Op-Ed Contributors

Tackling the mad rush to build buildings

By Grayson Clarke (China Daily)
Updated: 2011-04-26 08:00

Last week Dancheng county in Henan province was reported to plan to demolish a newly built 4.5-km railway line, which cost nearly 100 million yuan ($15.37 million), because the section didn't attract enough tourists.

Many media outlets have said that the amount of waste in infrastructure construction in China is a major source of pollution . Indeed, such news reports are not rare.

Recently, there was some good news for many senior citizens in Beijing. The local government reduced the age of senior citizens who are entitled to free medical care from 100 years to 95-plus years. This welcome announcement was accompanied by the news that the municipal government was planning to spend billions of yuan to build pension centers.

I don't know the details of Beijing's service centers, but it is not clear how necessary these centers are.

After all, aren't services supposed to be delivered at the community level these days? Wouldn't it be worth spending the money on building or refurbishing day centers, or improving the decentralized information network instead? Can't the idea of building a new center be dropped and the money used to provide free medical care to all people above 85 years?

Sometimes new facilities are essential. But it is time local authorities considered whether a new building is the answer to a certain problem, and if it is, what would be the real ongoing cost of providing first-class service from a first-class building.

In most European countries, for example, care for the elderly is now mainly focused on providing home-based services and most residential homes are reserved for the physically and mentally challenged. Yet a recent article in China Daily said that elderly care homes, which are few to begin with, had no provision for treating or dealing with Alzheimer's patients. You don't need to be a genius to know that a new building without qualified doctors or care-givers won't be a new building for very long - and certainly won't be one where senior citizens can live out their final years in dignity.

Yet almost every social or health care program these days needs to have infrastructure as a major component, irrespective of whether it is a retirement home for the elderly or a new hospital in the countryside. One cannot help feeling this because of two major obsessions of Chinese officials: that new buildings equal higher GDP and that they are a visible legacy for the next generation.

As the Romans liked to say, "If you want a monument to him, look around". They, of course, create room for corruption. No wonder, there are many buildings across China that are not used at all, have fallen in a state of disrepair because of inadequate maintenance or just present a ludicrous sight.

Clearly, changing officials' mindset is part of the answer to understanding that services are more than just buildings or expensive equipment. But this change of mindset could be facilitated by more rational local government financial planning and control system, which can prevent such useless projects in the first place. I see five main aspects to such changes that could be incorporated in the upcoming budget law.

There has to be a clear division between recurrent and capital expenditure and recurrent and capital financing. In the United Kingdom, for example, local governments are legally bounded to submit balanced recurrent and balanced capital budgets. This is not yet possible in China because of the inadequate revenue basis of many poorer governments and the reliance of richer ones on the revenue from transfer of land-use rights. But as the property tax is rolled out and a more rational and fairer local government grant system implemented, it should be possible to progressively reduce the amount of capital income that can be used to finance recurrent expenditure to zero.

A much fairer grant system needs to be introduced, which would move away from the current "gap filling" approach to a formula-based one that takes into account, on an empirical basis, each locality's needs and resources. Grants should be strictly separated into capital and revenue with large capital grants tied to specific projects meeting specific needs.

In the short term at least for the richer local governments, higher authorities need to think about "sterilizing" the use of capital income from asset sales and transfer of land-use rights. Faced with some limitations on what they can spend, this will hopefully make the richer cities think about what capital projects they really want and need rather than throwing money away on "prestige" projects.

All projects should have a proper business case detailing the best estimates of the capital costs needed to finish a project and the likely recurrent costs to bring the facility into full operation. The economic planning bodies should review business case submissions at their levels, after which the audit bureaus should check for accuracy of estimates.

A Swiss banking colleague once told me: "Truth is good but control is better." With social needs from education to care for the elderly growing fast, now is the time to make sure the controls are good and that every yuan is counted.

The author is resident fund management expert with the EU-China Social Security Reform Project.

(China Daily 04/26/2011 page9)