Rise and Fall of Ppp in China

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The rise and fall of Public–Private Partnerships in China:a path-dependent approach

Rui Mu ⇑ , Martin de Jong, Joop KoppenjanDelft University of Technology, Jaffalaan 5, 2628BX Delft, The Netherlands

a r t i c l e i n f o

Keywords:Public–Private Partnerships

Path-dependenceTransport project nancingChina

a b s t r a c t

Due to growing trafc demand, enormous investment requirements and high scal pressures, China haswitnessed a reshaping of nancing policies in large transport infrastructure projects from public nanc-

ing to Public–Private Partnerships. As a result, the provision of transport infrastructure services in Chinahas been steadily moving from the realm of government to that of private sector. In the same period, gov-ernments at the central and regional levels were actively engaged in this institutional transition by devis-ing corresponding policies and enacting new laws and regulations. However, in late 2009 it became clearto the authors of this article that there has been a tendency of rolling back private participation in trans-port infrastructure and service because of various forms of opportunistic behavior on the part of someprivate players and malpractices among some governmental ofcials in their interaction with privateplayers, and in relatively recent a number of large transport projects have been granted to state-ownedenterprises. Therefore, the purpose of this article is to analyze and explain the processes of rise and fall of Public–Private Partnership in China. We argue that the adoption of Public–Private Partnership in China isa path-dependent process rather than some economic optimum advocated by a variety of internationalorganizations. Specics of wider Chinese political, cultural and institutional context are recognized asimportant factors that inuence the performance of Public–Private Partnership. Effects of decisions madeunder transitory conditions can persist long after those conditions have vanished. In addition, these his-torical legacies are important in understanding contemporary use of Public–Private Partnership in China,and they are also the origins from which the sub-optimal statuses are often led.

Ó 2010 Elsevier Ltd. All rights reserved.

1. Introduction

The mass of large transport infrastructure projects and enor-mous investments that go with it has led to a reshaping of nanc-ing policies in the past decades in China. Until recently, one couldobserve a shift from public-nanced projects to a larger share of Public–Private Partnerships (PPPs), which became visible in sub-way construction ( Cong et al., 2007; Zuo and Tang, 2007; Xie andHe, 2006; de Jong et al., 2010 ) as well as in road constructionand maintenance ( Han, 2009; Chen, 2008; de Jong et al., 2010 ).After the founding of the People’s Republic, the Chinese govern-ment adopted a state-centric and top-down approach to infrastruc-ture development, which comprised the entire life-cycle; that isfrom planning, nance, design, construction, maintenance throughoperations. Initially, given the nature of network-bound infrastruc-tures as public goods, these arrangements worked reasonably well,especially for the expansion of railway services. However, afterdecades of low productivity, poor accountability, low efciency,lack of nancial returns and continuous growth in trafc demand,a clear need had grown to improve performance across all sectors

and enlarge the capacity even faster than the already substantialpublic funds allow for. Confronted with scal constraints, theChinese government then sought to attract private investment toll the gap. Roughly speaking, from 1993 to 2007 the provisionof transport infrastructure services in China has been steadilymoving away from the realm of government to that of the privatesector through PPPs. From roads to ports, and later to subways,state-owned, monopolistic enterprises gave way to a wide rangeof private players operating in a relatively competitive environ-ment, accompanied by promising, but far from complete economicregulation ( Huang et al., 2009; de Jong et al., 2010 ). Governmentsat the central and regional levels were actively engaged in thisinstitutional transition by devising corresponding policy frame-works and enacting new regulations such as independent regula-tory agencies (for instance, project tendering committees),competition law and adjusting property rights law.

However, in late 2009 it became clear to the authors of thisarticle during interviews with public ofcials with the ChineseNational Ministry of Transport and regional governments(Shenyang; Dalian; Beijing) that a trend of rolling back privateparticipation in transport infrastructure and service has set indue to harmful forms of opportunistic behavior on the part of someprivate players as well as malpractices seen among a number of governmental ofcials in their interactions with private players.

0966-6923/$ - see front matter Ó 2010 Elsevier Ltd. All rights reserved.doi: 10.1016/j.jtrangeo.2010.10.002

⇑ Corresponding author. Tel.: +31 (0)152781309.E-mail addresses: [email protected] (R. Mu), [email protected] (M.de Jong),

[email protected] (J. Koppenjan).

Journal of Transport Geography 19 (2011) 794–806

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From about 2007 to 2010, a large majority of new large transportcontracts were granted to state-owned enterprises (SOEs). Thisshift can be largely explained by the fact that many projectsgranted to private contractors were either abandoned, eventuallytransferred to SOEs for successful completion or otherwise didnot meet expectations. Compared to projects following the conven-tional approach a lot of effort has been put into (re)negotiations

and monitoring deviant behavior by private sector players, thusenhancing transaction costs. Apparently, SOEs began to be per-ceived as a more reliable and stable solution.

To explain the dissatisfaction with private involvement, it canbeargued that the government should rst have put into place theinstitutional framework before relying on PPPs to do the job. For in-stance, effective legal preconditions such as the application of rule-of-law, transparency law, strict competition law, decent regulatoryoversight, smart incentive mechanisms and an effective and ef-cient judiciary system to some extent are still lacking. Moreover,the relative weakness of the private sector in this area, the absenceof substantial numbers of large-scale contractors in parts of thecountry, the disrespect paid to open tenders and their systematicapplication and the strong position of SOEs at the capital marketand in their personal and organizational networks remind us of the specics of the wider Chinese political, cultural and institutionalcontext. It shows the importance of considering this as a path-dependent process ratherthan oneheading in the direction of someeconomic optimum advocated by international organizations suchas the OECD, World Bank or IMF. History demonstrably inuencesthe performance of PPPs. Choices made on the basis of transitoryconditions can persist long after those conditions have vanished.Understandingcontemporarypractices requires taking intoaccountpast conditions, the choices made in these circumstances and whattheir legacymeans forthe current situation andits policydilemmas.This article will address the question how the rise and fall of PPP inChina can be explained as a path-dependent process .

By providing answers to the question above, the authors hopeto contribute to: (1) the knowledge regarding the status quo of the use of PPPs in China, (2) the Chinese practice in carrying outtransport project nancing, (3) a hint of how an evolutionary eco-nomic perspective can enlighten the understanding of the Chinesehistorical path of transport infrastructure reforms and its inuenceon relations between the public and private sectors; and (4) anexplanatory framework that puts future policy choices in Chinain this eld in perspective. We have based ourselves on existing lit-erature on PPPs, a touch of policy network theory and evolutionaryeconomics for the appropriate explanatory terminology, leadingreports and documents published by various Chinese governments(national, provincial, local) and a number of interviews with pol-icy-makers and experts working for governmental organizationsand universities.

In the next section the theoretical concepts and ideas we de-

rived from the literature are presented. Next in Sections 3 and 4the empirical developments making up the rise and fall of PPPsin China are described respectively. Section 5 interprets theseevents from an evolutionary perspective, by identifying the uniqueChinese path towards the involvement of private parties in trans-port infrastructure, drawing lessons regarding the Chinese case,and exploring possible further developments, building upon thisanalysis.

