven out of 10 roads went over budget, whereas nine out of 10 rail projects went over budget.
And while costs were higher, projected traffic totals for many of these roads and railways didn’t materialize. About two-thirds of 156 projects had benefit shortfalls, that is actual traffic volumes were biased below forecasts.
“The magnitude of bias in these instances is staggering: the average traffic shortfall for these routes was –41.2%. Some routes received less than 20 per cent of their forecast traffic,” writes the authors.
Interestingly, China performed no better or worse than rich democracies in controlling cost over runs. Projects could be expedited with stronger, central governments, but the drive to build quickly came at a cost.
The Beijing–Shanghai High-Speed Railway. Creative Commons image by dunhilaryu
“China has built infrastructure at impressive speed in the past but, it appears, by trading-off due consideration for quality, safety, social equity, and the environment. The frequent laments by politicians in rich democracies that public consultation processes amount to ‘dithering’ are misguided.”
The build out has greatly added to China’s debt. China spent US$4.6 trillion in 2014 accounting for 24.8 per cent of worldwide total investments and more than double the entire GDP of India. The authors cite a McKinsey study showing that between 2000 and 2014 China’s total debt grew “. . . from US$2.1 trillion to US$28.2 trillion, in current prices—an increase of US$26.1 trillion, greater than the GDP of the US, Japan, and Germany combined.”
“Generalizing from our sample, evidence suggests that over half the infrastructure investments in China made in the last three decades have been NPV negative. Far from being an engine of economic growth, a typical infrastructure investment has destroyed economic value in China due to poor management of risks that impact cost, time, and benefits.”
“A firm that systematically makes negative NPV investments will run itself aground,” warns the authors.
Guangzhou High Speed Railway Station. Creative commons images by Michael Gwyther-Jones.
5 Comments
Altaf
The facts, figures mentioned may be correct. But the perspective, the outlook may differ.
May be the aim of putting up such massive infrastructure is different.
Unlike Capitalistic West which looks for profit loss even in family relations, the purpose of the investments may be different when looked from different cultural angle.
May be Chinese is the only govt in Asea which was fed up with the branding of Asean economies as underdeveloped and wanted to correct the historical misalignment.
May be they wanted to have world class infrastructure far in excess of current needs so that future generations may enjoy the hardships, toils of their forefathers.
May be with such massive infrastructure China need little incremental infrastructure in future while their entire energy can be spent on focused issues.
They may be gifts to the future generation.
marpy
As a society evolves, it becomes much harder and way more expensive to build infrastructure and so maybe China is a lot smarter than people think to get as much built as possible now.
Joshua Roberts
just the tip
(of the iceberg)
Joshua Roberts
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Wandering_Spirit
I believe this is the result of a combination of factors. First, China has to keep implementing these huge works because they boost the jobmarket, and therefore increase the capital available for expenditure. On the other hand, China is really a huge developing country that requires tons of infrastructures. Third, people keep forgetting that China is shifting from an essentially Socialist method of managing economic issues to a semi-capitalistic (not neoliberal, but purely capitalistic) one. This implies making a lot of errors. In short, it’s too early to make doomstelling previsions on how all this will consolidate over time. My experience is that at the very top, Chinese leadership is populated with very smart individuals who are used to make longterm planning aimed at A) Keep domestic stability and B) Grant the survival of the party. These two goals work in symbiosis and often even turn into economic losses that for western systems are hard to grasp or when grasped are very criticized. My final take is that judging China at this stage is premature. It needs more time to complete its transition from an old to a new, more sustainable system.