Related stories

Alexandre Fauvet talks about Business Beijing Rene S. Schmitt talks about Business Beijing Tao Jingzhou talks about Business Beijing Lincoln Venancio talks about Business Beijing Official: Bridge Linking Beijing and Foreign Business Communities

Public-Private Partnerships (PPPs) Promote Beijing’s Urban Infrastructural Development

       Few may realize it, but Beijing Municipality occupies an area the size of Wales of the United Kingdom or New Jersey of the United States.

And since Beijing is racing to modernize the capital—in the main, prior to the 2008 Olympic Games—the scale of its infrastructural construction is massive and requires more capital than the city can or should muster on its own. In fact, the city has spent more on capital construction since 2001 than all the members of the European Union combined.

Enter public-private partnerships (PPPs), which the city government is turning to in search of funds to fill the financing gap.

The infrastructural projects being pursued are massive in scope, but are aimed at solving special urban and rural development problems, especially transportation needs.

In November 2003, the Fifth Ring Road, a freeway surrounding urban Beijing, was opened to traffic. Preparations were begun for a Sixth Ring Road to finalize the development of a road system that would link Downtown Beijing with all of its rural districts and counties, and those districts and counties with each other. The Beijing Municipal Government is on schedule to complete construction of four more underground railway lines, Nos. 4, 5, 9 and 10, before the 2008 Games. Workers are racing against time to build a second freeway leading to Capital International Airport, which is expected to handle 45 million passengers a year within a few years, up from 35 million in 2004. The new airport freeway, located to the north of the airport, will supplement the existing “South Airport Freeway,” the “gate of the nation” as it is frequently dubbed. Also under construction are a range of modern facilities designed to supply water, heat and natural gas, recycling facilities and urban sewage and garbage treatment facilities.

       The construction boom is unprecedented in scale and speed in local history—perhaps even in the history of the world’s capitals. It comes at a time when urbanization is gathering momentum everywhere in China, but especially its urban centres, which are “going all-out” to modernize. Beijing is determined to become an international metropolis and a “congenial” city in which to live and work, and has time and again assured residents that the on-going construction boom, while serving as a face-lifting for the hard-won 2008 Olympics, has this broader economic development purpose.

       (Subhead) “Private Sector under Government Supervision”

       From 2002 to 2004, 163.3 billion yuan (US$20.2 billion) was invested for Beijing’s capital construction, and from 2005 to 2008, Beijing plans to invest an additional 320 billion yuan (US$39.51 billion) in construction projects, including that for Olympic-specific venues. These figures are astronomical, given that in 2004, the local government revenue was no more than 74.4 billion yuan (US$9.19 billion).

Qin Hong, deputy director of the Ministry of Construction Policy Research Centre, said: “Obviously, it won’t do to let the government be the sole source of financing. The private sector has to be involved in Beijing’s capital construction.”

       The official was talking about so-called PPP financing, which came into being in developed countries in the 1980s, with its theoretical basis being built by Peter F. Drucker, a Vienna-born American professor, writer and consultant who is regarded as the founder of modern management science.

 “Drucker calls for limited government,” Qin explained. “In his opinion, it would be stupid for a government to make a major decision while taking the sole responsibility for financing its implementation.”

       Drucker is the author of the landmark Practice of Management and the Effective Executive, which has been translated into more than two dozen languages. For his accomplishments, Drucker was awarded a Presidential Medal of Freedom by US President George W. Bush on July 9, 2002. In China, Drucker’s thinking has found fertile ground and has been readily accepted as the government tries to eradicate the lingering legacies of the Soviet-style planned economy.

 “For about three decades after 1949,” Qin said, “China had an ‘unlimited’ government, a government that overstretched itself to control everything and do everything on its own.”

       In China’s current political terminology, the acceptance of ideas advanced by Westerners such as Drucker amounts to “liberation of the mind,” but for so many years, anything private was considered a catering to “blood-sucking” capitalism.

 But such thinking is not unprecedented in China. More than half a century before the People’s Republic was born, enlightened Chinese were already embracing similar ideas. In March 1908, an official named Zhou Xuexi proposed the building of a modern waterworks in the capital city. In a report to the Qing Empress Dowager Cixi—the “fire-spitting dragon lady” who ruled China for nearly half a century from the late 1800s to early 1900s—Zhou proposed that the waterworks be “built and managed by private businessmen under government supervision.”

Qin said: “In Zhou’s opinion, government supervision was necessary to ensure that public utilities would be truly good for the public, and the involvement of private businesspeople in their building and management was meant to ensure profitability of such utilities.”

       The Capital Waterworks Company, the first-ever modern urban public utility in Beijing, went into operation in January 1910. In December 1921, the city’s first tram line became operational. Both were “built and managed by private businesspeople under government supervision.”

       (Subhead) Build–Operate–Transfer

       In today’s world, the “involvement of the private sector under government supervision” assumes a variety of forms. Back in the mid-1990s, China began experimenting with the so-called BOT (build–operate–transfer) mode of operations and finance. Under BOT the government grants a private company the right to build a project, allows the private company to operate the project for a profit over a period agreed upon by both sides, and then the private company transfers the project gratuitously to the government upon the expiration of that period.

       In Beijing, the BOT pattern has been used in a wide range of urban infrastructural projects. According to Ding Xiangyang, director of the Beijing Municipal Development and Reform Commission (Beijing Municipal DRC), one recent project was for the building and operation of a 375 million yuan (US$46.3 billion) sewage treatment plant near the ancient Marco Polo Bridge. In public bidding for the project, a local public utilities company emerged winner.