2. Basic explanatory concepts

In this section the concept of Public–Private Partnership andfactors that underlie its adoption and success or failure are intro-

duced. Since Public–Private Partnership is an institutional practicethat is taken from other settings and transplanted into the Chinese

context, inuencing China’s development towards a new institu-tional reality, theoretical concepts and notions from evolutionaryeconomics and institutional transplantation are discussed, in orderto select concepts and theoretical ideas that will be helpful inunderstanding and analyzing the developments regarding PPPs intransport infrastructure in China.

Public–Private Partnerships (PPPs) can be loosely dened as

cooperative institutional arrangements between the public andprivate sectors; they have gained wide interest around the world(Hodge and Greve, 2007 ). Some see it as a new tool in public man-agement that will replace the traditional method for public servicedelivery, thus being a revolution in infrastructure provision andproject nance ( Vincent-Jones, 2000; Mohr, 2004; Shen et al.,2006; Chinyio and Gameson, 2009 ), while others consider it merelya way to handle infrastructure projects constrained by the avail-ability of funds or technologies absorbing strengths from boththe public and the private sectors ( United Nations, 1998; Blacket al., 2000; Bank, 2004; Maskin and Tirole, 2008 ). From this per-spective, each of the participants must bring something of valueto the partnership such as the best available skills, knowledgeand resources and transfer them to the arrangement to strive fora ‘‘value for money” in the provision of public infrastructure ser-vices. Cross-cutting the diverse interpretations, our denition herewould be that PPP projects involve private actors in the design,nancing, construction, maintenance, operation and managementof a public infrastructure on the basis of competitive tenderingand long term contracts or arrangements ( de Jong et al., 2010 ). Inthis process of intermingling public and private sector interestsand strengths, a policy network of interdependent actors can bediscerned, albeit one often strongly regulated by legal require-ments for fair and solid contracting practices (Hodge and Greve,2007; Klijn and Koppenjan, 2000; Koppenjan, 2005 ). These actorshave different and often conicting objectives, interests and strat-egies ( Kickert et al., 1997; de Bruijn and ten Heuvelhof, 2008 ),which leads to difculties in making a regulatory framework forPPP, applying PPP in specic cases and negotiating among theactors involved in contract formulation.

In analyzing how private enterprises in China are contributingto the partnership and thus to the development of public transportinfrastructures, we need to understand how the term ‘‘private” isdened and used. Appendix A gives an overview of different typesof Chinese enterprises, which contribute different advantages toPPP. For instance, the involvement of private shareholding cooper-atives and corporations, as well as foreign-funded enterprises,makes the infrastructure purchasing process more competitive,while state-owned and collectively-owned enterprises are morereliable in terms of capital chain, management, technological andpersonnel strength for government to contract with. Dependingon different options of PPP and thus different responsibility alloca-tion mechanisms in formulating the PPP arrangements, the in-

volved private enterprise may bring different skills and resourcesto the partnerships. For instance, in the BOT (Build-Operate-Trans-fer) contract, the private partner contributes the partnershipthrough construction skills, some private capital, operation andmaintenance skills and personnel. However, in PPP contracts likeTOT (Transfer-Operate-Transfer), the private partners only needto contribute their operation and maintenance skills. In BT(Build-Transfer), private partners are just construction companieswith construction skills, but they do not provide capital.

PPP contracts have very important repercussions for all signato-ries, making the drafting of contracts an often lengthy and costlyprocess. As a result of PPP contracts being incomplete, the possibil-ity of strategic behavior on both sides and possibly high transactioncosts due to monitoring efforts and renegotiations remain high

(Laffont and Tirole, 1998; Maher, 1997; Dixit, 1996, 2003; Parkeraand Hartley, 2003; Williamson, 1996, 2008; Ho, 2009 ). In PPPs,

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private actors might make strategic bids, deliver lower servicequality where this is not easy to spot, reducemaintenance activitiesor increase the service price in obscure ways. Meanwhile, publicactors mayoffer public transport facility as serious alternatives thatbadly compromise the viability of private facilities, they mightintentionally reduce monitoring efforts in the contract period, ordisclose condential information to those actors that bribe them in

tendering process ( Boyne, 1998; Chalos and Sung, 1998; Crawford,2003; Boehm and Olaya, 2006; Dalen et al., 2006; Rooks et al.,2006 ). These modes of behavior on either side jeopardizepartnerships. In addition, transaction costs would rise if projectswerestopped becauseprivate actors went bankruptand the govern-ment had to take over the project and nd a new developer.

When looking at the interactions within PPP-related policynetworks from an institutional and evolutionary economics angle,the institutional setting that players end up in can be seen as anequilibrium among several others, which denes the rules of thegame and which can be more of less optimal from an efciencypoint of view ( Aoki, 2000; Greif, 2006 ). Institutional equilibriaare socially constructed states from which actors in the networkare not motivated to depart as long as others also do not changetheir positions and strategies. When reforming regulatory frame-works, the issue becomes one of dealing with the issue whatmechanisms constitute opportunities (incentives for players) to jointly move from one institutional equilibrium to another hope-fully more efcient one. By going beyond the static analysis of comparative equilibria, the concept of path-dependence enterscentre stage, referring to dynamic systems whose motions remainunder the inuence of conditions which are themselves contin-gent legacies of events and actions in its history. Put simply, itmeans that what happened in the past inuences what happenstoday. ( David, 1994; David and Thomas, 2003; Arthur, 1989,1994 ). This makes it easier to explain why the actor decisionsdo not necessarily lead to optimal solutions and sub-optimalchoices are often made.

Path-dependent institutional transitions can either take eitherthe shape of a punctuated equilibrium or of an incremental equi-librium. In the process of reaching a punctuated equilibrium, a sud-den dramatic change will radically break earlier patterns of path-dependence, and in the process of arriving at an incremental equi-librium a slow continuous process of change will take place whereattention is focused on learning in relation to adaption ( Magnussonand Ottossone, 2009 ). Streeck and Thelen (2005) criticize the punc-tuated equilibrium model for drawing heavily on exogenous shockexplanations for institutional change, but external forces such aseconomic crises and calamities often are a strong push for rapidtransitions. Incremental transitions are regarded as the most com-mon case of change due to gradual conceptual learning processesamong actors and/or gaps that arise between initial designs forinstitutional change and their actual implementation ( North,

1990; Vanberg, 1994; Mantzavinos, 2001; Streeck and Thelen,2005 ).

