I was discussing Chinese infrastructure with someone new to China a few days ago.  They lamented how in the US, our highways are often tattered and torn, our rail system (Amtrak) is practically nonexistent, and our urban mass transit is only passable in a handful of very large cities.  Compared to China, where you only need to wait 5 minutes for a bus, and something like a dozen cities have subway systems, he was right that the US looks to be falling behind quite dramatically.

When I first came to China, I felt exactly the same way.  Why are there literally 4 bus lines in my hometown, when Shenzhen has hundreds?  It’s cheap and convenient, and you usually only need to wait 5 minutes for the next bus to come.  If I was downtown, I could take the subway, which was spotlessly clean and cheap.  Every city I visited had huge modern airports or railway stations.

Some of that amazement remains, but some of that has certainly worn off as time has gone on.  The more trips I take between the US and China, the more I realize that China is building too much, too fast, with little concern whether or not anyone shows up.  There are hundreds of anecdotal examples, but the one I wanted to look at was one that comes off as a success story: The Beijing Subway.

The Beijing Subway is one of the fastest growing mass transit projects in history.  From 1969 through 2001, Beijing only had built two subway lines.  Yet from 2001-2008,  5 additional lines were built in preparation for the Olympics, at a cost of $7.7 Billion  In December 2010, an additional 5 lines opened, with a construction cost of $9.24 billion.  Three new extensions were opened in late 2011, and 7 more segments are due to be completed by 2014.

Now, I’m about to make a whole lot of estimates and assumptions, but something here doesn’t add up.  Since I don’t have most of the construction costs here, I’m only looking at 2001-2010, the total $16.94 billion in construction costs for 10 subway lines or segments.  That’s an extremely good deal.  By contrast, the Huanzhong Line in Shenzhen costs $3 billion on its own, almost twice as much per line as the Beijing version.  This could be because the terrain in Shenzhen is that much more difficult to build around, which is a legitimate argument.  Compared to the New York Second Avenue Subway, a 14km line that is expected to cost over $17 billion, the price difference is unreal.  Beijing is able to build 10 subway lines for the price of one very short line in New York?  Sure, there’s a difference in labor cost, but the cost of rails, train cars, and other infrastructure should be roughly the same between the US and China.  So I think the number Beijing touts publicly is very, very optimistic.

Looking at the revenue side, the formula is also worrisome.  I honestly have no idea how much money the subway makes off of vending and advertisements, but I assume it’s a pretty hefty haul.  Until I can look into the Shenzhen subway system further, let’s pretend advertising and vending offset the cost of repairs, employees, and electricity to run the line.  Actually, I think the latter costs much more than the former brings in, but just to compare revenue/costs, I’ll use this assumption for now.  We know that the Beijing Subway had 2.18 billion riders in 2011 and 607 million in 2004, so looking backwards, let’s say there were a total of 12.5 billion riders from 2001-2010 (avg 1.25 billion/year).  It’s probably a lot less than this because only a paltry few lines were open during much of this time, but I’m trying to be optimistic here.

With all these assumptions in place, and knowing that a subway ticket is a flat 2 RMB regardless of distance (excepting the Airport Express Line), ticket revenues are 0.32 cents per passenger, or $4 billion over the 10 year period ($400 million/year).  If debt servicing costs for the first year are $850 million (at 5% interest, ridiculously low but possible from Chinese banks), revenue is not even close to meeting the debt servicing costs, let alone the principal (short $450 million on interest payment)  But the problem is, the Beijing government stated publicly that they were only running a $159 million deficit by 2008.  Where is that extra revenue coming from?  Over $300 million of magically vanishing debt each year?

Coupled with the fact that ads/vending probably do not cover maintenance/workers/electricity, and that the initial construction cost is less than 10% the cost of building a subway in America, I would say all the numbers are probably bogus.  Estimates for overall cost (including infrastructure) during the Beijing Olympics is about $70 billion.  My guess is about $40 billion on rail projects, but even that looks very low compared to the New York subway.

In other words, will the Beijing Subway’s debt ever be paid off?  Sure, it has additional social benefits like reducing traffic, but is the debt worth it?   The current math behind it looks bad, but maybe I’m missing something big here.

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