Public–Private Partnerships in China a Case of the Beijing No.4 Metro Line

Transport Policy 30 (2013) 153–160

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Transport Policy

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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

(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). First is an efficiency gains. To better understand the benefits, costs, risks, and investment of rolling stocks, 30% of which is equity from the opportunities of the PPP model in China, I present a case study on private sector and the remaining 70% is loans from Chinese banks. the Beijing No. 4 Metro line. Second is the operational cost and capital improvement4. The third Using the Beijing No. 4 Metro line as an illustration of the cost is an annual rental fee of Part A paid to the public sector. In situation in China, the purpose of this paper is threefold: to 2010, the fee was RMB 42.5 million, to be adjusted every three describe the process to land the concession, including risk alloca- years. The fourth is corporate taxes paid to the public. tion; to demonstrate the consequences for revenue and costs from The contract establishes a mechanism to determine subsidy using a private sector entrepreneur; to estimate the benefits to the and revenue sharing based on “shadow price” and “shadow public sector of using a PPP model. patronage.” The shadow price is a technique used to isolate the The main research methodology applied in this paper is the case private partner from possible social policies of the government. In study. A cost–benefitanalysisandfinancial analysis are applied to this particular case, guaranteed revenue per passenger is estab- evaluate the gains brought to the public. As there is insufficient lished unrelated to the price actually charged. information available in published documents, I conducted more In 2006, Beijing Metro fares ranged from 3 to 7 RMB. Based than 50 interviews with mid- to high-level cadres from both the on passenger forecasts, both sides agreed that the shadow central and Beijing's local government. During a year and a half of price for the No. 4 line should be RMB 3.34. The fare would be field study, I found Chinese officials extremely reluctant to share adjusted every three years, based on the consumer price information for political and cultural reasons. By agreement, the index (CPI). The shadow fare was adjusted to RMB 4 in 2010 names of interviewees will not be disclosed in this paper.

2 The HK MTR Corporation was established in 1975 by the Hong Kong 2. The PPP agreement of the Beijing No. 4 Metro line government. Now, the Hong Kong MTR is regarded as one of the world's leading railways, carrying an average of 5.1 million passengers every weekday. 3 China Capital Group is a state-owned enterprise. Its business focuses on In 2001, Beijing won the right to host the 2008 Olympics. urban infrastructure development and real estate development. According to Beijing Statistics Yearbook, Beijing only operated 4 Capital improvement means addition or structure that enhances the value of 54 km of metro line that year, lagging behind other major Asian a property, or a replacement or upgrade that extends the useful life of an asset. Z. Chang / Transport Policy 30 (2013) 153–160 155

Fig. 1. Joint venture structure in Beijing No. 4 Metro line project. Source: Wang (2005).

Table 1A Summary of public subsidy and revenue sharing scheme: original.

R (ratio of actual patronage to shadow patronage) Public subsidy Public revenue sharing

Rr80% 80% Shadow revenue—actual revenue 0 80%oRr100% (Shadow priceactual price) actual patronage 0 100% oRr120% Shadow revenueactual price shadow patronage 0 R4120% Shadow revenueactual price shadow patronage 50% Actual price (R120%) shadow patronage

Table 1B Summary of public subsidy and revenue sharing scheme: revised.

R (ratio of actual patronage to shadow Public subsidy Public revenue sharing patronage)

Rr80% 80% Shadow revenueactual revenue 0 80%oRr100% (Shadow priceactual price) actual 0 patronage 100% oRr110% Shadow revenueactual price shadow 50% Actual price (R100%) shadow patronage patronage R4110% Shadow revenueactual priceShadow 50% Actual price 10% shadow patronageþ60% actual price (R110%) patronage shadow patronage