In light of the above, we can say that various countries includingChina follow their individual path-dependent trajectories for insti-tutional change thus facing their own challenges. Put otherwise,PPP in China is unlikely to mean the same thing as PPP in the coun-tries where it originated, the Anglo Saxon countries, and the earlyadopters such as Finland or Spain, even though they may drawtheir ideas from the same global pool of ideas disseminated ininternational expert networks ( Altamirano and de Jong, 2009;Altamirano, 2010 ). In recent years, PPP as a concept and approachfor managing infrastructure projects has been diffused from Britainand Australia to countries as diverse as Chile; Japan; Russia;India and China, often under pressure of growing demand for ser-

vices and limited public funds. This PPP diffusion can be regardedas a process of institutional transplantation when reforms in host

countries are inspired by experience in other places ( Jacoby,2000; de Jong et al., 2002; Carrillo et al., 2006 ). However, whethersuch transplants prove effective both in terms of legal adoption,actor application and desirability in terms of policy outcomes isto be studied on a case-by-case basis. Nation-specic characteris-tics as well as exibility, creative and an independent stance inits adoption process play a role here ( Jacoby, 2000; Mamadouh

et al., 2002 ).In conclusion, successfulness in applying PPP in Britain, Finlandor Chile has no direct and general bearing on the optimality of PPPin other countries whose political and administrative structure,culture, and specic implementation trajectory among the actorsis different. The attempt to transplant PPP policies to China in re-cent decades has led to the emergence of two signicant institu-tional transitions (the rise of PPP from 1993 onwards, and itssubsequent fall about 2007) resulting in two new equilibria. Nei-ther of these equilibria was optimal in the strict economic senseof the term, but both can be seen as meaningful choices made bypolicy actors given the path-dependent challenges they were fac-ing along the way. In the next two sections an empirical descrip-tion of these transitions and the new equilibria that followedfrom them is given, followed by a more in depth interpretationin Section 5.

3. The rise of PPP (1993–2007)

3.1. Initial conditions and driving forces

Until the 1980s, China had a top-down and state-centric ap-proach to transport management in place. The source of transportproject nance was mainly the central state budget. Other tasksthan nance, including design, construction, operation and man-agement, were assigned to 100% state-owned enterprises (SOEs).This state-centric approach generated a number of starting condi-tions for the newly evolving equilibrium. First, experience with

delivering transport service was limited to what was commonlypracticed within a command economy. In other words, there wasno experience with contracting out, forming partnerships or alli-ances, or carrying out competitive tenders for the selection of opti-mal project developers. Second, the long duration of living in acommand economy and lack of effective evaluation of SOEs perfor-mance led to accountability, transparency and efciency problemswithin the public sector. However, a trend of growing demand fortransport services and limited infrastructure capacity could al-ready be witnessed and operated as a bottleneck hampering eco-nomic development. A strong external driver for the shift fromthe command-and-control approach to the private sector drivenapproach was the global trend to apply privatization and liberal-ization to infrastructures and its apparent success in leading worldeconomies. A strong internal force was Deng Xiaoping’s SouthernTour in 1992, in which the initial opening-up reforms in Chinawere backed up by a subsequent plea for further privatization,commercialization and decentralization.

3.2. A formal picture of the institutional practice

In the wake of these changes enacted at the national levelthrough the State Council and spread out around the country, manyinefcient SOEs were closed down or privatized; new privateenterprises (PEs) entered the transport sector engaging in projectconstruction, nancing, operation and management. The sourcesfor project nance were enlarged by involving private capital andthus the physical network was expanded enormously. A new

institutional practice of infrastructure provision emerged centeringaround government procurement through PPPs. Among them were

796 R. Mu et al. / Journal of Transport Geography 19 (2011) 794–806



the TenderingLaw; the Contract Law;the Government ProcurementLaw; and some mode-specic regulations such as special Measuresfor Railway Construction; and Regulations on Toll Roads.

The tendering process for large transport projects in China wasmainly adapted from the UK’s 13 stages of contractor selection andis given in Fig. 1.1 The entire process consists of three major phases:(closed or open) bid invitation, qualication examination, and bidevaluation/selection. First, the governments at the central and regio-nal levels publish bid invitation notications on the ofcial websitesof China Tendering and Government Procurement and ProvincialGovernments. Connected to this invitation notice, project informa-tion is also published, including the project introduction, initial de-sign instructions, technical specications, and qualicationrequirements on potential bidders. And there are 14 days for inter-ested parties to submit their application and qualication docu-

ments. Second, the bidders are accredited by the tenderingcommittee in terms of their qualications as candidates for bid eval-uation. This accreditation process is monitored by the Discipline-Inspection Commission. The selected candidates are allocated andcharged with the production of detailed tendering documents andproject specications. And project eld visits are organized for them.After the visits, they have an opportunity to make some reasonableadaptations in their application documents which may include esti-mated project costs, completion date and technical applications. Thisprocess is obviously full of negotiations. Third, the evaluation pro-cess begins with randomly selecting experts from the expert-poolwho constitute the evaluation committee. The evaluation committee

then compares the bids and determines the winner. The selectioncriteria may differ for different projects, but normally include esti-mated project costs, project quality level, the technical standardsto be applied and the proposed nancing methods. Normally, theyare all considered to determine the winner but subject to differentpriorities for different projects. The evaluation process is also moni-tored by the Discipline-Inspection Commission. Once the bidder isselected, participants are notied and the decision is put online tomake it public (30 days). The purpose of making it public is to givecompetitors and the wider public the opportunity to put forwardobjections against the intended course of action. If this process doesnot lead to any complications, the contract is signed between thegovernment and the bidder.

The optimization of the capital structure; the establishment of organizational structure; the formulation of contractual structure;

and the enhancement of creditworthiness, are all formulated on arisk-return basis ( Ye, 2009 ). There are various options for each as-pect, so their combinations will lead to different nancing struc-tures of PPP projects.

The optimization of capital structure mainly concerns nancialsources, ratios of different types of funds and the timeframe forfund usage. There are three general categories of funds used innancing transport infrastructures in China: public funds (30%),debt (60%), and equity (10%). 2 In the 30% public funds, around10% is from the Central Government (the Ministry of Finance) andthe other 20% comes from regional governments (Provincial Depart-ments of Finance). In addition, the 60% debt is mainly from state-

Publish bid invitation notification andgeneral project information online

Collect the qualified biddingproposals

Accreditate the collected biddingproposals

Discipline-InspectionCommission

Allocate detailed tenderingdocuments and project introduction

Organize project field visit

Pre-tendering negotiation meeting for making adaptations in the proposal

Open tendering

Determine experts, evaluate andselect bid

Publicity

Send notice letter to the winner

Sign contract

14 days

Not less than20 days

30 days

Publicity isnot passed

monitoring

monitoring

monitoring

Bid Invitation

QualificationExamination

BidEvaluation

and Selection

Contracting

Fig. 1. The tendering procedures for large transport projects in China.

1 This gure is abstracted from the Chinese tendering regulations and instructionsat http://www.infobidding.com/ .

2 This information is obtained from interviews with experts from TransportationManagement College, Dalian Maritime University.


http://www.infobidding.com/

http://www.infobidding.com/



owned banks. And the borrowers could be either the public sector(the government) or the private sector (the private constructorand/or operator). The 10% equity is usually fully private capital fromprivate partners. In some special cases, there are also funds from for-eign direct investment, such as loans from the World Bank and AsianDevelopment Bank. Moreover, the capital structure also includes thetime factor: when will the money come in. Normally, money comesin along with the development of the project life-

cycle. Sometimes, PPP projects are rst nanced with constructionfunds, in which the interest rate of loans is higher than the loansfor operation. After the project is completed, operation funds arenanced.

