Seminar studies sustainable funding for China’s infrastructure

Originally published by USC News on March 30, 2012. Written by Matthew Kredell

China has undergone profound economic changes over the past 30 years. In 1980, the country’s population was just 20 percent urbanized. Today, that number has reached about 50 percent. To support this unprecedented growth, China has invested enormous sums to provide transportation, power, communications, sanitation and other basic infrastructure.

Newer infrastructure in China, most of which is concentrated on the eastern side of the country, is modern and in pristine shape compared to the United States and European countries, where much of the infrastructure is aging. However, in the coming decades, China will need to sustain this new infrastructure while redeveloping older cities and spreading urbanization westward.

Little, who focuses on critical infrastructure issues, warned that these are problems China should begin thinking about now, even though the country appears to be in a healthy financial state compared to most places in the world.

“I’ve raised this issue before in China and was told, ‘We have a lot of money. We don’t have to worry about that,’ ” Little said. “I pointed them to an old Chinese proverb: ‘You’ve always got to dig the well before you get thirsty.’ ”

Urban infrastructure in China primarily is a responsibility of local governments. Revenue from land leases has been the main funding source for infrastructure. Since the local budgets have less revenue for more priorities, borrowing for infrastructure became common. Most of the loans are backed by assets, such as commercial real estate.

This is setting up the potential for a scenario even worse than what the United States faced four years ago. As it turned out, land values don’t always go up.

“Sometimes, land values go down very rapidly and very far,” Little said. “This has not yet occurred in China, but there are people, myself included, that are concerned this could happen. There’s been a lot written about what happens if this bubble bursts. You come up with some scary stuff given the fact that there’s a lot of debt for infrastructure out there that will probably never be paid.”

Little suggested that China should develop a more robust infrastructure bond market to take advantage of domestic and international investor interest, consider more sustainable sources of tax revenue, such as ad valorem property taxes to capture the benefits of public investment, and raise public transportation user fees to produce sufficient revenues to fund necessary system repairs.

“A lot of people want to invest in China, in the local currency,” Little said. “The infrastructure bond market is not well developed. China made enormous leaps forward when it adopted Western-style stock exchanges. That’s probably something that ought to be considered, that they do something analogous in the infrastructure bond market.”

China currently has a one-time tax transfer on property. An ad valorem system would be an annual tax based on the assessed value of the property, which is how it is done across the United States. This would continue to generate money on a yearly basis that could be used for maintenance and repair.

User fees can be problematic in a country like China, which still has a great deal of economic inequality and where a lot of services are subsidized by the government. Over time, fees need to start to produce revenues that would fund maintenance. This is an issue that Little also said needs improvement in the United States.

“China has no real municipal bond market and a huge infrastructure need that’s basically been running on liquidity for a while now,” said Teddy Minch, a Master of Public Policy student at USC Price. “I was interested to hear what professor Little had to say in terms of what he saw as the best means of tying the loose ends together in both the near term and the longer term. He’s been on the ground in China taking a look at this issue for a long time.”