Increased Public-Private-Partnership in China’s infrastructure development:

A viable instrument to improve governance and reduce domestic debt?

A high-speed train leaves Beijing south railway station. Picture credit: www.marketplace.org

Road interchange in Beijing. Picture credit: www.freearchitecture.org.uk

A clerk counts yuan notes at an Industrial and Commercial Bank of China branch in Huaibei, Anhui province. Picture credit: www.asiannewsnet.net

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Acknowledgement:

I would like to thank Professor Stephanie Balme for putting me in touch with Mr. Christian Bret, a

specialist on infrastructure development with a wealth of knowledge on China and Europe. I would

like to thank Mr. Christian Bret for the extensive time he gave me in explaining the many nuances

of the subject especially legal, financial and technical knowledge. His inputs have been invaluable

for my work. I also made a special request to Howard Davies1 to speak about the Chinese banking

sector in our class and the inputs from this session has greatly helped me to understand the financial

sector and its regulation in China especially as it is so important for infrastructure development in

the country. Howard Davies is actively engaged in advising the Chinese government on the issue on

improving its regulatory structure in the financial sector. He is also engaged in advising the UK

government on its airports.

* * *

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1 Howard Davies was executive chairman of the Financial Services Authority in the UK from 1997 to 2003 and subsequently director of LSE till March 2011.

IntroductionChina’s emergence as an economic super-power with deep pockets during a time when developed

countries face an unprecedented squeeze hides a stark reality, namely that of its domestic debt. This

needs to be examined in all its complexity before a clear picture emerges. With the highest foreign-

exchange reserves in the world2, China is seen as having the power to bail out debt-ridden countries

(Subramanian: 2011). But this external financial capacity seems to be masking the alarming truth

that there maybe a massive hidden public debt parked in its large banks. Essentially, China is

heavily dependent on bank finance to fund large development and infrastructure projects and the

government has abused its banks by drawing deeply and repeatedly to manage its expenditure. As

of March 2012, the Ministry of Railways alone had $384 billion of debt (Hornby: 2012). Two

developments are gradually bringing out the full extent of this situation. One is China has taken the

decision to meet Basel III banking standards due to which it has to bring transparency in the

banking sector and also reduce its toxic debts. The second is that several of China’s banks have

listed on the stock exchanges which again requires full transparency and opening of its balance

sheet for shareholder scrutiny. Professor Victor Shih of Northwestern University in Illinois, US.

Shih conducted on-the-ground investigation in China to unearth the off-balance sheet liabilities of

local governments, and the contingent liability to central government of public entities such as

development banks and the Ministry of Railways. China’s hidden borrowing may push government

debt to 96 percent of gross domestic product in the coming years, increasing the risk of a financial

crisis in the country considered to be a “rescuer”. Moody’s rating agency has sounded warning

signals on China’s domestic debt. It has specified that Chinese banks’ loans to its own provincial

and local governments may be 3.5 trillion yuan ($540 billion) larger than the national auditors

estimated. This creates suspicion about the health of its economy and a poses a threat to the banking

system’s ability to provide future funding especially in infrastructure. Moody’s has been attempting

to better judge estimates given by China’s National Audit Office which in 2011 reported that its

local governments’ debt to Chinese banks was about 8.5 trillion yuan. Moody’s own analysis is of

the view that bank’s exposure to local government borrowing is greater than it had anticipated (WB

Macroeconomics Team: 2011). The rating agency could downgrade China’s banking industry unless

it came up with a master plan to clean up this problem (Ibid).

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2 To see a detailed picture, please consult Global Finance magazine database webpage: http://www.gfmag.com/tools/global-database/economic-data/11859-international-reserves-by-country.html#axzz2ENtTPPSk

A comparative view of the economic and political model reveals the real nature of the China’s

banking sector. In the US, the financial sector was responsible for creating the crisis which then

spread across sectors within the country and the sent shock waves to the rest of the world economy.

In short, financial institutions were themselves responsible for imprudent lending practices.

Investment banks packaged toxic loans into “safe” investment products. The government had to

step in and bail out the financial sector after the crisis reached its pinnacle especially as the real

economy was quickly spiraling down and job losses were soaring. In China the picture is

substantially different. Only recently due to restructuring for reasons mentioned earlier (i.e. meeting

Basel III standards and listing on exchanges) have they begun to have a degree of independence in

lending practices towards the government. Earlier, banks were used as an instrument by the

government to fuel its burgeoning expenditure programs especially in infrastructure. Therefore, the

internal debt problem in China is not a creation of the banks themselves but rather a product of its

political and economic system. In actual terms banks cannot be accused of unsafe lending practices.

Two questions throw-up at this point. One is how China should restructure its bad-debt. This is not

the subject-matter of this paper. Suffice to say here that the burden of the debt is with provincial

government. The cash rich central government has stepped in with relief funds. Bad debt has been

carved out and funneled into “bad banks” which will attempt to clean them up as much as possible.

The second question is what is the model that China should adopt for funding large infrastructure

projects henceforth? It is clear that the method used in the past cannot continue any longer. This

question is centrally important not just to the infrastructure sector and banking sectors in isolation.

It is a key question for China’s future. Firstly, in contemporary China, the Chinese Communist

Party’s (CCP) legitimacy on power largely depends on China’s economic progress and prosperity.