Considering the fact that transport projects are normally largein size and capital requirement, and usually exposed to variousrisks, a single investor is often unable to fund the project or unwill-ing to take all the risks alone. Consequently, transport projects areusually jointly nanced by a consortium of interested parties. InChina, these parties could be both state-owned enterprises and pri-vate enterprises. These enterprises, together with governmentalagencies, therefore, form a new organization to develop the PPPproject. In the Chinese transport sector, the encountered organiza-tional structures include incorporated companies and joint ven-

tures. The incorporated company is an independent legal entitywith limited liability, constraining investors from directly control-ling project cash ows, but providing them with a higher degree of insulation from nancial risks and liabilities of the project. In con-trast, joint ventures allow investors to manage exibly and setrules within the agreement, but they do not provide any limitedliabilities of a project. Among the two, incorporated companiesare currently the most popular ones in the transport sector, actingas a project owner. 3 In some more complicated cases such as thesubway projects in Beijing that were designed especially for the2008 Olympic Games, two or more organizational structures wereused in combination: one joint venture for construction, one incor-

porated company for operation and management, and one morefor the purpose of leasing equipment.

The formulation of a contractual structure pertains to the selec-tion of the PPP option, according to which a bundle of rights,responsibilities and risks will be transferred from the public sectorto the private sector. Traditionally, Chinese governments oftenused DB (Design-Build) and DBB (Design-Bid-Build), and operatedthe infrastructures by themselves. Before the advent of PPP, major

responsibilities such as initial design, operation, maintenance,management and ownership remained with the government, whileonly a part of the design and construction tasks were handed overto private players. Today, China usually uses the models of BOT(Build-Operate-Transfer) and TOT (Transfer-Operate-Transfer)with a combination of DBB.

If the project company is a limited liability company, such as anincorporate company, then greater risks will be assumed by banks.Banks thus need to take measures to secure their debt. A commonview on debt security is that the banks can take security over theproject as an asset in order to sell/auction it if its loan was in de-fault or if the project company went bankrupt. That is to say, theproject to be built as an asset is regarded as a collateral for loans.However, the asset is not in place when the loans are made. There-

fore, the banks always ask the borrowers (both state-owned enter-prises and private enterprises) to deposit a certain amount of capital to ensure that the civil works of the project can be nished.In China, for large infrastructure projects the credit market hasbeen occupied by ve major state-owned banks: the AgriculturalBank; the Commercial Bank; the Bank of Communications; theConstruction Bank; and the Bank of China. When they provideloans to borrowers for a new transport project, they will initiallylook at the protability of the project for the repayment and reli-ability of the contractor in terms of past creditworthiness. Apartfrom these considerations, the borrowers’ creditworthiness willbe enhanced if governments can act as their guarantors. 4

Fig. 2. The typical nancing model for large transport projects in China.

3 This information is obtained from interviews with government ofcials from

Transport Research Center, the Ministry of Communications, and Shenyang Develop-ment and Reform Commission, Shenyang Municipal People’s Government.

4 This information is collected from interviews with government ofcials fromUrban Transport Center, the Ministry of Housing and Urban-Rural Development.




The complete organizational structure for a typical PPP appliedto transport infrastructure projects in China has been nicely sum-marized by Sudong Ye’s framework (2009) below in Fig. 2.

3.3. Weaknesses appearing in the informal practice

The setting described above enables private actors to partici-

pate in some of the transport service tasks. However, interviewswith government ofcials and experts revealed that within thisequilibrium the Chinese PPPs actually did not provide a good re-cord: strategic behavior was often found in the project life-cycleas a result of the principle-agent problem ( Boyne, 1998; Walker,2000; Crawford, 2003; Fassina, 2004; Flyvbjerg et al., 2005, 2007;Boehm and Olaya, 2006 ). Collusive bidding, jerry-build problemsin construction and making illegal excessive prots from users dur-ing operations were found more than once; and malpractice on theside of the public sector also was regularly found ( Qiao, 2008;Huang, 2007; Dang and Zu, 2006; Zu, 2005; Wei, 2001; Liu,2000; Ouyang, 2007; Mu et al., 2010 ). In addition, strategic behav-ior also emerged around (re)negotiation processes with biddershaving the intention to extend the concession period, asking forsupplementary investments, or raising fares.

The China Audit Ofce (2008) has concluded that jerry-buildproblems are usually caused through subcontracting with cheapersub-constructors which are more likely to revert to strategicbehavior. Among a project sample in 34 provinces, 36% projectswere jerry-built for a total amount of 9.035 billion Yuan. For in-stance, the Xinjiang Road-Harbour Construction Enterprise wonthe contract for an expressway from Bengbu to Guangming. Itsigned sub-contracting contracts with 36 small construction rmsthat rarely qualied for their jobs and thus economized 19.46 mil-lion Yuan on the actual project costs (down from 84.97 to 65.51million Yuan. Of course, the subcontractors used fewer and low-er-quality materials. Even more dramatically, in Chongqing, theChang-Wan expressway (from Changshou to Wanzhou) was trans-ferred to sub–sub–subconstructors, thus reducing the amountavailable for project construction by 69% because each of the play-ers was taking a cut, adding no real value, and passing the realwork onto others. The China Audit Ofce further reveals manyexamples of strategic behavior during project operation and main-tenance. It writes that the most serious problem in China is the in-crease in the number of tollbooths. The investigation wasconducted in 18 provinces, and 16 of them turned out to face theseissues. The gures indicate that in these 16 provinces, 158 illegaltollbooths were detected (that is, without license permits) and un-til late 2005 the incurred user fees from them amounted to 14.9billion Yuan. It was estimated that if these illegal tollbooths hadnot been cancelled, operators would have charged 19.5 billionYuan extra until the expiry dates of their operating rights. Andfor some expressways the charging periods of which have not yet

expired, still 66 illegal tollbooths were still operating at the timeof writing the report ( China Audit Ofce, 2008 ).

Other empirical evidence is found in subway procurement inlarge Chinese metropolitans ( de Jong et al., 2010 ). Taking the rstsubway line in Chongqing as an example, this project was initiallycontracted out by the Chongqing government on a PPP basis in1992 with a Hong Kong construction rm without competitive ten-dering due to the absenceof enough qualied bidders. Five years la-ter in 1997 the PPP contract was terminated because of theconstructor’s capital structure problem and there was not suf-cient legal ground for negotiations. Therefore, the private actorwithdrew and left the project unnished. After the Chongqing gov-ernment took over the project, it took it 10 years to nd a newdeveloper. In 2007 a SOE, the Chongqing Metro Group, took the

responsibility for construction, a large part of the nancing, andoperation. And so far, this new partnership appears quite success-

ful. Similarly, subway projects in Beijing and Harbin ran into trou-ble when initially targeted as PPPs, but when transformed intoPUPs (Public–Public Partnerships), they proved far more stableand could be completed more quickly.

