3.8 Lesson 8: Test the waters before scaling up

Ensuring that local government had incentives to support port development was a critical step in the evolution of policy. It widened access to finance by contributing to the development of financing companies set up by local governments. It made possible awards of tax relief and subsidies to ports. And it encouraged the building of supporting facilities such as land-transport infrastructure. Inland provinces could invest in transportation systems through partnerships with coastal ports, which helped to grow China’s ports and in turn revitalized inland industries, boosting China’s economy.

China’s experience also shows that funding sources can be diversified over time. In addition, the share of state funding can be reduced, and the share of commercial funding increased. China has also demonstrated that profitable port companies can finance a substantial part of their own investment needs. Good operating results allow port companies to reinvest their available cash flow (earnings before interest, taxes, depreciation, and amortization [EBITDA]) as well as attract more equity through foreign direct investment, domestic private equity partners, or stock offerings.

In the early stages of port-linked economic development, high levels of uncertainty about demand will make state support and investment necessary, including for connected infrastructure. In the early period of China’s opening, capacity shortages in ports were overcome through large, sustained investments from the central government. Without these investments, bottlenecks would have emerged as a constraint to growth.

That early investments were funded chiefly by the central government is partly explained by the institutional context, but also by the relatively high uncertainty about demand. However, state support for port development was not limited to the initial phase of economic opening. In the decades since, port development has been supported by all levels of government in China. The central government has given port cities SEZ status, provided state funding for port infrastructure, invested in hinterland infrastructure, improved the quality of customs procedures by enabling the development of dry ports and bonded zones, and invested in innovation and education. Regional and local governments have developed attractive tax schemes for port development, invested in hinterland infrastructure, and provided incentives for the relocation of industries to new port areas. State-owned banks have provided funding to port enterprises.

BOX 3.8

Lesson 8: Test the waters before scaling up

Chinese port reforms have not been devoid of false starts, but there has been a willingness to change course when individual policy changes have failed to produce the desired results. Pilot projects have played an important role in developing Chinese thinking, and the authorities have encouraged the replication of successful innovations elsewhere, particularly in port finance. However, there is a need for leadership, both to drive the reform process and to monitor and evaluate the results. Although the most visible initiatives appear to have occurred at the local level, deeper probing suggests that softer interventions by the central government have been the main guiding force. China adopted an unusually holistic approach to export-led economic development in which the central government is the only body with the authority to coordinate the many other players involved.

Beginning with the opening of the Chinese economy in 1978, the port sector followed an incremental approach to policy making. Understanding that each port faces unique circumstances, the central government embarked on a gradual program of decentralization that transferred powers to local authorities, with the first step being targeted pilot projects.

Although decision-making power remained ultimately in the hands of the central government, local authorities were better placed to understand the needs of their own ports and better able to optimize resources and devise incentives for ports to improve performance. This relationship and division of responsibility between the central and regional governments was evident when ports were being aligned with central government guidelines, which identified port development as a top priority in the Port Law of 2004 and successive five-year plans dating from 1991. In a context in which international trade was booming, the central government coupled governance reforms with other elements, notably financial reforms, expansion of hinterland transport systems, workforce improvements, and digitalization.

The transition over the past three decades from an export-oriented economy to one driven by domestic consumption reflected another mind shift in government. The overcapacity of certain ports that resulted from early decentralization was remedied through the formation of integrated groups of ports. And the coordinated development of other modes of transport—such as inland water transport along the Yangtze River—was designed to accommodate new flow patterns. Transport-related ministerial functions were merged into a single Ministry of Transport tasked with improving coordination among the different modes. Connectivity of digital systems has also been strongly encouraged, reducing administrative burdens and facilitating cross-border trade through the development of a single-window system. Finally, the Belt and Road Initiative has given China a role in the development of a global ports network.

China’s port reforms since 1978 have followed a gradual experimental process characterized by ample piloting before scaling up. Decentralization of port governance began with an initial trial at the Port of Tianjin in 1984; only after the trial was deemed a success did other ports follow.

Likewise, the central government soon realized that more financing from a variety of sources was needed to achieve sector development goals. Financing policies were reformed over decades as China experimented with foreign direct investment, port charges, and greater autonomy for local port authorities and port enterprises. Reforms to the development of human capital, with new financial incentives for workers and upgrades in education and training, also resulted in greater efficiency.

The advantage of this gradual reform process is that China was able to experiment with and correct processes that did not work for its ports industry. The long timeline may also reflect China’s deliberate, conservative approach to policy during this period. However, a similarly drawn-out timeline may not suit other countries seeking more rapid development (Humphreys et al. 2019). At the same time, looking at the recent clustering of coastal ports, an important lesson from China is to take a cautious view about developing ports as isolated elements, and to always take developments in neighboring areas into consideration.