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Learning from China experience in PPPs

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Demand of infrastructure is very high in China given the rapid growth coupled with rural to urban migration. It is estimated that 60% of the Chinese population dwells in rural conditions. A significant migration to the urban areas has put pressure on infrastructure requirements where an estimated 20 million villagers are drifting to urban centres yearly.

PURCHASING & SUPPLY NYASHA CHIZU

The responsibility for building infrastructure projects is under the remits of regional and local governments, while central government is generally responsible
The responsibility for building infrastructure projects is under the remits of regional and local governments, while central government is generally responsible

This rapid urban growth significantly increased the requirements for energy projects, better road, railway, seaport and airport infrastructure facilities. China had been funding these projects using centralised funding from the national plan and use of State companies in the development of a massive railway network that span across over 65 000 kilometres.

The responsibility for building infrastructure projects is under the remit of regional and local governments, while central government is generally responsible.

This led to the empowerment of local government to collect taxes to fund their obligations. Public-private partnerships (PPP) have been adopted by local authorities in an effort to cover the financing gap that could not be covered by the introduction of user and connection fees, as well as land transfer fees and internal loans.

China’s initial PPP was a disaster. The disaster was mainly attributed to lack of experience, where risk allocation was protecting the private players at the expense of government. According to the general definition of PPPs, it involves in some instances, the design, funding, construction, operation and maintenance of the project.

The first Chinese PPP that failed was the Shenzhen Shajiao B power plant. The lesson is that since PPP projects are implemented after a proper feasibility study, the risk should lie with the implementing partner to avoid execution of unviable projects that would turn into white elephants.

In the 1990s, the Chinese government took a decision to fund infrastructure projects. This decision led to an audit of infrastructure projects that resulted in a cleanup of the unregulated and illegal structures that resulted in the demolishing of illegal projects.

The 1990 position changed around 2000 when the government realised that central resources were insufficient to finance infrastructure projects. The new wave of PPPs was now concentrated on toll roads, water and sewerage projects including city gas.

The decade starting 2000, PPP investment around $20 billion in transport infrastructure projects that covered bridges, roads, tunnels, seaports and airports was recorded.

A canal was constructed with a PPP term length of 30 years. Six rail line projects were constructed with the same average PPP term period of 30 years as the canal. The same PPP tenure applied to four airport projects.

Thirty five seaport projects were completed, with the highest average PPP tenure period of 48 years. Highways and bridges had a close PPP tenure of 26 and 27 years respectively. Twenty-eight highway projects and four bridge projects were completed during that period.

From the Chinese experience of implementing infrastructure projects, there is an interesting development where PPP contracts are now being awarded through competition.

Most PPP projects are awarded through direct negotiation or competitive negotiation. This is a shift from the early 2000 period where only three of 22 projects representing a paltry 14% were awarded through competition.

The latter half of the decade starting in 2000 recorded a significant improvement in volume and method of award. Sixteen of the 56 projects representing about 29% were awarded through completion.

Before we focus on the problems and the sources of the problems around Chinese PPP projects, it is important to focus on the lessons discussed. The main issue is that infrastructure projects operate between 25 and 30 years to facilitate recovery of private sector investment.

The infrastructure projects can be awarded through direct negotiation, competitive negotiation or a competitive bidding process.

The third lesson is that PPP projects are implemented on projects that have been proven viable, especially with infrastructure projects.

The risk of failure of the project must lie with the private sector that conducts the feasibility study. There is, therefore, no reason for the government to guarantee revenues on a PPP project. A project where the government guarantees revenue is a clear sign of smokescreened feasibility study and the emergence of a white elephant for the purpose of enriching few individuals at the expense of national interest.

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