(interview with Beijing MTR, January 2011 and July 2011). If the Thus, we define shadow revenue¼shadow priceshadow patron- actual fare is lower than the shadow price, the public will age. Table 1A summarizes the subsidy and revenue-sharing scheme compensate the private sector with the difference. If the actual (interview with Beijing MTR, January 2011), which includes the fare is higher than the shadow price, extra profits will be divided: following: 70% for the public sector and 30% for the private sector. Shadow patronage is a means to compensate the private partner (1) If actual patronage is less than 80% of the shadow level, the against risk of lower ridership than projected. Compensation public sector will guarantee the private sector with a revenue would be paid irrespective of whether the actual number of floor of 80% shadow revenue. passengers deviated from what is forecasted because of measures (2) If actual patronage is between 80 and 100% of the shadow level, taken by the government, or from truly external changes. In the the public sector will subsidize the operation with an amount case of the Beijing No. 4 Metro line, a consulting firm was hired to equals to: actual patronage (shadow priceactual price). forecast shadow patronage. The projected daily shadow patronage in (3) If actual patronage is between 100% and 120% of the shadow 2010 was 564,000, expected to grow to more than 1 million by level, the public sector will subsidize an amount equals to: 2025. shadow revenueactual price shadow patronage, while 156 Z. Chang / Transport Policy 30 (2013) 153–160

additional revenue generated by the excess number of pas- Table 3 sengers goes to the private sector. Long-term and short-term interest rates . (4) If actual patronage is above 120% of the shadow level, the Source: Bank of China website.

public will subsidize the same amount as (3), but will start to Interest 2005 2006 2007 2008 2009 2010 2011 2012 share half the revenue generated above 120% of shadow (%) (%) (%) (%) (%) (%) (%) (%) patronage. Short-term 5.22 5.40 5.85 5.04 4.86 5.10 5.85 5.60 debt Long-term 6.12 6.39 7.20 6.12 5.94 6.14 6.80 6.55 In 2007, the Beijing local government reduced metro fares to a flat debt rate of RMB 2. As passengers usually take more than one line on each trip, the actual fare of the No. 4 line was RMB 1.04 in 2010 (interview with Beijing MTR, Jan 2011).With the shadow price at RMB 4, the public subsidized RMB 2.96 per passenger per trip to the private sector 3.1. Cost control in rolling stock purchase that year. From past experience, actual patronage would be low during the first several years and would increase gradually; however, the Table 2 exhibits the budgetary costs and actual costs in the number went beyond both the public and private sectors’ estimations. purchase of rolling stock. It appears to show no cost savings using the The 2010 daily shadow patronage averaged 564,000 passengers; the PPP model; however, the actual cost of most rolling stock, such as actual number in 2010 was 687,600, or 122% of the shadow level. cars, which are strictly audited, is significantly lower than is The public sector believed the excessive patronage was due to budgeted. On the other hand, actual costs in categories of “others” fare reduction, which was not reflected in the original contract. and “preparation fees” are higher, while these categories are vaguely Seeing the profit, the public decided the original contract had been defined and can be easily overstated. The private sector has incen- too generous with the contractor and requested a modification tives to exaggerate the actual cost figures for two reasons: first, it that Hong Kong MTR was in no position to refuse, as it was only a wants to hide its profits to avoid being forced into renegotiating the minority shareholder in the joint venture company. Table 1B profit sharing agreement with the public agent. Second, if the actual summarizes the revised subsidy and revenue sharing scheme. In cost of the No. 4 line is significant lower compared to other lines, the the new version, the public will start to share revenue when actual private sector might run into trouble by making public developers patronage number reaches 100% of shadow level instead of 120%: appear incompetent: it would point to inefficiency and possible rent- if actual patronage is between 100 and 110% of the shadow level, seeking on the part of public developers. In fact, for public develop- the public gets half. If the patronage is higher than 110%, the public ment projects, an extra 20% buffer is always added to the initial receives 60% (interview with Beijing MTR, January 2011). budget by the central government. This allowance gives public The contract was modified accordingly in 2010. This illustrates developers more flexibility, and thus less of an incentive to reduce a risk related to policy changes in PPP projects in China due to the costs. Actual costs of metro projects in Beijing inevitably run 120% of absence of rule of law. the initial budget (Chinese Economic Web, 2010).

