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The Application of PPP in China's Infrastructure Development
von Weiwei WangChina’s infrastructure development has been driven by the state over the past two decades and it is regarded as a key character of China’s model of growth. Yet, in a recent trend, the government has adopted policies attracting private companies to bridge substantial investments still required to develop new infrastructure and to rehabilitate the existing infrastructure. Facing this situation, I frame the following main research questions: First, why should PPP be widely applied in China (here PPP refers to real PPP)? And Second, how can the successful implementation of PPP in China be ensured?
In answering the first research question, I investigated the current state-driven infrastructure investment model and demonstrated that it is unsustainable and is nearly at its end. In contrast, real PPPs in infrastructural development help solve all the problems. Furthermore, private participation in China’s infrastructure development is not just an economic matter; it is part of a much wider and more complex stage of China’s transition.
After recognizing the implications of PPPs, I answer the question of how to ensure the successful application of PPPs in China. Many researchers through institutional perspectives have empirically proven the link between the failure of the private investment in infrastructure projects and the weak institutional environment, and vice versa (Araral, 2008; Ehrhardt et al., 2007). Generally speaking, China’s current institutional situations for private participation in infrastructure sectors are still vulnerable. Therefore, the key to successfully applying PPPs lies in designing institutional frameworks to limit the opportunisms from both the government and the private sector that are sources of risks threating the successful application of PPPs. Based on theoretical knowledge conferred by Institutional Economics, Public Choice Theory and Principal-Agent Theory, I identified critical institutional variables including property rights, effectiveness of regulation, competitions, monitoring, and stakeholders inclusion. They are grounded in – and adequately reflect – the theoretical perspective of the study, and they act as independent variables, while the result of the infrastructure project is the dependent variable. And I investigated how they interrelate and interact with the outcomes of project through analyzing five carefully selected cases.
The conclusion is that clearly-defined property rights are critical to the outcome of a PPP project, and it influences the other institutional variables to a great extent, especially the effectiveness of regulations and monitoring. Involving more stakeholders will be deterrent to government from infringing private property rights. An independent agency regulating PPP projects has many advantages and should be the direction of PPP regulatory development in China. At present, since the government still acts as regulator, what we can do is reduce conflicts of interests as much as possible. Therefore, real PPPs should be arranged as an important institutional framework for effective regulation and monitoring. Competition ex ante is meant for removing information asymmetry and getting the appropriate contractor. Competition ex post is important for reducing moral hazard problems, but it is missing in most of the current PPP projects in China. Methods such as yardstick competition and inset appointment can be undertaken to create competition ex post. Stakeholders inclusion helps limit the opportunism from both contracting parties, and it is a measure relatively easy and less costly to implement.
In addition, the main risks of PPP application in China come from government opportunisms. This conclusion is also in line with some authors who study PPPs in developing countries. Therefore, designing institutional frameworks in China should be emphasized to restrict the government opportunisms.
Secondly, interest alignment should be paid greater attention to. I propose two methods to align the interests of local government with the development of real PPP projects, thus reducing the transaction costs associated with the institutional changes.
In answering the first research question, I investigated the current state-driven infrastructure investment model and demonstrated that it is unsustainable and is nearly at its end. In contrast, real PPPs in infrastructural development help solve all the problems. Furthermore, private participation in China’s infrastructure development is not just an economic matter; it is part of a much wider and more complex stage of China’s transition.
After recognizing the implications of PPPs, I answer the question of how to ensure the successful application of PPPs in China. Many researchers through institutional perspectives have empirically proven the link between the failure of the private investment in infrastructure projects and the weak institutional environment, and vice versa (Araral, 2008; Ehrhardt et al., 2007). Generally speaking, China’s current institutional situations for private participation in infrastructure sectors are still vulnerable. Therefore, the key to successfully applying PPPs lies in designing institutional frameworks to limit the opportunisms from both the government and the private sector that are sources of risks threating the successful application of PPPs. Based on theoretical knowledge conferred by Institutional Economics, Public Choice Theory and Principal-Agent Theory, I identified critical institutional variables including property rights, effectiveness of regulation, competitions, monitoring, and stakeholders inclusion. They are grounded in – and adequately reflect – the theoretical perspective of the study, and they act as independent variables, while the result of the infrastructure project is the dependent variable. And I investigated how they interrelate and interact with the outcomes of project through analyzing five carefully selected cases.
The conclusion is that clearly-defined property rights are critical to the outcome of a PPP project, and it influences the other institutional variables to a great extent, especially the effectiveness of regulations and monitoring. Involving more stakeholders will be deterrent to government from infringing private property rights. An independent agency regulating PPP projects has many advantages and should be the direction of PPP regulatory development in China. At present, since the government still acts as regulator, what we can do is reduce conflicts of interests as much as possible. Therefore, real PPPs should be arranged as an important institutional framework for effective regulation and monitoring. Competition ex ante is meant for removing information asymmetry and getting the appropriate contractor. Competition ex post is important for reducing moral hazard problems, but it is missing in most of the current PPP projects in China. Methods such as yardstick competition and inset appointment can be undertaken to create competition ex post. Stakeholders inclusion helps limit the opportunism from both contracting parties, and it is a measure relatively easy and less costly to implement.
In addition, the main risks of PPP application in China come from government opportunisms. This conclusion is also in line with some authors who study PPPs in developing countries. Therefore, designing institutional frameworks in China should be emphasized to restrict the government opportunisms.
Secondly, interest alignment should be paid greater attention to. I propose two methods to align the interests of local government with the development of real PPP projects, thus reducing the transaction costs associated with the institutional changes.