Public–Private Partnerships in China a Case of the Beijing No.4 Metro Line
Total Page:16
File Type:pdf, Size:1020Kb
Transport Policy 30 (2013) 153–160 Contents lists available at ScienceDirect Transport Policy journal homepage: www.elsevier.com/locate/tranpol Public–private partnerships in China: A case of the Beijing No.4 Metro line Zheng Chang n Department of Civil and Architectural Engineering, City University of Hong Kong, China article info abstract Through a case study on Beijing's No. 4 Metro line, this paper illustrates benefits, costs, opportunities – Keywords: and risks in public private partnerships (PPP) in China. It describes the process to land a concession Public and private partnership agreement; demonstrates the consequences for revenue and costs from using a private entrepreneur; Beijing metro development and estimates the benefits to the public sector. By using a PPP model, the public sector may save up to Cost saving 31% of its initial investment and 9.4% of total expenses during the concession. The private investor may Revenue and cost analysis earn a profit, but bears a risk due to absence of the rule of law. & 2013 Elsevier Ltd. All rights reserved. 1. Introduction These benefits might not always be the case, however. Private contractors have few incentives to be efficient if it operates in a Due to population density and inadequate space in China, grow- monopoly and their motives of reducing costs may hold back the ing cities have chosen rapid transit as preferred a transportation quality and quantity of services provided (Gomez-Ibañez and technology to facilitate economic growth and urbanization since the Meyer, 1993). The PPP model could effectively raise funds in the first decade of the 21st century. According to the 2010 China Metro short term, but over the long run, the non-compete clauses in the Annual Report, from 2001 to 2009, the operational length of metro concession agreements restrict the flexibility of the public to systems increased from 143 to 960 km. (China Metro Annual Report respond to changing conditions (Siemiatycki, 2010). PPP models Team, 2010) The pace of metro development will continue as the also raise issues such as environment protection, public safety, and central government has planned to spend more than RMB 1.2 trillion other social consequences of the services they operate. For on urban metro systems through 2015 (Yu, 2011)1. China is expected instance, Rosenau (1999) argued that PPPs do not exhibit superior to more than triple its rapid transit mileage to 3000 km by 2015; performance in the criteria of equity and democracy. however, local governments have faced fiscal and management Internationally, many countries have promoted PPP models to challenges to finance and operate the projects. As a result, cities help governments develop infrastructure projects since the 1980s. such as Shenzhen and Beijing have applied a public–private partner- Based on past experiences, general principles and critical factors ship (PPP) model in their metro development in 2004 and 2006, have been summarized for implementing successful PPP projects respectively. (see Zhang, 2005; Garvin and Bossos, 2008; Aziz, 2007). The A PPP model is a relationship between the government and majority of available literature, however, focuses on specific issues private companies to deliver a project that will serve the public. in PPP arrangements, such as risk allocation, institutional barriers, In theory, the public could receive several benefits from a PPP and government regulating strategies, etc. For instance, risks are arrangement. Private entities have incentives to reduce costs and often underestimated and not appropriately distributed in a PPP improve management and operational efficiency. These efficiency arrangement, which will result the delay of projects and increase gains might reduce the cost of taxpayers to support the contracted costs. Ng and Loosemore (2007) and Phang (2007) demonstrated services. Further, the funds raised by private sectors can effectively the complexity and difficulties in risk distribution in the practice bridge the constrained fiscal resources of the government. Hammami of PPP models and analyzed different risk allocation strategies. In et al. (2006) found that the PPP model tends to be more common practice, the institutional factors (e.g., attitudes, behavioral rules, in countries where governments have suffered from heavy debt and perceptions of each other) could prevent parties from achiev- burdens. ing actual partnerships (Klijn and Teisman, 2003; Hodge and Carsten, 2007). Koppenjan (2005) found the stagnation of the PPP practice in the Netherlands transportation infrastructure was n due to a lack of interaction among key stakeholders. To fairly and Tel.: þ852 34425434. E-mail address: [email protected] effectively regulate private infrastructure, Gomez-Ibañez (2003) 1 $1 is equivalent to RMB 6.13 as of April 2013. explored the advantages and disadvantages of three options 0967-070X/$ - see front matter & 2013 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.tranpol.2013.09.011 154 Z. Chang / Transport Policy 30 (2013) 153–160 (private contracts, concession contracts, and discretionary regula- cities such as Seoul, Hong Kong, and Shanghai (Bureau of Statistics of tion) in different industries and countries. These international Beijing, 2011). Fiscal constraints of Beijing government were the main experiences and lessons are definitely valuable to China; however, reason for the slow growth in its mass transit network. In 2003, the due to the country's unique political, cultural and institutional Beijing government restructured its metro division into three inde- context, new issues arise in China's PPP model potentially. pendent corporations: the Beijing Infrastructure Investment Corpora- Compared with developed countries, China is a latecomer in tion (BIIC), Beijing Metro Construction & Management Corporation the PPP practice. Historically, the private sector was strictly (BMCC) and Beijing Metro Operation Corporation (BMOC). In the new forbidden to take part in the construction and operation in public public agency structure, BIIC is responsible for metro project finan- infrastructure. At the end of 2001, China joined the World Trade cing, BMCC is responsible for construction, and BMOC is responsible Organization (WTO) and opened up infrastructure investments to for operations. foreigners (International Finance News, 2002). In October 2003, To accelerate metro development for the Olympics, BIIC decided China's State Council launched a set of policies to encourage to implement a PPP model for the Beijing No. 4 Metro line project. private investments in urban infrastructure industries, and it In 2004, Hong Kong's MTR Corporation was selected as partner reiterated the favorable policies in July 2004 (State Council, through public tender2. Chinese law requires that foreign investors 2003,2004). The private sector will enjoy the same favorable tax must not hold more than 50% of the joint venture company for rate, funding sources, and land use advantages as the public sector. urban infrastructure projects. In this case, Hong Kong MTR holds Since then, more and more cities have implemented the PPP 49% of the joint venture company, and Chinese investors – the model in urban infrastructure development. China Capital Group and the BIIC – hold 49% and 2%, respectively PPP practices in China have caused academic interests during the (Wang, 2009)3. The contract was under negotiation for one more past decade. Chang et al. (2003) analyzed how the PPP model can year and it was not finalized until 2006. The joint venture company assist the Chinese government to finance their urban infrastructure was named Beijing MTR. by examining the international experiences. Wang (2005, 2009) Fig. 1 illustrates the joint venture structure and investment advocated applying the PPP model in metro expansion projects and agreement of the project. Beijing's No. 4 line is 28 km long with described the concession contract of the Beijing No. 4 Metro line. projected costs of RMB 15.3 billion. The project was started in Sachs et al. (2007), Ke et al. (2010),andXu et al. (2010) studied the August 2004 and completed in September 2009. As the contract risk allocation in China's PPP projects and analyzed the political risks was finalized in 2006, the private partner could not participate in when applying a PPP model in the country. Chan et al. (2009) the entire construction process, so project financing was divided compared the key drivers in adopting the PPP model in China and into two parts. Part A is the infrastructure building financed by the Hong Kong and found the main motive in China was to raise funds, public sector, with an estimated RMB 10.7 billion total investment. but in Hong Kong it was to improve efficiency. De Jong et al. (2010) Part B is a rolling stock purchase financed by the private party, studied seven PPP projects in five metropolitan areas in China and with an estimated investment of RMB 4.6 billion. The private found the institutional framework had not yet been established. The sector will operate the system for 30 years, and then transfer the absence of legal safeguards could hurt private interests and drive ownership of Part B at no additional cost. The contract also them away from projects. Mu et al. (2011) also explained why the provides an exit option for the private sector. If the private sector number of PPP projects fell from 2008 to 2010 by examining Chinese loses money and exits due to poor management, the public will political and institutional context. acquire Part B at a discounted price. If the loss is due to a policy The current literature on China's PPP mainly focuses on change by the public entity – for example, artificially low fares – institutional barriers and risk allocation; however, there is no the public should compensate the private. detailed analysis on the conditions and implications of the PPP According to the contract, the private sector receives all the model in China, no deep investigation on revenue sharing and risk operational revenues from fares and advertisements, but it has to allocation arrangements, or the nature and size of cost saving and bear four costs (interview with BIIC, January 2011).