3.2. Cost control by ﬁnancial treatment of acquisition

The acquisition of rolling stock was not made once-and-for-all 3. Cost control of the private sector but adjusted according to when it was needed. The financial treatment of acquisition did reduce costs. The private sector takes no risk with respect to revenue; this is The estimated total investment in the Beijing Metro's Part B altogether with the public sector. Given that the public sector has an plan is RMB 4.6 billion. Per previous agreement with the banks, up ambition to charge below a commercial price level, and since this to RMB 3.2 billion could be financed through long-term debt, with would generate additional patronage compared to the commercial an average annual interest rate of 6.3%. To reduce the debt level, there seems to be no loss in reducing the incentives of an financing cost, the private sector uses a six-month debt financing entrepreneur to generate additional travelers. As current fare revenues model instead of a long-term loan to achieve a lower interest are mainly dependent upon the contract rather than management, payment. Table 3 illustrates the difference between long-term and this part will evaluate the private sector's efficiency by examining short-term interest rates. To refinance the short-term debt, the private cost control. All data were acquired from BIIC and Beijing MTR private sector used corporate bonds, tax refunds, and eventually during interviews with their respective management teams. fare revenues. In the end, the private sector used only RMB 1.6 billion in long-term debt, and debt repayment during construction was 65% lower than the budget. This strategy was quickly adopted by public developers in other Table 2 lines. That said, the short-term debt strategy presents certain risks Cost of rolling stock purchase (in RMB million). Source: Data is from interview with Beijing MTR. because there can be a mismatch in the timing of revenues and liabilities. The model requires sufficient sources of revenue to Budgetary cost Actual cost fulfill the repayment timeline. It can be risky for lenders if borrowers are unable to pay loans on time. If used on a large Communication devices 197 182 scale, the default risk would increase. Accordingly, banking reg- Signal system 371 324 fi Power system 948 1183 ulators halted short-term nancing for transit development in FAS, AFC 340 214 2011 (China Banking Regulatory Commission, 2011). Cars 1704 1290 Based on the policy, the private partner has to use at least 70% Depot 287 317 domestically produced rolling stock. If not, the government will Preparation fees 193 395 Debt repayment during Construction 273 94 charge a 30% tariff on the imported rolling stocks, but this fee would Others 264 605 be refunded if the domestically produced components were to reach 70% of the total value of the rolling stock. In practice, the private Total 4577 4604 sector imported the core equipment first and gradually purchased Z. Chang / Transport Policy 30 (2013) 153–160 157 equipment from domestic markets. It took three years to satisfy the is at the heart of most PPP arrangements and promotes societal 70% minimum requirement. To avoid the three years of interest efficiency. payments on the tariff, the private sector requested a Letter of Commitment from the Industrial and Commercial Bank of China 4.2. Financial benefits (ICBC) to guarantee that the private sector would reach a 70% threshold within three years. As a result, the private partner received The PPP model also generates financial benefits to the public. an exemption from the tariff payment and only paid the ICBC a 0.2% To illustrate this, I will calculate financial expenses in the public fee, as opposed to paying 6.3% interest on the tariff over three years. model and in the PPP model, respectively, and then compare the fi Furthermore, the private partner bene ted from its currency results. Table 4 summarizes the components of public financial strategy. In 2006, the private sector forecasted that the Chinese expenses and when they occur in two models. All calculations are yuan would appreciate in value compared to the U.S. dollar. When measured in nominal terms and then discounted back to fi importing rolling stock, the rm used prescient currency exchange real terms. hedging to lock in the favorable rate. From 2007 to 2009, the yuan appreciated more than 14.2% compared to the dollar, and this 4.2.1. Public expenses in the public model alone saved the private partner around RMB 80 million by 2010. In the public model, expenses include initial investment, debt repayment, operational deficit, and capital improvement costs. I 3.3. Cost control during operation use the following assumptions to do the calculation: one, the public side could build the No. 4 line within the initial budget of To reduce costs, the private partner trained its employees with RMB 10.7 billion for Part A and RMB 4.6 billion for Part B. Two, the the basic maintenances of cars and signal systems. It also public also invested 30% equity in the No. 4 line and borrowed the persuaded suppliers to bear 80% of the maintenance costs in the rest from banks. The equity would be evenly expended during the first couple of years. As a result, actual maintenance was RMB 33 construction period. Three, for an easier calculation, the construc- million in 2010, as opposed to the anticipated average annual costs tion period of No. 4 line was rounded to the period of January 1, of RMB 90 million per year. 2005 to December 31, 2009. Four, the annual debt interest rate Cost savings for capital improvement was achieved by using an would be a flat 6.3%, the same as the long-term loan offered to integrated central control system. This system recorded when and Beijing MTR. In reality, according to an agreement made between which part was maintained and replaced. Thus, top managers the Beijing government and the banking consortium, from 2005 to could get a sense for capital improvement costs in real time and budget accordingly. Such a system is not used in the publicly run projects. In strictly public projects, this gap in information could Table 5 Beijing Metro operational deficit per unit of length. lead to rent-seeking opportunities, as the capital improvement Source: Data is from an interview with Beijing Revenue Bureau; 2010 data is costs are relatively high in domestic lines. excluded from the No. 4 line.

