Why Expressways Are “Exorbitantly Profitable”
At the annual session of the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC) this year, many NPC and CPPCC delegates discuss on the exorbitant profitability of expressways, putting the issue again in the public spotlight. What is the exorbitant profitability? Statistics show that in 2010, Nanjing-Shanghai Expressway’s profit rate in its main business hit 56.21 percent, and Chengdu-Chongqing Expressway’s reached 59.28 percent. In comparison, the real estate industry, usually considered exorbitantly profitable, only has a gross profit rate of less than 40 percent.
However, it is not the industry’s over-50-percent profit rate in its main business that annoys the public. Taking the real estate industry a few years ago as an example, despite the sharp rise of housing price, many real estate companies, such as Vanke Group, still earned their reputation from consumers and the public. By contrast, the expressways are not so lucky. Apart from collecting tolls, what valuable services do they offer? I assume most of the public have no idea about it.
In fact, the expressways play an important role in the modern society. The modern economy relies mainly on the expressways or the railways to transport the products from they are produced to where they are consumed. Without a well-developed expressway network, the logistic system will be paralyzed, making the products in our daily life more expensive and less diversified. A well-developed expressway network can even be deemed as a basic precondition for the modern economy to run smoothly, and it is not so exaggerated for us to call it the economic artery. You may imagine a world without such a convenient traffic network, how boring our life will be!
However, the fact that the expressways are important to the modern life doesn’t necessarily mean the expressway companies nowadays have created exceptional value for the society. Undeniably, the expressways are built and maintained by the expressway companies. But this doesn’t mean that these companies, which are in charge of the maintenance and operation of the expressways, have contributed much during the process of providing transport services. In fact, apart from collecting tolls, the expressway companies are doing nothing truly valuable. Furthermore, the process of collecting tolls has few technical requirements, for almost everyone can do the job.
Since the expressway companies don’t create much value, why does their main business have such a high profit rate that even surpasses some international conglomerate — the world renowned Apple Inc. only has a profit rate of 37 percent in its main business in the 4th quarter of 2011? To me, the reason is simple. It’s all because of monopoly. There are two areas the expressways monopolize — the thresholdof market entry and the toll fees.
Although the Chinese laws don’t specify the market entry threshold for the construction of expressways, the reality is that in most regions, the construction of expressways only favors state-owned capital, with little private capital injected. When an overwhelming number of expressways are controlled by state-owned capital, it is inevitable that the expressway companies have a long list of redundant personnel. Because of their stable cash flow return, relatives of the powerful persons are usually assigned to work in the expressway companies, which become a machine for the stakeholders to rake in profit. Some CPPCC delegates pointed out that some expressways have 5.4 staff members per kilometer, and that a toll station, which is supposed to hire 45 employees, ends up having an 80-plus member payroll. It is reported that the Luoyang Branch of the Henan Expressway Company, which is responsible for the management of only a 98.8-kilometer tollway, has 403 employees, not including its security guards and office support staff.
Why does the profit rate remain high despite the severe personnel redundancy? On the one hand, the investment made in these expressways years ago was relatively lower than the current cash flow, leading to the huge profit. On the other hand, the expressways, controlled by state-owned capital, are able to monopolize the toll fees. Although the toll fees are set and approved by the pricing and transport regulations instead of the expressway companies themselves, most expressways, which are backed up by state-owned capital and have close liaison with the industry regulators, usually have the final say in pricing the toll fees, while the consumers can only remain in silence.
Therefore, although the expressways play an important role in China’s modern economy and society, they have been underestimated too much by the public and many a time slammed by media. In this context, how to neutralize the exorbitant profitability of the expressways, enabling them to create more value in the modern society? Free competition probably doesn’t work here because the expressways is an industry with the property of natural monopoly — once an expressway between two regions is built, hardly can a second expressway compete with it. In addition, under China’s current regulating system, the privatization of expressways will often bring about corruptions.
Is regulating the expressways a mission impossible? In my opinion, the US model is worth a try. In the US, the Federal Highway is mostly toll free except for a few interstate highways. Of course, being toll free doesn’t mean that the public can use them for free. Instead, the payment is made in a different form, which is an exquisitely designed mechanism. In 1956, the US Congress and the then President Eisenhower approved the foundation of the Highway Trust Fund, which receives tax revenues derived from excise taxes fuel, trucks and tires to build new highways and roads funded by the federal government. In this case, drivers don’t need to pay the toll fees after they have gassed up their vehicles.
What advantages does this model have compared with expressway companies collecting toll fees? I think there are two. Firstly, it cuts the labor cost. Without a lot of expressway companies, there’s no need to hire so many redundant employees. Secondly, it makes the expressways less commercialized, cutting the logistic cost in the society. If a company runs an expressway, it must take into account its revenue and profit and will try every means possible to seek profit from the customers. “Your profit is my cost.” The rise of the profit of expressway companies will lead to the rise of logistic cost in the society. But such cases can be radically eliminated by using tax revenue to maintain the expressways.
China started imposing fuel tax in 2009, intending to cut the toll fees. But after implementation, drivers didn’t pay less toll fees and the mileage of tollways was unintentionally increasing. Why? In my opinion, the tax policy has been jeopardized by the numerous tollway companies and the interested group who benefits from these companies. Once the fuel tax policy is fully implemented, the tax revenue will be used to cover the cost of the construction and daily maintenance of expressways, which means a lot of the current redundant employees will lose their jobs. Those who are benefiting from the current rule of game will surely say no, while the policymakers are not motivated to make the change because the change won’t benefit themselves and will even offend many other groups.
From this perspective, if there’s no change to be made in the source of the money used to cover the cost of the construction and maintenance of expressways, it will be an exorbitantly profitable industry with the expectation of no end.
Originally published on Southern Metropolis Daily.