This is not to say that all PPPs suffered from such adversity. Infact, the same article gives a few examples of successful projectstoo, such as the Beijing Olympic Lateral and the Beijing Interna-

tional Airport’s Terminal 3, but these were often high-prole onesand none of the involved actors could therefore afford to let thingsgo wrong. The reason is that the political and economic attentionsinuence positively project implementation and projects that areof signicant emphasis from the central government and/or areof international focuses are easier to success. However, the seedswere sown for the rising dissatisfaction with the new institutionalequilibrium.

3.4. Strong and weak and governing principles in the Chinese PPP practice

The post-1993 era provided private actors with an enlargedmarket. Normally private actors utilize their professional skills,allowing to sell these at a prot. Consequently, it provides privateactors with more opportunities to make a prot. They regard PPPprojects as low-risk investments because they are often backedby government agreements, providing a long term yield whilemost risks are sub-contracted. In contrast to nance projects inother areas, private actors are exposed to market risks only to alimited extent (e.g. demand for transport which continues to risedramatically). On the public side, it had also reduced the risksborne by the government since most technological and manage-ment risks have been transferred to the private sector. Further-more, it had resolved the government’s problem of limitedresources through the call on users to pay for the facility ratherthan the government ( Hodge and Greve, 2007 ). In other words,PPP is simply a buy now and pay later scheme, and does not inher-ently reduce the call on the government budget. It can only do thisby either superior efciency (so that long term repayments are lessthan they might otherwise have been) or through the more usualattraction for most governments that this PPP arrangements forfacilities like toll roads require users to pay for the facility directlyrather than governments to fund the infrastructure.

However, on balance, the rise of PPP in China seems to havegenerated higher transaction costs. The costs of organizing tender-ing, evaluating and selecting bids have proven quite high. In addi-tion, in the contract period, costs have increased due to extensivemonitoring and the search for adequate incentives to prevent ormitigate opportunism. Moreover, its weakness also lies in the riskof private contractors going bankrupt and the government needingto take over the unnished project and having to nd new projectdeveloper, which both pushes up project costs and hampers the

continuity of the project. Mu (2008) made a detailed study of theseadversities and perversities and found various forms of strategicbehavior and formulated recommendations to mitigate their nega-tive effects. For instance, to prevent bidders from colluding in thebidding process, she proposed a disclosure system and extremelyheavy penalties for the perpetrators. Such a disclosure-penalty sys-tem has in reality even been set up, the Administration Ordinanceon Opportunistic Bidding, and made effective from January 1st,2009 onwards. Even the most challenging problem here, which isto prove collusions, has also been stipulated in this AdministrationOrdinance. It stipulates that the bidders whose strategic behaviorhas been disclosed should be transferred to provincial or national judiciary departments and if they are condemned for disturbingthe order of tendering procedures and thus inuence the tendering

results, the disclosure-penalty system will be started up. Neverthe-less, the effectiveness of these measures has been insufcient to




stem the changing tide away from PPP. Other proposals she formu-lated such as opening the bidding process to a broad range of bid-ders and to larger territories to avoid collusive communicationamong contenders, or to compare the bidding price with the bid-der’s proven capacities were rarely tried or never implemented.

4. The fall of PPP (2007–2010)

4.1. Initial conditions and driving forces

The seeds for the fall of PPP’s popularity were largely sown inthe previous phase when a host of projects in which private con-tractors were unable to deliver a nal product at reasonable condi-tions and state-owned enterprises were found to replace them.Although the basic institutional conditions had been establishedto distinguish the responsibilities and risks of various involved par-ties and basic legislation for tenders, contract formulation and con-tract enforcement had been put in place, the net result wasinsufcient to preclude instability, opportunism and high transac-tion costs. The failure to enact other key pieces of legislation, suchas transparency law and effective enforcement mechanisms did lit-tle to improve the situation. The success that a number of signi-cant and highly visible projects, such as the Beijing Olympiclateral and Beijing’s International Airport’s Terminal 3 had engen-dered was insufcient to turn the negative image around. Finally,the Global Economic Crisis in 2008 caused the bankruptcy of manyprivate construction companies. 5 Twenty percent of the privateenterprises in Beijing closed down; 90% of small and medium sizedprivate enterprises in Guangdong province have nancial problemsand are close to bankruptcy ( Jiang, 2009 ). Especially for the privateconstruction and operation enterprises, problems have emergedconcerning about construction quality and safety because staff areless motivated due to the income reduction ( Zhao, 2009 ). Statisticsshow that during the period of the crisis the number of serious acci-dents has been increased by 20.7% ( Yan, 2009 ). As a consequence, alot of PPP contracts were terminated halfway, 6 leading to immediateturmoil. Therefore, since about 2007, we observe a shift away fromPPP adoption towards the use of SOEs 7 to deliver transport infra-structure. In other words, there is a movement away from PPP andtowards PUP. This ‘‘movement” can be interpreted both narrowlyand broadly. In a narrow sense, it means that the market share of state-owned economy in a certain industry is increasing, while themarket share of privately-owned economy in the same industry isdiminishing. However, broadly speaking, it also refers to the situa-tion that the macro-economic control is more intensied throughenacting more strict regulations on market access. In the transportsector, although there is no an exact measured sample which canindicate the denite overall movement from PPP to PUP, more strictregulations on the market access to large transport projects indeedemerge. For instance, the demands for the qualications (e.g. certif-icated technical skills and experiences) over the enterprises are in-creased, which is unfavorable for private enterprises because mostof them do not have those qualications. In addition, it newly regu-lates that the contractors need to pay for the project guarantee de-posit in advance of project construction, 5% of the total projectcost, which is also adverse for private enterprises because few of them can afford this fee.

4.2. A formal picture of the institutional practice

The policies enacted by the Chinese national government in thewake of the 2008 nancial crisis target the promotion of economicdevelopment through state investments in large transport infra-structures. The purpose of the Chinese Economic Promotion Pro-gram is to counter the negative effects of the nancial crisis and

sustain the national economy through extensive state investment.This program effectuates a 4 trillion Yuan investment in variouspublic policy areas, of which no less than 1.5 trillion Yuan has beenallocated to transport. 8 In addition, several market entry regulationshave been established. In future, to avoid situations in which thegovernment is forced to make additional expenditure on projectswhich are terminated halfway or quality of which is not in line withpromised standards, contractors will have to pay 5% of the total project investment up front as an advance payment. Besides, contractorqualications (i.e. technical strength; number of experts; provenexpertise; creditworthiness; past experience) are emphasized morethan before and will play a decisive role in winning contracts. Theseadjustments make market entry more difcult and constrain the par-ticipation in large transport projects for some small and mediumsized private enterprises. 9