Year 2008 2009 2010 4. Benefits to the public sector Length (kilometer) 141 198 198 fi fi Total operational de cit (in RMB million) 1030 1520 1500 Having discussed the ef ciency of the private sector's opera- Deficit per kilometer (in RMB million) 7.31 7.68 7.57 tions in the PPP model, here is a further illustration of social and financial benefits to the public sector in this model.

4.1. Social benefits Table 6 Beijing No. 4 Metro line budgetary cost and lifespan. *Source: Chen, Liang, and Chen, 2008. In the case of the Beijing No. 4 Metro line, the PPP model brought three social benefits to the public. First, the saving of real Cost (in RMB Lifespan Annual n resources has been significant due to the cost control of the private million) (years) depreciation sector. Second, costs for operating trains are lower than antici- (in RMB million) pated, while quality of service is higher. Through a survey Preparation fees 860 conducted by McKinsey and Beijing MTR, consumer satisfaction Land acquisition 2,360 08. of the No. 4 line has been much higher than that of other lines. For Infrastructure 5,590 100 56 example, punctuality rate is 99.4%, compared to only 90% in other Cars 1,700 25 68 Parking 700 70 10 lines (interview with BIIC, June 2011). Third, certain financial Signal, power 2,810 15 187 strategies of the PPP model – a debt-interest saving strategy, system prescient currency exchange hedging, and letters of commitment Other expenses 1,350 – fi from banks manage some nancial risks by reducing uncertainty. Total 15,370 321 That risk transferred to those most willing or able to bear the risks

Table 4 Public ﬁnancial expenses and timeline of occurrence in two models.

Public model Initial investment Debt repayment Operational deﬁcit Capital improvement

Part A 2005–2009 2010–2035 2010–2039 2010–2039 Part B 2008–2009 2010–2035 2010–2039 2010–2039

PPP model Initial investment Debt repayment Subsidy to private sector Other revenues

Part A 2005–2009 2010–2035 Part B 2010–2039 2010–2039 158 Z. Chang / Transport Policy 30 (2013) 153–160

