Financing Urban Infrastructure for Growth in Challenging Times

Published on 2013-01-19

On the 9th of January the British Chamber of Commerce Shanghai, invited Professor Michael Luger, Dean of Manchester Business School, to assess the current state of infrastructure funding and look at its possible future in China.

In the past few decades, China has experienced astonishing rates of urbanisation which is one of the mega trends responsible for its rapid economic growth over the same period.

The Chinese government has facilitated this by funding and implementing immense infrastructure provision but, given the vast amount of further development needed, and the fact local governments are increasingly cash strapped, there is a growing consensus alternative financing methods are needed if China is to continue along this path.

On the 9th of January the British Chamber of Commerce Shanghai, invited Professor Michael Luger, Dean of Manchester Business School, to assess the current state of infrastructure funding and look at its possible future in China.

Modern infrastructure is crucial to the development of a country both in order to guarantee a minimum quality of life to the population as well as to attract global investment i.e. itself acts as fuel for economic growth.

The term ‘infrastructure’ covers a wide range of manmade projects but all of them are long lived, very complex and capital intensive which, by definition, creates challenges on many levels. In addition to maintenance and management, Prof. Luger cited the financing as the most problematic challenge which typically has three solutions:

1) Fund through national savings - traditionally high in developing companies with a large trade surplus and low debt to GDP ratio
2) Borrow from the public against future payments i.e. issue bonds
3) Private sector

In China, like many other countries, the savings rate has peaked and is now in decline suggesting it is only a matter before China needs to consider alternative models such as the Public Private Partnership (PPP) model prevalent in the West. With huge infrastructure plans still in the pipeline for China (including over 120 new airports commissioned), the ‘old’ way of financing cannot be sustained.

However, this does not mean China will experience a smooth transition into accepting more Western models and in fact, there are some fundamental dynamics in China which will make the introduction of PPP more difficult.

  • The state owns the land and the Chinese government has a strong propensity to retain control, particularly for national projects.
  • Business in China generally has much shorter term outlook than that required for PPP.
  • Difficulty of enforcing long term contracts especially guaranteeing payment over an extended period of time.


Overall, as China continues its economic development, it is likely to diversify its approach to financing infrastructure (whether out of necessity or desire) and the associated difficulties are merely obstacles which will need to be negotiated in due course.