About People’s Republic of China: Toll Roads Corporatization Strategy Towards Better Governance This report draws on extensive review, examination, and international experience to explore five key areas that impact corporatization and privatization policy: the separation of owner and service provider functions, competition, value-for-money, contract clarity, and transparency. A strategy of corporatization and privatization will assist the People’s Republic of China finance the current $250 billion expansion of its national highway network. Corporatization and privatization will not only diversify financial resources available for toll road expansion but also improve highway efficiency and quality through commercial management. About the Asian Development Bank ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to help its developing member countries substantially reduce poverty and improve the quality of life of their people. Despite the region’s many successes, it remains home to two thirds of the world’s poor. Nearly 877 million people in the region live on $1.25 or less a day. ADB is committed to reducing poverty through inclusive economic growth, environmentally sustainable growth, and regional integration. Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance. People’s Republic of China Toll Roads Corporatization Toward Better Governance Asian Development Bank Strategy 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines Tel +63 2 632 4444 Fax +63 2 636 2444 ISBN 978-971-561-769-7 Publication Stock No.. BBK172408 Printed in the Philippines People’s Republic of China Toll Roads Corporatization Strategy Toward Better Governance Xiaohong Yang and John Lee © 2008 Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines All rights reserved. Published 2008. Printed in the Philippines. ISBN 978-971-561-769-7 Publication Stock No. BBK172408 This book is a product of the staff of the Asian Development Bank (ADB) assisted by an independent staff consultant. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of ADB or the governments concerned. ADB and the governments do not guarantee the accuracy of the data included in the publication and accept no responsibility for any consequence of their use. ADB encourages printing or copying information exclusively for personal and noncommercial use with proper acknowledgment of ADB. Users are restricted from reselling, redistributing, or creating derivative works for commercial purposes without the express, written consent of ADB. 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines Tel +63 2 632 4444 Fax +63 2 636 2444 www.adb.org For orders, please contact: Department of External Relations People’s Republic of China: Toll Roads Corporatization Strategy—Toward Better Governance Better Strategy—Toward Corporatization Roads Toll China: of Republic People’s Fax +63 2 636 2648 ii Abbreviations ADB – Asian Development Bank BOT – build–operate–transfer Abbreviations DBFO – design–build–finance–operate EMB – Expressway Management Bureau FYP – Five-Year Plan GDP – gross domestic product HAB – Highway Administration Bureau HDM – Highway Design and Maintenance Standards Model JEHDRA – Japan Expressway Holding and Debt Repayment Agency M&E – monitoring and evaluation MOC – Ministry of Communications MOF – Ministry of Finance MOT – Ministry of Transport NAO – National Audit Office NDRC – National Development and Reform Commission O&M – operation and maintenance PCD – Provincial Communications Department PFI – Private Finance Initiative PRC – People’s Republic of China PPP – public–private partnership PPTA – project preparatory technical assistance SECDC – Sichuan Expressway Construction and Development Corporation SECL – Sichuan Expressway Company Limited SPCD – Sichuan Provincial Communications Department SRA – Swedish Road Administration SRBG – Sichuan Road and Bridge Corporation WRDS�������������������������������������� �������������������������������������– Western Region Development Strategy NOTE In this report, “$” refers to US dollars. iii 7th proof_PRC Toll Roads.indd 3 2/9/2009 6:46:28 PM Foreword etween 2006 and 2020, the People’s Republic of China (PRC) will require about CNY2 trillion in resources to expand its network of tolled expressways from the present 41,000 kilometers (km) to some 85,000 km, and expects the private sector to fund a B much larger proportion of projects than in the past under a policy of corporatization and privatization. The People’s Republic of China (PRC) views corporatization and privatization as a policy instrument to achieve two main objectives: bridging the funding gap by diversifying funding