Godfree Roberts, Ed.D. Education & Geopolitics, University of Massachusetts, Amherst
Updated Sep 6, 2017 ·
Yes, China’s high speed rail is profitable and there aren’t many Chinese who haven’t
personally profited from it, either. It’s an excellent, highly visible example of how China designs its programs holistically– whether they’re for infrastructure, social security or defense–and eliminates what Western economists call ‘externalities’ (things, like pollution, that someone else must pay for. There is no ‘someone else’ in China; there’s only ‘us’).
To be fully inclusive, I’m going to borrow the best points from the best answers by
Walter,
ZhenXiang Shi,
Yu Cheng,
X. Huang,
Wen Ling,
Haiyan Chen and
Prasanna Bhalerao and add a dimension that foreign critics of China often miss. But first, let’s review some infrastructure history to help us understand why critics have long predicted problems for China.
One of the most famous, most popular high speed rail lines on earth is the 400 km
London-Paris Eurostar: “The company awarded a contract for the construction of the tunnel to TransManche Link (TML). The tunnel cost around £9.5bn to build, about double TML's original estimate of £4.7bn. The tunnel was financed partly from investment by shareholders and partly from £8bn of debt, and was officially opened on 6 May 1994 by HM Queen Elizabeth II, and President François Mitterrand. In its first year of operation the company lost £925m because of disappointing revenue from passengers and freight, together with heavy interest charges on its £8bn of debt. In April 2004, a dissident shareholder group led by Nicolas Miguet succeeded in taking control of the board. However, in February 2005, Jean-Louis Raymond, the Chief Executive appointed after the boardroom coup, resigned and Jacques Gounon took complete control becoming Chairman and Chief Executive. In July 2006, shareholders voted on a deal which would have seen half the debt, by then reduced to £6.2bn, exchanged for 87% of the equity. However this plan failed, and on 2 August 2006, the company was placed into bankruptcy protection by a French court for six months”.
Eurostar’s experience confirmed what neoliberal critics had long claimed: infrastructure is unprofitable
even if it benefits millions of people. So it’s natural that, when the Chinese government built 20,000 km of even higher-speed rail, skeptics predicted bankruptcy. High-speed rail service in China was introduced on April 18, 2007 and traffic has grown 30% per annum ever since, reaching 1.44 billion in 2016: four times of the HSR volume in Japan, nine times France’s, and greater than north America’s total air traffic.
Despite these impressive figures, every completed line incurs losses in its first years of operation. The
Beijing–Tianjin HSR cost ¥20.42 billion to build and ¥1.8 billion annually to operate, (including ¥0.6 billion in interest payments) and needed to provide 40 million rides a year to reach profitabilty. In its first year, 2008–2009, it carried 18.7 million riders and generated ¥1.1 billion in revenues for a loss of ¥0.7 billion. The next year, ridership rose to 22.3 million and revenues improved to ¥1.4 billion, for a ¥0.5 billion loss. By 2016 it was maxed out, providing 100 million rides–100% capacity–and highly profitable. Construction of a second line has commenced. (
WikiVisually).
China’s HSR network has exceeded its predictions–both technically and financially–and is solidly profitable today.
Where do the profits come from and how are profits diverted to pay off construction loans? The answers are: they come from almost everywhere and, since every aspect of the network is cooperatively owned, it’s easy to skim off enough pay the interest and retire the bonds when they fall due. ‘Everywhere’ is a little vague, so here’s a list of the cost savings and some revenue streams:
- Increased forecasting accuracy. The more they have built, the more accurate their predictions have become. Accurate predictions lead to accurate financial models which lead to accurate bond pricing.
- Low construction cost. The program benefits from scale. From mass-produced, unballasted rail sections to bridges (ordered by the meter) to engines and carriages. Production and demand are tightly integrated, eliminating stop-and-go and costly downtime. Current construction and manufacturing costs are now 30%-40% cheaper than anywhere on earth. Here’s an example of how automated the process is: the SLJ900/32 Bridge Girder Erector Machine lays a pre-fabbed tranche of track in 50 minutes, much faster than if done by 20 workers. High-Speed Railways in China: A Look at Construction Costs
- Economic stimulus from the initial investment. A surprising percentage of the $650 billion invested (so far) came back within twelve months in the form of income and sales taxes that ripple out in all directions from the factories and construction sites. HSR construction creates jobs and lifts demand for construction, steel and cement industries during the economic downturn. Work on the Beijing–Shanghai HSR mobilized 110,000 workers.
