Survival of the Unfittest

Lessons From China’s Infrastructure Boom

Among Asian countries, China has invested the most in large infrastructure projects. There is much to praise about China’s infrastructure investment path, such as a remarkable scale and speed of infrastructure delivery. These achievements can be partly attributed to devising effective incentives for local government officials to invest in infrastructure; local officials received binding economic growth targets in their annual performance evaluations triggering impressive infrastructure investments. One takeaway from the Chinese experience is that compared to the central government, local governments can be more effective in planning and delivering local infrastructure. For instance, in my research of 136 large infrastructure projects in China constructed between 1983 and 2015, I found that projects’ cost and time overruns were lower, when provincial or municipal governments were in charge rather than the national government. One lesson for other countries might be to consider whether it is feasible to delegate infrastructure planning and delivery to subnational governments.

Yet, there are also numerous mistakes China has made over the past decades that should be avoided by other countries. First, many of the investments in China have not been put to productive use. “Image projects” were often planned to further the career of government officials and resulted in unproductive investments, such as oversized government buildings, massive public squares, or large, empty “ghost towns”. Many of the approved infrastructure projects did also not undergo transparent bidding contests, and even if a bidding process was conducted, the cheapest offers often won at the cost of quality (this is a problem faced by many countries and is known as the problem of the “survival of the unfittest”). As a result, one can find much poorly-built infrastructure in China today, also commonly referred to as Tofu-buildings or Tofu projects.

Second, almost all of China’s local infrastructure projects were debt-financed. Local governments across China set up local government financing vehicles (LGFVs) to get around a formal ban on municipal bond issues, leading to reckless lending from state-owned banks to finance local infrastructure projects. LGFVs opened the door for soft budget constraints for local governments as they helped local governments to raise extra-budgetary finance outside authorization of the central government. Many of these investment approvals did not follow strict scrutinization and local LGFVs repeatedly faced financial troubles and did not repay their loans. By 2015, China has seen an exponential rise of local debt and local governments accumulated an “infrastructure debt” of more than 1 trillion USD. One lesson here is that the use of local government financing vehicles can result in substantial infrastructure investments, but such financial platforms and accumulating debt levels need to be carefully monitored.

Finally, like many other countries in the world, China was also not very effective in planning and delivering infrastructure within budget and timeframe. Drawing again on the database of 136 large infrastructure cases, findings show that cost overruns in rail projects were on average 35 percent, in hydro 32 percent, and road 29 percent. This suggests that China is doing slightly better than the world in hydro, but the same or worse in rail and road infrastructure investments. Many of these cost overruns resulted from deficiencies in the governance arrangements. Typical examples here include inappropriate or complex governance set-ups and rent-seeking behavior by individuals or firms. These cost overruns could have furthermore been partly avoided if comprehensive front-end planning was adopted. That could include using sector-based benchmarking such as Reference Class Forecasting, a method of predicting the future costs and time budgets of a project by comparing it to actual outcomes of similar projects in the past. Supervisory bodies also need to be in place, staffed with experts in infrastructure project management.

In sum, the China example shows that it will be important for other countries to invest not only in high-quality infrastructure, but to also dedicate sufficient thought in how best to plan and deliver these projects to stay with cost and time budgets. Three factors seem to be of particular importance. First, countries should promote transparency throughout a project’s life cycle, including providing comprehensive information during the planning phase or competitive bidding processes. Second, sufficient thought should go into creating appropriate financing tools that do not bring financial instabilities. And finally, tight supervision and regular monitoring through supervisory boards is associated with better outcome.

Dr. Genia Kostka is a professor of Chinese politics at the Free University of Berlin and a Fellow at the Hertie School of Governance in Germany.

This essay is part of our Big Questions series.