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Market-Driven Investment in Infrastructure and Operation of State-Owned Capital
Guo Lihong
Research Report No 157, 1335
During the Ninth Five-Year Plan period, China scored unprecedented achievements in infrastructural construction. However, as we started from a low level, our infrastructure is a weak link in the overall development of the country, whether compared with industrialized nations or judged by the internal structure of national economy. The situation cannot be changed fundamentally within a short time. Furthermore, as infrastructure has public and external features, its supply and demand cannot be simply determined in terms of "meeting effective demands", an ample volume anticipating and spurring (by service and price) demands should be taken into account.
A number of development strategies to be carried out during the Tenth Five-Year Plan period call for a continuous high-speed expansion of infrastructure. Among them, the strategic adjustment of the economic structure, with urbanization as the focus, means that the construction of urban infrastructure should reach a new stage. The focus of the first phase of the planned development of the western regions will be no other than a breakthrough in the construction of local infrastructure. Whether infrastructural construction can play such a strategic backing role depends on two factors: one is whether non-governmental and overseas capital can be introduced into construction projects; the other is whether investment yield can be raised substantially. Therefore, it is necessary to discuss two closely related subjects: market-driven investment in infrastructural construction and operation of state-owned capital.
I. Infrastructure and Natural Monopoly & Governmental Monopoly
To give a clear conceptual basis to this article, a number of disputed problems need to be explained. Firstly, the "theory of natural monopoly" is the basis on which the government must formulate rules and regulations rather than monopolize. Secondly, government interference and government monopoly are necessary and natural at a given stage and have nothing to do with natural monopoly. Thirdly, "government monopoly" and "government taking on everything" are two things of different nature.
1. Market competition dominating the U.S. infrastructure
It has always been the principle of the United States’ economic philosophy that "the government never meddles in anything that can be done by non-governmental organizations". Therefore, it is not surprising that infrastructural services are provided by non-governmental organizations. The American railway system was built in the 19th century with non-governmental investment funds raised from the European capital market. Other infrastructural facilities such as energy supply, transportation and telecommunications were all financed and operated by non-governmental organizations. Even many schools and hospitals were established by private groups or with private donations. The only exception was highways, which were all built by the government. But this cannot be viewed as monopoly, for these highways were free of charge, and the government did not exclude private investment from building highways. In fact, the first privately-owned toll highway, the Dulles Greenway in Virginia, failed in the end. The only government-owned corporation in the electricity industry was the Tennessee Valley Authority. Although its fundamental purpose was to alleviate poverty with cheap electricity, TVA was established only after a dozen years of Congressional debates and by taking the opportunity of the Depression.
As there is no governmental monopoly, the United States is a nation where the theory of natural monopoly is best tested and monopoly is most strictly restrained. AT&T exercised monopoly in the course of market competition and thus was forced by the government to split. That is a typical example of natural monopoly in infrastructure and anti-monopoly move taken by the government.
The term "natural monopoly" describes the competitive behavior of certain trades in market economy. To prevent monopoly from harming society, the government must enact laws to fight against monopoly and formulate rules to regulate these trades. Natural monopoly is a theory of seeking profit rather than a theory of justice. In a country of market economy, even the government has to interfere in or monopolize certain sectors with the aim to maintain social justice or to remedy market failure, rather than to carry out the apriori concept that "only by exercising governmental monopoly can the cost of a trade be lowered". In China, nearly all economic sectors were monopolized by the government before the beginning of the reform drive. That was due to the doctrine of planned economy and had nothing to do with the general theory of seeking profit (including the theory of natural monopoly).
2. Government capital injection and withdrawal in the European infrastructure
European nations differ from the United States in political and cultural background. Social democracy has been an influential trend of thought in Europe. That accounts for the fact that some European governments attached importance to government interference in economic affairs. For instance, Germany tended to exercise state monopoly in production before World War I and further favored the theory of social market economy after world war II. Lufthansa is a government-owned aviation company with a long history. It once enjoyed a status of de facto monopoly in the country’s aviation industry, for the government provided that it must operate on more than half of the nation's domestic airlines. In 1982, when the Kohl administration negated the idea of all-round government interference, there were some 4,000 government-owned enterprises in Germany. Private ownership was almost absolutely banned in such trades as post and telecommunications, railway and gas supply. In 1993, France turned 21 of the 58 governmental enterprises into private ones but kept those in electricity, gas, coal, aviation, post and telecommunications.
It was around the early 1980s that the European countries began to give up exclusive state ownership in the field of infrastructure. The move was quickened in the late 1990s. No more than three or four years ago did these nations give up government monopoly on telecommunications. There were various reasons for the abandoning of government monopoly. The most important reason was the low efficiency of government operation, which made it difficult to adapt to economic globalization; the least important reason was the government could hardly raise necessary funds.
The course of change and development of the infrastructure in Europe suggests that at a certain stage of economic development, government monopoly is necessary and natural. It has nothing to do with high or low operational cost, nor can it be explained by the rationalization of "affirming the present while negating the past".
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