“But,” Ding said, “this project is definitely dwarfed by the four underground railway lines we are building or are about to build. We need no less than 50 billion yuan (US$6.17 billion) to build them.”

       In October, the State Development and Reform Commission (State DRC) had approved a Beijing Municipal DRC document that allowed investors from outside the Chinese mainland to participate in the building and operation of the 27.69-kilometre No. 4 Beijing Subway line, which is expected to cost about 15.1 billion yuan (US$?????) to build. The MTR (Mass Transit Railway Corporation Limited) of Hong Kong has expressed a willingness to invest up to 6 billion yuan (US$741 million) in this and other operations. The MTR is owned exclusively by the Government of the Hong Kong Special Administrative Region. The territory’s underground railway system is a highly profitable business, while Beijing’s has run at a loss ever since the first line was put into operation in 1969.

Ding said: “By allowing the MTR to operate our lines, we’ll learn the secrets of making a government-run business profitable, while rendering quality services to our citizens.”

       The official said the government could be innovative using the BOT mode of financing and operations. In Beijing, an underground railway project is divided into two parts—one meant for the public good and to be operated on a not-for-profit basis and the other for profit.

 “The government invests in the non-profit seeking part, mainly by covering the cost of capital construction,” he said. “The private company invests in the purchase or development of things like vehicle, ticketing or signal systems.”

       Under the BOT exclusive operating agreement, the investor will operate the enterprise for a specified period of time. When that time expires, the project may be handed over to the government, the agreement may be extended or a new agreement put in its place.

“We have decided to use the B-SO-T pattern (“build-subsidize in the course of operation-transfer”) to ensure that our investors will reap more than they invested in building and operations,” he said.

       B-SO-T is one of two major forms of BOT, the other being SB-O-T, meaning “subsidize in the course of building-operation-transfer.” B-SO-T obliges the government to share possible risks with investors during the period of operations and SB-O-T during the building of the project.

 “In both cases, a mechanism of government subsidy is necessary. The investor seeks profits and the government has the responsibility of ensuring that the investor is properly rewarded,” Ding explained.

       (Subhead) Legislation

       PPP is well-understood by governmental and development experts, and it means more to them than a mere way to raise funds for construction projects. As the Beijing Municipal DRC director put it, “A desire for profits invariably motivates the private sector to demand that the government improve the decision-making process, making it more transparent.”

       More than 860 projects are being built in Beijing, all set for completion before 2008, all of which, officials claim, will benefit the city’s residents one way or another, including those meant for the 2008 Olympic Games.

       One example is the No. 5 Beijing Subway line, which construction was begun on December 27, 2004. The 27.6-kilometre-long line runs north-south, with a feeder line reaching the National Stadium (“bird’s nest”) where the opening and closing ceremonies of the 2008 Olympic Games will be held.

 “Essentially,” said Ding, “it is designed to promote the development of Nan Cheng.”

       Nan Cheng is the southern part of urban Beijing and is regarded as economically backward relative to Bei Cheng, the northern part of the city. Experts attribute this state of affairs to feng shui, a set of geomantic beliefs rooted deep in feudal China’s monarchical system. North is seen as the abode of the sovereign, the high class, and south, the place for the ruled, the lower classes. That explains why, when the city served as the capital of the successive Ming and Qing dynasties (1368–1644 and 1644–1911), the northern part of the city always received priority in development.

       After the Qing were overthrown, the development gap in the city narrowed somewhat, but the legacy of feudal thinking remains obvious.

But the No. 5 subway line is scheduled for completion in 2006, and Ding said, “After that Nan Cheng will receive a fresh boost in development. For one thing, people there will have direct access to Bei Cheng, the most developed part of the city, where more jobs are available.”

       Ding and other experts cite the example of Japan to demonstrate the importance of infrastructural development to the development of a country as a whole. Back in the 1950s, Japan, in ruin because of its role in the Second World War, had an acute shortage of electrical supplies. Its transportation system fell far short of the demands being placed upon it. The Japanese Government responded by earmarking, year after year, 7 percent–8 percent of the country’s GDP (gross domestic product) to infrastructural development.

“That prepared the country for an economic take-off in the 1960s and 1970s, an economic miracle, that is a matter of fact,” Ding said.

       According to computations by some Chinese economists, by investing one yuan (12 US cents) in its urban infrastructure a Chinese city will generate an extra 2.4 yuan (30 US cents) for its annual GDP (gross domestic product).

Professor Xue Gangling of the China Political Sciences and Law University said, “Beijing has to spare no effort to promote its infrastructural development if it is to attain the target of becoming an international metropolis like New York, London or Tokyo.”

       Xue said that developed countries have developed a fairly complete system of legislation concerning PPP and BOT practices. In 1993, the Philippines and Vietnam promulgated a BOT investment laws. In 1995, Brazil, the largest developing country in South America, promulgated a law on franchised business operations. “In comparison, Chinese legislation is far from adequate on PPP,” he said. “In China, the government, not market forces, remains the dominant factor determining the success or failure of a BOT project.

       “This means that, if government behaviour is inappropriate or illegal in the course of a cooperation, the company involved in a BOT project will have to face grave, even insurmountable, risks in the course of building or operating a project.”

       Municipal authorities in Beijing seem to have taken note of the danger and are ahead of the nation in formulating local legislation concerning BOT plans. In September 2006, the Standing Committee of the Beijing Municipal People’s Congress deliberated the Beijing Municipal Regulations on Franchised Operation of Urban Infrastructure Facilities (draft). According to a source close to the committee, these regulations will soon be promulgated to allow PPPs in the development of heating, water and gas supplies, sewage and solid-waste treatment, the building of mass transit railways and facilities and other means of public transportation.