In contrast, this new policy is favored by SOEs, since they havethe critical mass to match requirements in terms of capital andexpertise. China Entrepreneur, a professional organization dedi-cated to fostering the growth of entrepreneurship in China,launched a survey concerning the degrees of participation of bothstate-owned and private enterprises in the transport sector, show-ing that recent concessions for large transport projects were nearlyexclusively granted to SOEs with bank loans backed up with gov-ernmental guarantees. Borrowing money from banks has becomehard for private players even if they are creditworthy; most ten-ders were held in closed circles among SOE candidates ( Liao andSohmen, 2001 ; China Entrepreneur, 2009 ). As a result, a newnancing pattern ( Fig. 3)10 has emerged which differs markedlyfrom the one shown in Fig. 2. The project is normally divided intotwo parts: operation/management and civil work/construction.About 70% of the total investment consists of civil work such as tracklaying, tunnel and station construction, including land acquisitionand relocation of residents or farmland. About 30% of the totalinvestment is spent on rolling stock, trafc control system andpower supply facilities. The two parts are granted by governmentsto two separate project companies largely on a basis of invited ten-dering among SOE candidates. The tendering procedures are largelythe same as the ones illustrated in Fig. 1. The main sources of projectnancing are from the Central Ministry of Finance (i.e. public funds)and banks (i.e. loans). Often, loan agreements are signed betweenbanks and state-owned actors who are often provided with govern-mental guarantees for loan repayment and/or the right of land use asan example of these guarantees. In addition, state-owned construc-

tors very often subcontract with smaller constructors. And state-owned operators need to sign lease agreements with facilitysuppliers.

We can take the Beijing Metro Line 10 as an example. This me-tro line is 32.9 km long, running in a circle that covers a large areaof Beijing city centre, with 28 stations along its way. 11 Its totalinvestment is about 3 billion Yuan, and its development was

5 This evidence is gathered though interviews with professor Lu from Insititute of Transportation Engineering, at Tsinghua University.

6 This data is provided by Dr. Liu Li from Liaoning Lijie Consulting Co., Ltd. andgovernment ofcials from Shenyang Municipal People’s Government.

7 Although the overall industry pattern in China cannot be called state-ownedeconomy dominating, the transition of PPP adoption in the transport sector of Chinafrom using PEs to SOEs in recent years has been indeed implied by a report from the

Development Research Center of the State Council. The report is available on line butin Chinese: http://www.xj71.com/ ?action-viewnews-itemid-117200-page-2.

8 This gure is collected from special reports of the Chinese 4 trillion investmentplan. Available online: http://news.sohu.com/s2009/5466/s262385658/ .

9 This information is obtained from interviews with road infrastructure designersfrom Liaoning Road Design and Planning Institute.

10 This gure is abstracted from interviews with government ofcials from theMinistry of Communications, and the Ministry of Housing and Urban–RuralDevelopment.

11 This information is collected from CCTV at: http://news.cctv.com/society/20071212/104176.shtml .


http://www.xj71.com/

http://news.sohu.com/s2009/5466/s262385658/

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http://news.sohu.com/s2009/5466/s262385658/

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awarded to state-owned enterprises. A part of this project has beenopened to trafc in 2008 and the remaining part is now under con-struction and will be in operation in 2013. 12 Its nancing structure isshown in Fig. 4.13 Two SOEs (BII and BMCC) were selected throughinvited tendering by the Central Government and the Beijing LocalGovernment, the rst as operator and manager, and the secondone as constructor. With governmental guarantees, the BII signed adebt agreement with Taiping Insurance Co. Ltd. (Taiping) which is

also a SOE, providing the entire investment through debt for BII tonance the project. This project is then the rst example in Chinawhere an insurance company as a consortium is used instead of abank. BMCC made a loan agreement with a governmental guaranteewith banks to make up for the 5% project quality deposit. BII andBMCC have a turnkey relationship, in which BII will periodicallypay BMCC for construction costs after examinations on project qual-ity and timetable. Once the project is nished, it is transferred to BIIfor operation. During operation, BII pays back the debt with interestto Taiping. This can be regarded as a successful project because con-struction costs, schedule, project quality and service quality have re-

ceived positive appraisals to date, except for the landslip accident inconstruction in 2007 due to inadequate geological surveys byBMCC.14

4.3. Weaknesses appearing in the informal practice?

Do large transport projects without private involvement help toincrease project quality and reliability and thus protect the public

better than PPP after all? Stability and reliability have denitelybeen enhanced, but the answer to this question is not straightfor-ward, because in China the main shortcoming of using SOEs is thelack of mechanisms for enforcing accountability, namely theloosely dened appraisal methods, the absence of clear objectives,weak performance measurement and often the absence of rewardsand penalties for good or poor performance ( Holz, 2002a; Huanget al., 2010; Cauley et al., 1999; Bajona and Chu, 2010; Tanget al., 1999 ). In addition, another problem of the Chinese SOEs isoverstafng, which will seriously affect the protability of projectsand thus efciency ( Yin, 2001; Holz, 2002b ). Overstafng is a pre-valent phenomenon in Chinese SOEs because the governments of-ten value output targets higher than efciency and protability.

Fig. 4. Financing structure of Beijing Metro Line 10.

Fig. 3. New nancing pattern for large transport projects in China.

12 This information is collected from Xinhua News at: www.xinhuanet.com .13 The nancing structure for Beijing Metro Line 10 is abstracted from the

information obtained from China International Bidding: http://www.chinabid-ding.com/zxzx-detail-170849.html .

14 The evaluation on the success or failure of Beijing Metro Line 10 is based on theinformation obtained from China Metro: http://www.chinaditie.com/ .


http://www.xinhuanet.com/

http://www.chinabidding.com/zxzx-detail-170849.html



http://www.chinaditie.com/





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The ignorance and neglect of production efciency encouragesSOEs to employ as many resources, including human resources,as possible to fulll the target. Therefore, for many large transportprojects in China, one could still rightly dispute whether SOEsreally do the best possible job. For China, placing projects on aSOE guidance during the nancial crisis can be regarded as a strat-egy to safeguard the delivery of transport service, but it may nothold out as a national strategy to sustain economic growth in the

long term.15

Once economic recovery becomes evident and privateentrepreneurs grow stronger, bigger, stable and more reliable, theirinvolvement may become increasingly attractive again. It is far frominconceivable that once policies are put in place that remedy the stillexisting weaknesses in the PPP legislation and privileges SOE stillhave over others have been removed, the current equilibrium mayprove to be another sub-optimal ad short-lived one.

