New study examines alternative funding sources for transit infrastructure in Chinese cities
China’s rapid urbanization has dramatically increased the need for public transit infrastructure in cities across the country. The World Bank estimates that China needs to expand rail lines by at least 3,000 kilometers by 2020—a $4 trillion investment—in order to meet the increasing transit demand. However, the traditional sources of infrastructure funding—sales of land development rights and bank loans—have not only burdened local governments financially, but also led to costly urban sprawl and diminished arable land.
WRI China recently published Rail Plus Property Development in China: the Pilot Case of Shenzhen, which examines an alternative approach to financing transit-oriented development (TOD), called rail plus property (R+P). The working paper evaluates the experiences of Shenzhen—the first mainland Chinese city to implement R+P development successfully on a large scale. Building on extensive expert interviews, field visits, and comparative case studies between Shenzhen and Hong Kong, the study analyzes the city’s innovative policies and explores how they might be applied to other cities facing similar problems.
Rail plus property: an approach to unlocking an untapped funding source
Land that has access to transport increases its value. By WRI China’s estimation, the added value from transit access amounts to US $300 million – $1.6 billion in the average Chinese city—about 20 – 90 percent of the investment needed to develop a subway line. This added value—known as land premiums—can be a potential source of funding for transport infrastructure projects, which often either rely on large subsidies from local governments to continue operating, straining public funds.
R+P development allows a single entity to develop both rail and property. The working paper notes that this approach can be more financially sustainable, as the future revenue from property tenants can be used to pay for the construction costs of building rail up front. Furthermore, R+P incentivizes developers to build compactly around stations, as denser properties result in higher land premiums for the developer.
Strategies for ensuring successful development
The study advises local governments on different strategies for setting up financial arrangements supporting R+P development.
Local governments can fund urban transit projects in a variety of ways, and R+P development is only one option. Consolidating property and transit development in one entity can be risky, and it’s important that decision markers identity early on the macro-economic and institutional factors. Clear and fair rules for sharing the benefits, risks, and costs among stakeholders must be established as well.
Land contributions that governments make to R+P development should ensure both a strong rate of return on investments and social and environmental benefits.
Performance-based contracts and government oversight are necessary to improve the operational efficiency of city-owned transit agencies and encourage entrepreneurship.
Institutional reforms for local and national progress
As the study notes, the success of R+P development rests heavily on a sound and comprehensive policy environment.
At the national level, the working paper highlights the role of land policy reforms for directly granting developers with land. Doing so will streamline project implementation and mitigate institutional risks. Additionally, sound planning principles are also important to ensuring high land premiums and guaranteeing broader socio-environmental benefits. Lastly, bridging the knowledge gap will require nation-wide capacity building and developing standardized toolkits for R+P best practices.
At the local level, cross-departmental coordination is necessary to streamline decision-making and implementation. The study emphasizes how Shenzhen expanded land development rights, to encourage mixed-used development—allowing commercial, residential, and underground transit building rights to be obtained separately. The study also notes that cities need to expand in-house expertise on R+P management and operations, and understand when they require professional consulting services to jump start a project.
A critical first step
Shenzhen’s success has important lessons for other Chinese cities. As Lulu Xue, Research Analyst of WRI and co-author of the paper explains, “if Shenzhen can successfully implement R+P, so too can other Chinese cities. But R+P does not offer quick wins: in Shenzhen, it took over a decade to design implementable R+P solutions; in Hong Kong, it took about a decade to make a profit. Success was made possible by a booming real estate market, a mature capital market, a capable and willing private sector, and more importantly, a strong political will that is open to changes and undeterred by failures.”
To read the working paper and learn more about Shenzhen and transit-oriented development in Chinese cities, click here.
About EMBARQ at WRI Ross Center for Sustainable Cities
EMBARQ, Sustainable Urban Mobility by WRI, catalyzes and helps implement environmentally, socially, and financially sustainable urban mobility solutions to improve quality of life in cities.