Why are prices so high? Look to China’s toll roads

A small motor leaves a factory in Guangzhou at a price of 24 yuan ($3.80), but by the time it reaches a buyer in Beijing, its price has ballooned to 185 yuan.

What's behind the more than seven-fold increase? Logistics costs, according to Liu Wu, chairman of PG Logistics Group, who recently used the example to show how out-of-control logistics costs have pushed up the price of goods on the Chinese mainland.

Rising logistics costs are indeed partly to blame for China's recent high inflation.

According to analyst Wang Tongsan from the Chinese Academy of Sciences, 50 percent to 70 percent of a product's end cost is related to logistics. The ratio is even higher for agriculture.

It turns out that road tolls make up a significant part of logistics costs. According to China's National Audit Office, 82 percent of all toll roads in the world are located in China. In 18 provinces and cities that have been audited, there are 4,328 toll stations.

Those stations contributed heavily to the 4.4 trillion yuan that was spent last year on transporting goods, according to a report issued by the National Development and Reform Commission.

Also, storage costs rose 22.6 percent to 2.9 trillion yuan while management fees grew 18.7 percent to 1 trillion yuan, the report shows.

All in all, last year, China's logistics costs contributed almost 20 percent of the country's GDP, far more than in developed countries, where logistics costs on average make up less than 10 percent of GDP.

Although the central government has instituted regulations aimed at cutting logistics costs, enforcement remains in the hands of local governments, which may explain why their impact has been less than effective.

I think it is the local governments' poor enforcement of these regulations that has undermined the attempt to rein in logistics fees.

For example, the central government abolished all toll stations on secondary roads - those with speed limits between 60 and 80 kilometers per hour - in 2009, but the stations continue to operate. In Fujian Province alone, there are still more than 120 toll stations in operation on secondary roads.

The reason is because these toll stations remain a major source of revenue for the local governments where they are located.

To tackle the problem of mounting logistics fees, the central government needs to reduce the local governments' reliance on these stations for income.

If it doesn't, local governments will always have an incentive to buck regulations. Central authorities would be better off making the reduction of logistics costs part of the political performance criteria for local officials. That would give them an incentive to work toward the central government's goal, not against it.