4.4. Strong and weak and governing principles in the Chinese PUP practice

Public–Private Partnerships cannot often promote project conti-nuity and quality given the fact that there is insufcient priorknowledge and experience with private participation in publicinfrastructures. Also, it is still uncertain whether PPP in Chinaworks in terms of value-for-money because of higher transaction

costs. In such circumstances, SOEs prove more reliable for govern-ments because they cannot go bankrupt or simply terminate con-tracts ( Heald, 2003 ). However, as mentioned in Section 4.3 , thedownside of setting up more PUPs is the emergence of problematicaccountability and efciency. Private sector partners are generallymore motivated to make optimal use of the facilities/assets tomaximize return on investment, certainly in China. A possible fur-ther institutional shift in China may benet from advice given byFlyvbjerg (2003) and the OECD (2003) . The rst advice is to intro-duce a transparency requirement, which means that all documentsand other information prepared by the government and its state-owned actors should be made available to the public. A transpar-ency law needs to be established to legally formulate formal proce-dures of communication between the government and the public

and early participation of the public and special expert groupsuch as environmental, technical and economic stakeholders. The

Table 1

An overview of the institutional equilibria of PPP adoption in China.

Historical period Prior to 1993 traditional state-centeredstage

From 1993 to 2007 PPP stage After 2007 PUP stage

Actors 1. Government organizations 1. Government organizations 1. Government organizations2. Traditional state-owned enterprises(SOEs) (100% state-owned)

2. Commercialized state-ownedenterprises (at least 51% state-owned)

2. Upgraded state-owned enterprises (atleast 51% state-owned)

3. Township and village enterprises (TVEs)

(not state-owned but collectively-ownedunder local governments)

3. Private enterprises (PEs) (evolved from

small scale activities in retail and servicebusiness known as getihu , de-collectivizedTVEs, and privatized SOEs)

3. Private enterprises (PEs)

Actor roles 1 .Governments make the plan, design theproject, allocate resources, and operatethe project

1. Governments make a design for theproject, and conduct feasibility studies;governments also organize tenders, andevaluate and select bids

1. Governments make a design for aproject, and conduct feasibility studies;governments also organize tenders, andevaluate and select bids; sometimes theydirectly assign projects to certain SOEs

2. SOEs investigate geographicalconditions and construct the project

2. Both SOEs and PEs can take part indesign, construction, operation andmaintenance of the project

2. SOEs design, build and operate theproject

3. TVEs play a role in maintaining theproject and governments pay them for themaintenance work

3. PEs are sometimes involved assubcontractors

Institutional environment 1.Socialist command economy 1. Socialist market economy with Chinesecharacteristics

1. Socialist market economy with Chinesecharacteristics

2. Tasks and resources in transport serviceare directly allocated to SOEs

2.Reform policies on privatization(loosening restrictions on market entry),commercialization, and decentralization

2. Reform policies on stricter market entryand nancial requirements

3. Tasks and resources in transport serviceare allocated to the winner of opentenders through contracting

3. Tasks and resources in transport serviceare allocated to the winner of closed orinvited tenders among SOEs throughcontracting

Financial resources 1. Traditional central government funds 1. Central and local government funds 1. Central and local government funds2. Debt by governments 2. Debt by SOEs from banks or state-

owned insurance companies3. Debt by SOEs and PEs4. Equity by SOEs and PEs

Characteristics 1. No experience with contracting orpartnerships

1. Little experience with contracting andpartnership

1. SOEs act as a public sector and play arole in protecting transport servicedelivery

2. Need to expand the physical network 2. Private sector is increasinglydominating the economic output of the

transport sector

2. Public sector dominates the economicoutput of the transport sector

3. Potential inadequacy of public funds 3. Strategic behavior is evoked in theservice provision process

3. Accountability and efciency issuesappear to be problematic for SOEs

15 This is the opinion held by many Chinese professors in the eld of Institutionaleconomics who argue that sustaining long-term economic growth in China should beachieved by promoting competition in private sector and shifting the investmentresponsibility to private capital and multiple nancing methods, while state investingin infrastructures can be regarded as short-term effective national strategy to release

the inuence of the Crisis on service provision. This lien of information is obtainedthrough interviews.




second advice is the use of a performance specication approach,which means that all requirements of a project (e.g. economic per-formance; environmental sustainability; and safety performance)need to be identied before approving the project. Both instru-ments should then not be limited to the management of in-houseprojects, but especially become important for projects in which thepublic as well as the private sector are involved.

By means of summary, Table 1 gives an overview of the domi-nant features in the three phases or institutional equilibria.

5. Discussions and conclusions

In the previous Sections 3 and 4 , we have described the resultsof two institutional equilibria in recent decades (1993–2010)resulting in two new equilibria in the way transport infrastructuresare funded and managed in China. In this section these equilibriaand their transitions will be interpreted in the light of evolutionarytheory.

Prior to these equilibria, a long-lasting equilibrium was in placecharacterized by a top-down/state-centric approach which was theinitial condition for the evolutionary path. China had a commandeconomy where the public sector produced projects in-house andthus little experience and regulations were available regardingcontracting and establishing partnerships. In spite of institutionalinertia and low speed of infrastructure construction, trafc de-mand and the need for expanding the physical network continuedto grow. The viability of this equilibrium therefore tended to be-come increasingly problematical. This historical equilibrium reallybegan to break down around 1993 due to the global input of ideason the desirability of PPP and the wider domestic trend to open upthe economy to private enterprise. These external forces changedthe path of transport infrastructure management in China towardsprivate sector solutions and induced a new institutional equilib-rium, in which a series of new bodies of legislation was enactedto promote private participation in nancing and delivering trans-port services. As such this transition was the cumulative result of

both internal and external factors coming together, top-down ini-tiatives to introduce new practices inspired by international exam-ples, and local and regional initiatives aimed at the realization of concrete transportation projects. However, this new equilibriumthat allowed for new practices of private involvement was not tolast for more than about 14 years. Its attractiveness was graduallyweakened by multiple occurrences of strategic behavior from both

private and public players (such as collusive behaviors in tender-ing, jerry build and lack of maintenance on the private side, andpoor competitive arrangements, the building of alternative cheapertoll roads on the public side) which necessitated high transactioncosts to monitor malpractices, address renegotiations, rescue projects the contracts of which were terminated and install new moreand productive incentives along the way. The advent of the 2008nancial crisis led to the bankruptcy of many PEs involved in PPPprojects. As a consequence, the government took over the highwayprojects by re-granting them to SOEs and intentionally developednew projects within SOEs. This rearrangement implied a severeblow to the viability of PPPs, because it was accompanied bynew regulations on much stricter market entry requirements andhigher levels of public investment. As result, Public–Public Partner-ships (PUPs) large replaced Public–Private Partnerships (PPPs).Again the transition was a result of an interplay of internal andexternal developments, bottom up initiatives and top-down poli-cies. A gradual build-up of dissatisfaction and local responses toproblems was accelerated by an external event (the nancial crisis,deteriorating the resources of private companies and the ow of extremely large amounts of public funding, making private invest-ments obsolete), resulting in a new practice becoming dominantand being sanctioned and supported by new formal policies andregulatory changes.

