With the rapid development of China’s economy and the continuous improvement of people’s living standards, the demand for transportation infrastructure such as toll roads has increased significantly. However, restricted by fiscal revenue, the government alone cannot fully undertake the huge investment in toll road construction. Therefore, encouraging social capital to participate in toll road investment through various forms such as sole proprietorship, joint venture, or cooperation has become an important part of meeting transportation infrastructure needs. Toll road investment has the characteristics of large investment scale, long investment period, and stable cash flow. It has become an attractive infrastructure investment field. However, there are also problems such as high industry barriers to entry. Finding reasonable equity and debt financing structures is the key to smooth implementation of toll road projects.
Toll road industry development overview and business model analysis
From the perspective of highway mileage and growth rate, 1988-1998 is the initial stage; 1999-2008 is the high-speed development stage; 2009-present is the stable development stage. Although the growth rate has slowed down, under the strategic planning of building a strong transportation country, the toll road industry still has much room to grow. The investment scale remains large. The toll road industry chain includes highway construction, highway operation, and highway maintenance. The common financing methods are BOT (build-operate-transfer) and TOT (transfer of operating rights). The toll road industry has the characteristics of monopoly, high barriers to entry, and stable cash flow. Although it faces diversion from high-speed rail and airlines, under policy support, the toll road mileage and revenue still maintains a relatively high growth rate.
Technology standards determine toll road construction
According to the current “Technical Standards for Highway Engineering”, highways in China are divided into five grades: highways, primary highways, secondary highways, tertiary highways and quaternary highways. Highway capacity is much stronger than low-grade roads, undertaking about 20% of the traffic volume. Therefore, the construction planning of highways is the key point in road traffic and transportation. Factors influencing toll road pricing mechanisms include economic growth, competition from other transportation methods, and toll policies. Although affected by the epidemic in 2020, toll road sample enterprises’ revenues are still growing steadily. However, profitability weakened, and dependence on government subsidies increased.
Finding reasonable financing structures is crucial for smooth toll road PPP projects
Toll road investment requires huge amounts of capital and has high barriers to entry. Therefore, private capital participation has become an important financing method. PPP can help make up for shortages in infrastructure investment and long-term assets for pensions. However, problems like public opposition, policy changes, and improper financial structures often plague PPP projects. The key is to evaluate whether and how private capital can bring incremental benefits compared to public finance alone, instead of focusing on keeping projects off the government balance sheet. The financial structure should balance the interests of taxpayers, investors, banks, and fund managers. For toll roads, using more stable debt financing rather than sole equity financing is more feasible.
With huge capital requirements, long cycles, and stable cash flows, toll roads are an attractive infrastructure investment field. Private capital participation can alleviate fiscal pressure. But reasonable financing structures must be found to align stakeholder interests, and public support should be nurtured.