and by managing the network on a commercial basis, raising standards of efficiency and quality. The purpose of this report is to review the suitability and effectiveness of this corporatization and privatization strategy, comparing it with approaches used in other countries, and recommending practical changes that would enhance efficiency, transparency, and accountability. It examines whether the present strategy ensures value-for-money from investments, effectively secures private sector participation under the right conditions, and provides for transparency, accountability, and good governance. Its focus is on management mechanisms that govern the toll road network, the institutional arrangements involved, the process of attracting investment and transferring management and tolling rights, and the policy and procedural reforms that could be implemented in the short term by the Ministry of Transport, its representatives at provincial and municipal levels, and the Asian Development Bank (ADB) to address apparent shortcomings. The report seeks to create a platform for policy dialogue between the government and ADB to guide development of a toll road corporatization strategy for the PRC’s 12th Five-Year Plan. ADB staff member, Xiaohong Yang, senior transport economist, and John Lee, staff consultant (initially through Meyrick & Associates of Australia), prepared the report under the management of the Transport Division of ADB’s East Asia Department. People’s Republic of China: Toll Roads Corporatization Strategy—Toward Better Governance Better Strategy—Toward Corporatization Roads Toll China: of Republic People’s Klaus Gerhaeusser Director General East Asia Department Asian Development Bank iv Acknowledgments his report, completed in 2006, is the product of close collaboration between the then People’s Republic of China’s (PRC) Ministry of Communications (subsequently renamed Ministry of Transport [MOT]) through its Comprehensive Planning Department and Acknowledgment T Institutional Reform and Legal Affairs Department, Sichuan Provincial Communications Acknowledgments Department (SPCD), and Asian Development Bank’s (ADB) staff members working in the PRC’s transport sector. The authors gratefully acknowledge the suggestions and comments of ADB staff members including Halady Satish Rao, Klaus Gerhaeusser, Nigel C. Rayner, Tyrrell Duncan, Edgar Cua, Makoto Ojiro, David Sobel, Scott Ferguson, Seiji Noda, and Zhang Wen. The authors received valuable insights from Graham Smith, lead transport specialist of the World Bank. Huang Hao, Yao Ping, Chu Kebo, Chen Hong, Zhang Ruoqi, Zhao Guangbin, and Wang Guangshan provided research assistance. Ligaya P. Cuevas-Arce worked as administrative assistant. Muriel S. Ordoñez and Karen Williams helped edit the report. Wang Qingyun, director general, and Wu Xiao, deputy director general, Transport Department of the National Development and Planning Commission, offered valuable suggestions regarding the scope and orientation of the report. The authors received other valuable comments from Dong Xuebo, director general, Comprehensive Planning Department; Cui Xuezhong, director, Comprehensive Planning Division; Xia Hong, director, Foreign Capital Utilization Office; Ge Yuan, deputy director, Industry Reform Division, Institutional Reform and Legal Affairs Department (MOT); and Qiu Jiangtao, director, Tariff Management Division, Policy and Fiscal Affairs Department of Ministry of Finance. The report benefited substantially from discussions held in both Sichuan and Beijing in the context of ADB transport operations in the PRC, and from data prepared by MOT and SPCD staff. The content of the paper, however, remains the responsibility of the authors and does not necessarily reflect the views of ADB or the PRC. v 7th proof_PRC Toll Roads.indd 5 2/9/2009 6:46:28 PM Executive Summary etween 2006 and 2020, the People’s Republic of China (PRC) plans to spend about CNY2 trillion expanding its network of tolled expressways from 41,000 kilometers (km) to about 85,000 km. Under a policy of corporatization and privatization, the PRC expects that the private sector will fund a larger proportion of projects than previously. B Summary Executive The PRC views corporatization and privatization as achieving two main aims: bridging the funding gap by diversifying financial resources, and raising standards of efficiency and quality through a commercially managed road network. This report reviews the suitability and effectiveness of corporatization and privatization strategy, compares it with international approaches, and recommends practical changes to enhance efficiency,