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Urban Infrastructure: Where Private Capital Can Play A Great Role
2004-12-13
Guo Lihong
Research Report No 100, 2004
In the mid- and late-1990s, the shortage economy generally ended and a buyer’s market started to emerge in areas where the government did not impose entry bans. Private capital, including foreign capital, started to turn to the investment areas that had long been monopolized by the government, and infrastructure construction drew more and more attention. In 1995, the Development Research Center of the State Council sponsored a high-level international forum on infrastructure construction, the document of which pointed out that "privatization is the trend of development", which was a concept quite ahead of time.
Some of the power controlling the entry into infrastructure market rests with the hands of the Central Government, and some with local governments. Over the past decade, the reform and opening up of the infrastructure sector was characterized by a typical feature. The targets of academic and policy research and discussions focused on areas where the Central Government had restrictive power, such as electricity, telecommunication, railway and air transport. Whereas, breakthroughs in areas where private capital could play a role actually concentrated in areas controlled by local governments, especially those areas controlled by municipal governments, such as road, water, public transportation and fuel gas. This feature was not an accidental phenomenon. Since the 15th Party Congress when the "restructuring of the economic strategies of the state-owned sector" was raised, even the "advance and retreat" movements in competitive areas were characterized by the desire of the high level governments to "expand" and the desire of lower levels governments to "retreat".
This article does not intend to explore the cause of such a phenomenon, but just to point out that in a certain period of time in future, the most practical options of private capital is still urban infrastructure. It is a broad area where private capital can play a significant role.
I. Private Investment Is More Efficient and Profitable
Based on statistics of total social investment in fixed assets, during 1981-2002, government investment (the state-owned economy) rose from RMB74.59 billion to RMB1887.74 billion, with an average annual growth of 16.6%. Meanwhile, private investment (non-State economy) grew from RMB16.5 billion to RMB2462.25 billion, with an average annual increase of 26.9%. During these 22 years, annual growth of private investment was 10 percentage points higher than government investment. This was one of the great achievements of reform and opening up, and one of the major reasons why the Chinese economy sustained rapid speed of development.
In the current stage of reform, the government still largely controls the allocation of the key factor of social capital, which is tilted towards government companies and government projects. First, for a long period of time, the purpose of the stock market is to "lift the State-owned enterprises out of difficulties", and over 90% of shares or convertible shares were issued by government companies. Second, when the People’s Bank of China (PBC) was responsible for approving the issuance of enterprise bonds, it always gave approvals to government companies. In 1999, the State Planning Commission started to be responsible to approve the issuance, but it still always gave approval to government projects. Third, the State had the right to allocate most of the State investment bonds. Fourth, among various estimates on the ratio of bank loans to non-State economy, an optimistic estimate from a survey by the Statistics Department of the PBC (People’s Daily, 31 May 1999) pointed out that in 1998, "of all the loans made by the financial institutions, short-term loans to the non-State economy took up 44.4%, and mid- and long-term loans took up 24.8%." Since 1998, government investment increased rapidly and absorbed more resources. Therefore, there may be little changes in the ratio of mid- and long-term loans between the State and the non-State sectors, which may still remain at 75:25.
The above comparison of the two areas of output and input clearly reveals that private investment achieved rapid development with fewer resources. It supports the conclusion that has long been accepted as the open truth in market economic states: private investment is more efficient and profitable than government investment. While sustainable development of private capital is based on high efficiency and high profitability, the growth of government investment depends largely on the bad debt strategy and administrative monopoly.
II. Scope of Private Investment in Urban Infrastructure
To clarify the concept of infrastructure, it is useful to borrow the concept from the World Bank paper, World Development Report 1994: Infrastructure for Development. According to the research paper, infrastructure is first of all a term covering many activities. Paul Rosenstein-Rodan, Ragnar Nurse and Albert Hirschman, economists on development economics, have generalized various economic activities as "social management capital". There are no accurate definitions for the two terms, but both cover economic activities with certain features of technology proportions (such as scale economy) and the economy (diffusion from users to non-users). Secondly, infrastructure may be divided into two large categories. The first category is economic infrastructure, which is permanent engineering construction, equipment, facilities and services they provide to households and used by economic production. Such infrastructure includes public utilities (electricity, pipe gas, telecommunication, water supply, environment and sanitation facilities and sewage systems, solid waste collection and treatment systems), public projects (dams, irrigation canals and roads) and other transportation facilities (railways, urban transportation, ports, water transportation and airports). Another category is social infrastructure, which generally includes culture, education and healthcare.
To clarify the concept of urban infrastructure related to private investment, it is necessary to streamline the above connotations. First, in terms of geographical areas, it is not necessary to include rural and inter-city infrastructure, such as irrigation canals and inter-city transportation. Second, in terms of capital relations, all infrastructures invested and managed by the Central Government should be excluded, such as railways, power (except thermal power) and telecommunication (except networks in user areas). Third, in terms of property right relations, due to the long mixing-up of "ownership system" with "ownership right" and the misleading concept of "public ownership", property right is still ambiguous in government capital and enterprises, and the phenomenon of "you invest and I own" is still common. Some assets with local government investment may not belong to local governments, such as urban electricity distribution networks; and assets owned by the Central Government may also be passed on to local governments for "localized management", such as airports. The concern of private investments is what kind of infrastructure they may be allowed to enter with local government permissions. Therefore, the urban infrastructures discussed in this article include those aimed for "localized management", such as airports, but exclude those such as urban electricity distribution networks.
Based on the above classification, the areas of urban infrastructure that private capital may enter basically include those listed in Table 1. Naturally, this list reflects only the current conditions. Private investment is both quick and pervasive. Meanwhile, more and more municipal governments now realize having the infrastructure is more important than owning it, and they also become aware of the value of "protecting the legal ownership rights of citizens". With closer relationship between the two sides, the areas in Table 1 will continue to increase.
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