2015, the public would only repay the interest on the loan. Starting Table 7 in 2016, the principal will be paid annually for another 20 years Subsidies and other revenues in the PPP model (in RMB million) . until 2035. And five, the calculation goes up to 2039, when the *Source: Shadow patronage and estimated patronage are from an interview with BIIC. concession expires. Using these assumptions, the annual investment in Part A from Shadow Actual Subsidy Revenue Rental Corporate 2005 to 2009 is RMB 2.14 billion (RMB 10.7 billionC5), and the patronagen patronagen sharing fee tax investment in Part B in 2008 and 2009 is RMB 2.3 billion (RMB 2010 206 251 618 25 43 57 4.6 billionC2). The annual equity investment and debt repayment 2011 220 281 660 34 43 57 could then be calculated. 2012 235 289 705 30 43 57 If the No. 4 line was operated by the public sector, the 2013 251 309 753 32 43 57 operational deficit per kilometer should be equal to that of other 2014 268 330 804 35 43 57 public lines. Table 5 shows the annual operational deficit per 2015 286 355 858 39 43 57 2016 289 362 867 41 43 57 kilometer in the Beijing Metro system over three years, which 2017 291 368 873 43 43 57 ranges from RMB 7.3 million to RMB 7.7 million. This calculation 2018 294 374 882 45 43 57 takes the average of RMB 7.5 million as the per-kilometer deficit. 2019 296 381 888 48 43 57 The assumption here is that the Beijing government will continue 2020 299 384 897 48 43 57 2021 302 384 906 46 43 57 its RMB 2 flat fare policy so that the deficit per unit of length 2022 304 384 912 45 43 57 remains constant. The length of the No. 4 line is 28 km, and thus 2023 307 383 921 43 43 57 the annual operational deficit is RMB 210 million (7.5 28). 2024 310 383 930 41 43 57 The current operational deficit does not include capital improve- 2025 312 383 936 39 43 57 ment costs. I use annual depreciation of the project to illustrate this 2026 312 382 936 39 43 57 2027 312 382 936 39 43 57 cost, which is RMB 321 million. Table 6 demonstrates the budgetary 2028 311 382 933 39 43 57 investment and lifespan of the No. 4 line. 2029 311 381 933 39 43 57 Fig. 2 summarizes financial expenses in public model. Adding 2030 310 381 930 40 43 57 up the four items, total financial expense is projected to be RMB 2031 310 381 930 40 43 57 2032 310 380 930 39 43 57 41.42 billion in nominal terms. 2033 310 380 930 39 43 57 2034 310 380 930 39 43 57 2035 309 380 927 40 43 57 4.2.2. Public expenses in the PPP model 2036 309 380 927 40 43 57 In the PPP model, expenses include initial investment in Part A, 2037 309 380 927 40 43 57 debt repayment, subsidies to the private sector, and other reven- 2038 309 380 927 40 43 57 ues. Note that other revenues in the PPP model are accounted as 2039 232 285 696 29 43 57 negative financial expenses, which includes rental fees, revenue sharing by large metro patronage, and corporate taxes. Table 7 illustrates the prediction of subsidy and other revenues. 2.00 Calculation of Part A's initial investment and debt repayment is the same as that in the public model. To predict the annual subsidy and other revenues, I assume the public will keep the current RMB 1.50 2 flat fare policy, and the per-person per-trip subsidy will remain constant at RMB 3, rounded up from RMB 2.94 in 2010; thus the future subsidy can be calculated using the formula in Table 1B. 1.00 Other revenues to the public sector under the PPP model include revenue sharing, rental fees, and corporate tax. The revenue sharing can be calculated using the formula in Table 1B. 0.50 The rental fee is assumed to keep constant at the current level of

1.8 0.00 1.6

1.4 -0.50 1.2 Corporate Tax Revenue Sharing Debt Repayment Rental Fee Subsidy Initial Investment 1 Fig. 3. Public expenses in PPP model (in RMB billion). 0.8 RMB 42.5 million per year. Total corporate tax is RMB 1.7 billion 0.6 during the concession, predicted by the private sector. I divide this 0.4 amount evenly into RMB 56.7 million annually. Fig. 3 exhibits the annual expenses of the public sector in the 0.2 PPP model. The total expenses will be RMB 40.07 billion. The subsidy and debt repayment are the main sources of the public's 0 expenses, while other revenues are minor.

Capital Improvement Debt Repayment 4.2.3. Public savings in the PPP model Operating Deficit Initial Investment Fig. 4 demonstrates the undiscounted annual net public savings Fig. 2. Public expenses in public model (in RMB billion). in the PPP model by comparing the difference of public expenses Z. Chang / Transport Policy 30 (2013) 153–160 159

0.8

0.6

0.4

0.2

-0.2 2026 2007 2011 2031 2039 2020 2022 2024 2013 2016 2027 2033 2035 2037 2018 2019 2021 2023 2025 2005 2006 2008 2009 2010 2012 2014 2015 2028 2029 2030 2032 2034 2036 2038 -0.4 2017

Fig. 4. Annual net public savings in PPP model (in RMB billion).