- Land development. This is the system’s ace card: Those shopping complexes at the stations? A share of the rents goes to pay off the bonds. Land sales around the stations? A share of the sales price goes to pay off the bonds. The increased commercial activity around stations? A share of the increased taxes help pay off the bonds. Those ‘stations in the middle of nowhere’? When new towns are built around them, land sales and development and the increased tax base will help pay off the bonds.
- Increased productivity from passenger time savings. Improves economic productivity and competitiveness over the long term by increasing the transport capacity of railways and linking labor markets. The World Bank’s survey found that high-speed passengers' average income is 35-50% higher than that of passengers on conventional trains. This year (2017), if 1.8 billion riders each saves an average of four hours compared to automobile, plane or regular train and the average urban wage in 2017 is US $1,000/mo, then HSR will save the average rider $24 of productive time, for a total of $43 billion. that will, eventually, boost economic activity and, of course, tax revenues.
- Ticket revenues. Since the first line opened, ticket prices have stayed almost flat while the average wage has doubled. Today, twice as many people can afford HSR as could afford it in 2007.
- Enhanced freight revenues. Intercity high speed package delivery is a large and growing revenue source. Today someone who lives in Shanghai can order products from Alibaba in the morning and get them in the evening thanks to the HSR network, another reason why China's e-commerce is flourishing. Improved productivity and competitiveness generate increased taxes. Moving passengers to high-speed lines frees up older railways to carry more freight, which is more profitable for railways than passengers.
- Advertising revenues. Billions of ‘impressions’ to passengers whose average income is 30–50% higher than the national average.
- Concession revenues (food and drink). Those snack carts, station concessions, drink dispensers? They’re paying off the bonds, too.
- Environmental benefits. HSR reduces noise, high-atmosphere pollution and CO2 dramatically. These are direct contributions to quality of life and indirect contributions to reducing atmospheric pollution, thus raising the value of surrounding land.
- Tourism revenues. ‘The results indicate that at the national level, a trend of convergence emerges during the three-year period of analysis in both China and Korea. At the HSR passing area level, HSR contributes to accelerate regional economic convergence and reduce the regional income disparities in China’. HSR is responsible for 59% of the increase in market potential for the secondary cities connected by bullet trains. (Economic geographers call market potential "a geographic area's access to markets for inputs and outputs"). A 10% increase in a secondary city's market potential is expected to be associated with a 4.5% increase in its average real estate price. HSR promotes the growth of second-tier cities by making them more livable/desirable–and, of course, collects taxes on the increased revenues that go to pay….you know the rest.
- National cohesion and a national market. People, products and services move quickly, allowing people to live in one place and work in another. HSR helps rural areas profit from their natural resources by bringing business opportunities and tourists–while reducing rural people’s isolation (think Tibet!).
- Intellectual property exports. China is a leading source of high-speed rail technology. Chinese train-makers have absorbed imported technologies quickly, localized production processes and began competing in the export market. Six years after receiving Kawasaki's license to produce Shinkansen E2, CSC Sifang produced the CRH2A without Japanese input (Kawasaki ended cooperation with Sifang and has been sulking ever since).
- Energy savings. Electric trains use less energy to transport people and goods on a per unit basis and can draw power from more diverse sources of energy–including renewables–than automobile and aircraft, which are more reliant on imported petroleum. This cuts billions from China’s energy import bills.
- Scale savings: more profitable lines subsidize less profitable lines that serve thinly populated areas (think Tibet again).
Because the government controls
all these factors for the benefit of
all the people, it can skim off enough from each to easily repay the bonds.
And this is just one of hundreds of such projects underway whose planners approach them in the same holistic way.