Actually, the direction of these transitions may be interpretedas an attempt to transplant an institutional practice into the Chi-nese context, followed by an imminent response from the old sys-tem, resulting in a new equilibrium somewhere in between therst and second equilibrium. The introduction of PPP could not re-sult in a stable situation given its mismatch with the indigenous

Fig. 5. The Chinese path of transport infrastructure management.




circumstances (e.g. inadequate institutional framework, absence of market conditions and strong private parties, unfamiliarity withnew roles requirements and a lack of incentives to keep actors tothese). What is called strategic behavior might well refer to behav-ior repertoires that stem from the older equilibrium. In this lightthe transition to the third equilibrium may be viewed as a fall backto older well known and still present practices: governments tak-

ing the lead, preferring invitations to participate above competitivetendering, and involving SOEs rather then PEs. Although our anal-ysis was not designed to reveal this and therefore did not provideany data on this, perhaps the transitions may even be perceived aspower games, in which for instance proponents of old practiceswaited during the new consensus of the second equilibrium forfailure and new opportunities. Perhaps they actively pushed in thatdirection. Anyway, the transition that did occur did not result in areturn to the original equilibrium, given the dynamics at the vari-ous system levels that had occurred since then (e.g. changes in thepositions of SOEs, legislative developments and so on), but in a pro-cess in which elements of the second equilibrium were mergedwith elements of the inheritance of the former equilibrium, result-ing in a new mixture, probably more adapted to the unique Chi-nese environment.

Although this newly evolved equilibrium has largely stabilizedthe situation, enabled the completion of several transport infra-structure projects and the starting up of new ones, it still doesnot provide an adequate response to the low efciency of moststate-owned enterprises, the advantages they enjoy over privateplayers in terms of personal networks and borrowing opportunitiesand government guarantees. In this sense, the most recent institu-tional equilibrium is a logical response to the problems that hademerged, but not an optimal one from an economic viewpoint.Fig. 5 gives a graphical overview of these transitions. At the sametime suggesting solutions as the introduction of more transparencyand more competition to improve the current practice, does notseem to t the above analyses. Perhaps these measures may beappropriate in the future, when the drawbacks of the new equilib-rium will become apparent, but currently they can be viewed as just another institutional transplant, vulnerable to the samepath-dependent response as the introduction of PPPs and untimelygiven the current disappointment with the former attempts atinstitutional transplantation.

Given the fact that none of the equilibria is ‘optimal’ in a narroweconomic efciency sense, it appears they all carry within them theroots of their own demise. The question is not whether but whenthese internal pressures within the institutional equilibrium be-come unbearable for players to accept (for instance leading tochanges in their preferences) and/or are strengthened by outsidepressures in such a way that breakdown is imminent and reformis bound to follow.

Theoretically speaking, optimal equilibria are conceivable

(OECD and International Transport Forum, 2008 ), but given the re-straints on economically efcient performance as they are left eachtime from previous equilibria, it becomes understandable whythey never seem to emerge. Apparently, each national institutionalsystem, China in this case, evolves in path-dependent ways to-wards the equilibria that suit its own spatial and temporal contextand can best be understood as the result from previous possibilitiesand limitations that leave their mark on subsequent developments.Outsiders, such as international organizations, orthodox economictheorists or independent observers such as us, may promote seek-ing objective optima that include higher transparency, level play-ing elds in the bidding process, a reduction in the role of SOEs,more equality in the opportunities for players to borrow at the cap-ital market, the disappearance of informal networks and more

attention paid to feasibility studies, economic and environmental

appraisal and risk analysis. However, these considerations willonly matter in a possible future transition towards yet anotherinstitutional equilibrium if actors within the Chinese system adoptthese ideas and are willing to take them further in the evolution of their own transport infrastructure management system. Some as-pects that prevail now may be deeply ingrained in the Chinese set-ting due to historical legacies and are unlikely to be weeded out in

one stroke (if at all). In fact, they may even be seen as positive insome cases and therefore not to be sacriced, or alternativelymerged or combined with inuence from the outside world.Sketching an objective optimum that players should strive for re-mains a theoretical option the merits of which cannot be deter-mined in concrete institutional reality. The institutional realitynow is that private players have at least seen their role reducedto that of subcontractor or sub–subcontractor within conditionsdecided by public clients that order works and state-owned enter-prises that act as main contractors. Whether they will be able touse this role to grow nancially stronger, become technologicallymore advanced, acquire organizational prociency, act in morehonest and reliable ways and/or merge with foreign constructionrms or state-owned enterprises to reclaim an important positionin the world of transport infrastructure management in China, onlythe future can tell. If so, they may tip the institutional balance atsome point and shift it to yet another new equilibrium.

Appendix A

Classication of Chinese private enterprises ( Sources : AsiaDevelopment Bank, 2002 ; All-China Federation of Industry & Com-merce: www.acc.org.cn ).

1. Siying qiye are dened as ‘‘for-prot organizations ownedby individuals (natural persons) and employ more thaneight people”. Siying qiye can take many formsProprietorship: wholly individually owned private

enterpresises registered under the ‘‘Provisional Regulationsfor Private Enterprises” issued by the State Administrationfor Industry and Commerce in 2000Partnership: private enterprises owned by natural personssharing unlimited liability for the enterprise and registeredunder the ‘‘Law Governing Enterprises under Partnership”and ‘‘Methods for Registration by Partnership”Private limited liabilities companies and privateshareholding corporations: limited liability companiesregistered under the ‘‘Company Law” and ‘‘ProvisionalRegulations for Private Enterprises”

2. Shareholding cooperatives are enterprises that arecollectively-owned by employees of the enterprises. Theseenterprises are in fact at an intermediate stage, transitingfrom the formerly collectively-enterprises into privately-owned enterprises. Although they are not legally privateenterprises, they are self-governed and solely responsiblefor salaries and dividend payouts. So they can be treated asprivate enterprises

3. Shareholding Corporations are enterprises that are publiclylisted on the stock exchange. Theoretically, they should beconsidered one form of private ownership as long as thestate is not a majority shareholder

4. Foreign-funded enterprises are those that have foreigninvestors (including Hong Kong, Macau and Taipei) oroperate with foreign partners. Many of them should beconsidered part of the private sector in China since foreigninvestors often hold the control rights, especially for thewholly foreign-funded enterprises. However, depending on


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ownership shares, these enterprises can be state-owned,local government controlled or fully private. Therefore,they can take the following forms

Joint ventures with domestic rmsCooperatives with domestic rmsShareholding corporationsWholly foreign-funded enterprises

Notes1. Getihu: Individual business that denotes a single industrial and

commercial proprietor. These individual businesses cannot employ more than eight people and are commonly referred toas individual-employed or self-employed. Although Getihubusinesses are owned by private individuals or households,they are not legally considered enterprises and therefore theyare excluded from the denition of ‘‘private enterprise ”

2. The privatized old state-owned enterprises are also regarded as part of the private sector in China. They are formerly state-owned and then privately-owned by selling the enterprises tonatural persons. And they can take any forms of the privateownership above

3. The traditional state-owned and the commercialized state-owned enterprises are all categorized into the state-ownedownership

4. Township and village enterprises (TVEs) are collectively-ownedenterprises which fueled rapid industrial growth in rural Chinaand absorbed millions of surplus farm workers

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Rise and Fall of Ppp in China

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