Table 8 5. Future opportunities for the private sector Public saving in initial investment period (in RMB million)a. The No. 4 line proved to be successful when it was put into Public model PPP model Total savings operation in 2009. Hong Kong MTR and the Beijing government Initial investment Initial investment Nominal Real continue the cooperation in developing new metro lines. In Decem- (nominal) (nominal) ber 2009, Hong Kong MTR signed a contract for the Daxing line, an extension of the No. 4 line. Unlike the No. 4 line, the private sector 2005 642 642 0 0 was only responsible for operation and maintenance; the Beijing 2006 642 642 0 0 2007 642 642 0 0 government would subsidize 200 million annually to Hong Kong 2008 1332 642 690 732 MTR, and the private partner would bear whatever operational 2009 1332 642 690 690 profits or loss. The contract would last for 10 years and the annual Total 4590 3210 1380 1421 subsidy would be evaluated and adjusted every three years (interview with BIIC, February 2011). a Constant with 2009 RMB. Per Hong Kong MTR's 2012 annual report, the current concession in Beijing does generate profits for private investors (Hong Kong MTR Corporation, 2012). By operating the Beijing No. 4 and Daxing lines, Hong Kong MTR earned net profits of RMB 70 million in two models. In total, the public sector will save a net of RMB in 2011 and RMB 200 million in 2012. Encouraged by the success 1.35 billion by using the PPP model. of the existing PPP practice in Beijing, Hong Kong MTR is expand- As most of the savings incurred during the early years of ing its business in China. In March 2010, Hong Kong MTR signed a development while extra expenses are incurred during a later contract with the Hangzhou government to develop Hangzhou's stage, if discounted back to the present value, the total net savings No. 1 Metro line. The contract is similar to the Beijing No. 4 Metro in the PPP model would be even more significant. Using the line: Hong Kong MTR holds 49% of the joint venture company and current lending rate of 6% as the discount rate, in constant 2009 will operate the line for 30 years. This line began operating in RMB, the present value of public expenses in the public model will November 2012, when Hong Kong MTR also signed a similar be RMB 22.98 billion and RMB 20.83 billion in the PPP model. That partnership agreement with Beijing government for the Beijing means the public could save up to RMB 2.15 billion in the PPP No. 14 line, and will invest RMB 15 billion for the purchase of model, accounting for 9.4% of the total expenses in the public rolling stock. model (RMB 2.15CRMB 22.98). Savings during the construction Hong Kong MTR's practice illustrates opportunities for the private period were even more significant. In constant 2009 RMB, Table 8 sector to develop PPP projects in China. Hong Kong MTR clearly shows the public savings were RMB 1421 million from 2005 to understands its risks in these concessions; however, it is still willing 2009, which account for 31% of the total expenses in five years in to expand its business, given the promising returns. It may already public model (RMB 1421CRMB 4590). accumulate sufficient experience to deal with different issues, as risks In summary, financial savings for the public sector in the PPP are already taken into account for expected returns. model are significant. Although changes in assumptions will impact the result, the impact is limited. For example, estimation of other revenues in the PPP model only accounts for a small portion of the 6. Conclusion total expenses. Last but not least, the Beijing government is likely to raise metro fares in the future. That policy change will reduce the This paper is a case study of an existing PPP practice in Beijing's operational deficit in the public model, but will also decrease the No. 4 Metro line. The No. 4 line case is not a “typical” PPP project, subsidy in the PPP model. Given Beijing's serious trafficcongestion, since the private operator does not pay for the original infra- demand for public transportation in Beijing is likely to be very structure investment; however, it does illustrate many typical inelastic. The net effect of fare hikes tend to be small. issues of the PPP practice in China. It discusses the process to 160 Z. Chang / Transport Policy 30 (2013) 153–160 negotiate a PPP contract, which determines the mechanism of wasted). Retrieved from 〈http://www.ce.cn/cysc/jtys/csjt/201008/25/t20100825_ revenue sharing and risk allocation. It illustrates how the private 20486446.shtml〉. De Jong, M., Mu, R., Stead, D., Ma, Y.C., Bao, X., 2010. Introducing public–private partner reduces costs through efficient management. Further, this partnerships for metropolitan subways in China: what is the evidence? 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