Success factors for financial sustainability of toll road project in China

The rapid growth of the Chinese economy calls for massive development of infrastructure and assets. Over the past 10 years a national trunk highway system and a network of urban and provincial expressways have emerged in China (World Bank, 2003). A World Bank (2003) research estimated that highway investments in China significantly increased in the late 1990s and reached 2.5 percent of GDP. Still, an estimated $75-100 billion needs to be invested in highway construction over the next 15 years. Toll road is one of infrastructure project that has high ability to attract private investment since it is able to recover directly the costs of its operation and construction through toll charges. While this brings a lot of opportunities to project stakeholders, it also contains various risks that can bring the result that the real project outcomes are very much lower than the expected.

Ms. Truong Thi My Thanh made a study which main objective was to develop the model of success factors for Chinese toll roads to achieve financial sustainability in planning and executing stages and recommend proper consideration from key stakeholders to ensure that toll road project can be sustainable and more attractive to private investment. To complete the main objectives, following sub objectives were explored:

1. Investigate the cost and financial performance of toll roads in China to find out significant attributes influence on the difference of estimated and actual outcomes

2. Investigate the impact of above factors to project finance for short term and long term sustainability.

3. To propose the model for financial sustainability of toll roads in China and provide recommendations for policy makers, international lending institutes and toll road developers as required consideration in planning stage to enhance the certain of financial condition and control the financial sustainability in executing stage.

Conclusions

Toll road is one of infrastructure project that has high ability to attract private investment since it is able to recover directly the costs of its operation and construction through toll charges. Toll road development can be attractive to investors and lenders only if the financial and economic benefit can be met. Financial sustainability is the essential part of this entire criterion, with many attributes should be considered. It is true that the financial sustainability of toll road depends on the performance of all stakeholders involve in project from initial phase to the end of project life cycle. Planning and executing stages are the most important and have high impact to project financial sustainability. Proper considerations to the significant attributes in these two stages need to be taken from involved stakeholders to ensure that long-term survival and sustainability are achieved.

The purpose of studying toll road performance and the impact to financial sustainability is to (1) indentify the significant factors impact to project financial sustainability in planning and executing stages, and (2) recommend proper consideration from key stakeholders to ensure that toll road project can be sustainable and more attractive to private investment.

The study was carried out by examining seven Chinese toll roads with different development model. The focus was to investigate toll road development model, the participation of stakeholders and the risks they had to face with. After that, in-depth analysis is on (1) financial sources (2) financial usages and investment cost variation (3) revenue base (4) operating performance (5) financial benefit and (6) financial sustainable situation. Those attributes were investigated in combination with the involvement of key stakeholders related to projects. A qualitative research was prepared where the data collection techniques are case studies.

From the analysis, the factors impact to project financial sustainability can be divided into five levels (1) Policy support (2) Regional development (3) Fund raising model (4) Project development (5) Financial structure. All these factors are essentially important for project developer’s consideration.

Policy support: This factor covers four significant attributes (1) Government assurance (2) Land acquisition and resettlement policy (3) Toll rate structure and tolling adjustment and (4) Penalty regulation for truck over load. Government assurance provides the legal support to negotiate with ADB/WB to get the loan. The policy support for land acquisition activities reduces the risks of delay and cost overrun. Additionally, the proper toll rate setting and fixed frequency of tolling adjustment ensure the certainty of revenue stream and help toll road developer can foresee the profit. Lastly, the strictly penalty is needed for truck over loading to reduce the maintenance cost of toll roads.

Regional development: Financial sustainability extremely depends on the certainty of project revenue stream which significantly impacted by master plan of regional development. The study found that appropriate point time of investment base on socio-economic situation ensures proper traffic flow after toll road start to operate. Additionally, toll road projects constructed in combination with the upgrading of local toll road network and industrial zones promise the high traffic growth rate and higher revenue stream in the future.

Fund raising model: The study found out that securitisation model for Chinese toll road development has the highest level of long term financial sustainability, because the local government provides very high level of grant and subsidy. Government build and operate model has quite high ability of financial sustainability but lower than securitisation model. Project establishes very high level of contingencies budget even the total cost will increase. Additionally, local government subsidise the over budget of construction cost, hence there will no increase in short term debt and current liabilities. Cooperative joint venture model of toll road in China has lowest level of financial sustainability since it uses very high debt to equity ratio; the debt mostly comes from domestic bank with high interest rate and high interest during construction. Project is developed separately with the improvement of local road network and the expansion of industrial zones because there is limited source of fund of investors.

Project development: It was found that four significant problems closely go along with the development of toll road project, they are inappropriate preparing in feasibility study, improper land acquisition planning, delay in land acquisition implementation and not timely approval of works variations and equipment procurement from ADB/WB. Changes between feasibility design and detailed design because of improper feasibility preparation was the most significant reason caused civil work and land acquisition cost overrun. Resettlement plan, compensation standard and the difference in acquiring temporary and permanent land was carried out ineffectively caused over budget of land cost. Limited budget contributes to the delay of land acquisition activities. The delay of project completion also involved with the insufficient feedback on report ADB/WB required from project executing agency hence delay in resolving problems and difficulties that occurred during project implementation.

Financial structure: This factor covered five significant attributes; they were (1) Debt to equity ratio of capital investment, (2) Government grant, (3) Source of debt, (4) Source of equity and (5) emergency budget for financial consumption overrun. It was found that the D/E split which was used to develop toll road project in China mostly based on the financial health of local government rather than the ability to generate revenue of project itself. The grant from central government was just used to improve some section of feeder roads, hence the amount mostly based on the length and socio-economic condition of the projects while grant from local government was significantly based on the benefit that local government could receive from project. The result showed that the amount of ADB/WB loan had very high impact to financial structure of investment capital since it reduces the debt from domestic bank and the percentage of grant. The study also found out that local government was not yet successful to attract private participation since equity from private sectors still played minor part of investment capital. When project got construction cost overrun project owners used three sources of emergency budget cover investment overrun, they were short term loan from domestic banks, local government subsidy and contingencies budget. Government build and operate model used highest contingencies budget and received fully support in the context of subsidy from local government. Whereas cooperative joint venture model had to find the loan from domestic bank since it used low contingencies budget and not received any subsidy from local government.

Recommendations for critical factors model

The development model for financial sustainability of Chinese toll road has been structured in considering long term and short term impact. Based on the findings from the information of diverse situation, the model has been structured on policy support, regional development, organisational model, project development and financial structure levels. The recommendations for key stakeholders involves in toll road project have also been provided to enhance the financial sustainability of toll road development. The applicability of critical factors model will help policy makers, toll road developers and international lending organisation (ADB and WB) to foresee the sustainability of financial condition of toll road in planning stage through proper master plan for regional development, policy support and effective organisational model. Additionally, the findings also help toll road developers to control and enhance the financial sustainability in executing stage through the risk mitigation instrument in each development step, proper financial structure of investment capital and appropriate sources of fund as emergency budget for financial consumption overrun. Lastly, the applicability of the findings not only used for Chinese toll road developers but for stakeholders in other emerge economy countries as well.