A worker with China Railway Group Ltd. walks over rails being laid at a construction site of the Hami-Ejina Railway.

China’s Infrastructure Cost Overruns Build

Breakbulk Magazine Issue 1-2017 Cover

By Jaya Prakash

 

For all its hype, boasts, charm offensive in Africa, and even its taunts in the South China Sea, China could well be sitting on a ticking debt time bomb.

Massive cost overruns in China’s infrastructure investment regime were recently highlighted by a scathing report from Oxford University’s Saïd Business School, which mocked China’s “choreographed” regime of mismanagement, ineptitude, audit lapses, shoddiness and a lack of oversight.

“For over half of the infrastructure investments in China made in the last three decades, the costs are larger than the benefits they generate, which means the projects destroy economic value instead of generating it,” Atif Ansar, program director of the MSc in Major Program Management at the business school, said in the study. The report analyzed 95 large Chinese road and rail transport projects, and 806 transport projects built in rich democracies.

Ansar found an ally in the International Monetary Fund, which in October 2016 faulted Beijing for the tide of excessive corporate credit growth in recent years. The global financial body noted that, “investment efficiency [in China] has fallen and the financial performance of its [corporations] has deteriorated steadily, affecting asset quality in financial institutions.”

At the core, there is little of the quality and transparency familiar to the West governing the audit process in China. A large part of the infrastructure shortfall is in the large-scale subcontracting of work projects, said Zhao Hong of Singapore’s Institute of South East Asia Studies.

“Quality is poor in some places because most works are subcontracted, if the projects are built by large companies,” he told Breakbulk. This can lead to a significant disconnect between planning, prioritization, implementation and the eventual realization of profits.

 

Audit Trail

There is also the question of oversight. There are no known reputable bodies willing to audit, give recommendations or grant consultations in the country before massive projects are undertaken. Additionally, there are no nationally recognized audit boards willing to recommend and regulate financial payouts for projects.

Such deficiencies confirm the lack of administrative integrity, and this has cost China dearly. Estimates from the Saïd Business School say the cost overruns have set the nation back by some US$28 trillion – a figure that dwarfs the combined gross domestic product of the U.S., Japan and Germany.

Entrenched cultural practices have influenced how businesses and huge commercial contracts are transacted in China today. The practice of “guanxi” – a system of patronage where large opaque networks of ethnically and commercially leaning guilds (often called clans in China) band together to undertake transactions on behalf of their brethren – still holds true.

Guanxi also means working with people who will not take advantage of a person with whom they have guanxi, similar to the Western-style “old boys” network. The danger of corruption and mismanagement is not just real in China, but is magnified by the lack of any credible rule of law and independence judicial mechanisms.

“It may not be serious now,” Hong said, but “even as recently as five years ago, the system of patronage was largely responsible for shoddy work” seen today. Even after the stellar results of the last few decades, the World Bank still calculates that some 160 million Chinese are below the poverty line.

All the same, China has to its credit identified some critical priority infrastructure areas such as urban transit, including subway, light rail, and bus rapid transit; and city pipe networks, including water supply, rainwater, fuel gas, heat supply, telecommunication, power grid, drainage and water-logging prevention, flood control and utility tunnels, among others, as highlighted by Zuo Kun, executive vice president of China Development Bank Capital, in a McKinsey & Co. report.

But a larger issue has always been a reluctance to co-opt market private investment.

 

Intra-regional Opportunities

None of this bodes well for project cargo moves in the country, especially those that have found themselves victim of substandard workmanship. Then there is what China has in its sights – a further blow to the prospects of project cargo movers in China.

In the words of a Communist Party official speaking on condition of anonymity, China’s future economic plans will hinge on government plans to cut infrastructure developments. China’s aim for now, he said, is to maintain a 6.6 percent GDP growth projection. The only reason for more infrastructure development over the next five years is to consolidate intra-regional developments. A key plank of China’s newly unveiled 13th five-year plan will be the introduction and promotion of innovation as a means of soaking up surplus capacity in the Chinese economy that resulted from the huge investments preceding the 2008 global financial crisis. Meanwhile, the thrust of the One Belt, One Road initiative over the next five years is primarily to redirect domestic capacity for regional infrastructure development to improve trade relations with ASEAN, Central Asian and European countries, according to the party official.

One goal that has not changed is that of China’s central planners to eradicate poverty: China is the only country in history to have lifted some 700 million people out of poverty. In 1980, China was one of the poorest countries in the world; fast forward some 35 years and it has morphed into the second-largest economy with a US$11 trillion GDP.

Under its autocratic system, a single party or leader sets the direction for the country, but beneath that veneer is enormous improvisation and creativity flowing through from local grassroots initiatives, according to Ang Yuen Yuen, an assistant professor of political science at the University of Michigan writing in an op-ed to Singapore’s widely distributing broadsheet, the Straits Times.

But there is no sweeping the massive infrastructure cost overruns under the carpet. It is a dilemma that China must tackle and quickly, or risk it morphing into a much greater problem in the future, a problem that may crush international project cargo under the weight of it.

 

Jaya Prakash is a Singapore-based journalist who can be reached at prakruby@hotmail.com.

 

Lead photo: In this 2015 file photo, a worker with China Railway Group Ltd. walks over rails being laid at a construction site of the Hami-Ejina Railway in Hami, northwest China’s Xinjiang Uyghur Autonomous Region.  /  Credit: Imagine China/Newscom

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