There will be large scale social disturbances if living standards and incomes do not continue to rise.

And infrastructure plays a key role in China’s economic growth. Firstly, China’s rapid growth in

laying a mammoth transportation infrastructure across the country has laid the foundations for a

modern economy that has a sufficiently strong foundation for ramping up economic output. In the

time of global economic slow-down, China banked on its infrastructure development to maintain its

GDP growth by means of a stimulus package. China will continue to invest heavily in in

infrastructure in the future as part of its economic growth plans. So, there is a clear link between

China’s political stability, economic success and its infrastructure development. The need for

funding is is ever-increasing. The country still needs billions more in rail investment, to remove

bottlenecks in cargo transport, ease overcrowding in passenger transport and develop commuter

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lines in its sprawling megacities (Hornby: 2012). To reduce the dependence on banks, the evident

answer is increase private finance in all new projects. However, bring private finance represents a

formidable challenge as it would entail major reforms in governance, introduction of transparency

laws and a fundamental shift in economic model where the role of the government would be

moderated by private enterprise. Introducing private finance would also require a deeper

engagement between private and public sectors in the form of Public-Private-Partnership (PPP).

The PPP model is not new to China however it is not seen in strategic terms especially in addressing

governance, quality of economic growth3, and public finances. Give it more importance would

mean tremendous levels of resistance from party and government officials who would prefer to

keep power in their own hands. The aim of this paper is to investigate whether an increased

reliance on the PPP model in infrastructure development can serve as a tool for improving

governance, transparency and public finances4.

To answer this question, at first a relatively small section will be dedicated to defining the concept

of PPP. In the second part PPP model would be discussed in the highway sector where there has

been a degree of success. An attempt will be made to explain the formidable growth of this sector in

China and implications for the future in the light of PPP. I then will be discussed in the high-speed

rail (HSR) sector where there have not been any progress in the PPP model. Quite significantly,

these are the very sectors which have created the debt problems and therefore where private finance

is most required. This section will explain why PPP cannot work unless major reforms are made. In

the conclusion, I will discuss the findings and attempt to give a well rounded answer to the question

at hand. One of the key questions that will be answer will be why the PPP model has worked in the

highways sector while it has made no progress at all in the railway sector. This paper will not

discuss the stimulus packaged announced in 2008 as a way to lift GDP growth during the economic

crisis. Infrastructure plays a large role in the stimulus package however examining implications of

this issue is not in the scope of this paper because the aim here is to investigate PPP related issues.

And as yet enough material is not available linking the two subjects. The paper also does not aim to

go very deep into discussing nuances of different PPP models. Instead it will discuss what effect

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3 Improvement in qualitative growth would mean better balance between demand and supply. There are ghost cities in China today where very few people actually live. They were sanctioned by local governments to achieve GDP targets.

4 A more blunt way of at this question would be: can the CCP tame itself by using this model?

key players has on success of a PPP project and what effect PPP has on the behaviour of key

players.

PPP Model: theoretical perspectivePPP represents a balance between state ownership and privatization as indicated below:

Conventional procurement (No private ownership)

The procurement of assets by the public sector using public funds (tax-payer’s money)

Public Private Ownership (Joint ownership to varying degrees)

• Design, build, finance and transfer (DBFT)

• Build, operate and transfer (BOT)

• Build, operate and own (BOO)

• Design, build, finance and operate (DBFO)

Full privatization (No public ownership)

Publicly regulated but privately owned in perpetuity

Public Private Partnership (PPP)/Public Finance Initiative (PFI) are used interchangeably and can

be defined as the design, build, finance and operation, by the private sector, of assets and services

that the government has traditionally provided to the society and where the funds have come from

taxpayers. In return, the private sector generates revenue either from the levying of tariffs on users

or the receipt of periodic service payments from the government over the life of the PPP agreement

(KPMG: 2003).

PPP can be summarized as a long-term, market-driven approach to public sector asset construction

and service delivery which is designed to:

• allocate risks between public and private sectors to those parties who have the financial capacity

and technical know-how to manage them;

• reduce costs by better procurement procedures and efficient and streamlined service delivery;

• enhance the quality of services delivered to the public through better management and reduce the

time of project completion

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• generate reasonable profits to the private sector participants;

• free up government fiscal funds for use in other areas.

Through PPP, services are delivered to the required quality over the lifespan of the project

specification, at the most economical cost, to the benefit of the economy and the society. For all

practical purposes, the terms PPP and PFI are used interchangeably, although PFI refers specifically

to the private sector financing of public infrastructure projects. Construction of new or acquisition

of existing public sector assets may be financed through a mix of debt and equity. Therefore strong

debt and equity capital markets are an important factor for PPP sector development. Loan term

facilities are commonly extended for 25-30 years, provided that lenders are confident in the private

consortium’s ability to secure future government service payments or generate sufficient tariff

revenue (KPMG: 2003).

PPP models have been applied in the following sectors:

• Road and rail transportation• Health – hospitals and nursing homes • Water and waste water• Energy supply• Telecommunications• Schools• Government housing• Correctional facilities• Defense

PPP originally arose in the United Kingdom (UK) in the late 1980’s and early 1990’s and has been

adopted principally in Australia, Europe, Canada and many other countries (KPMG: 2003).

However, considerable research has been done in France and a high degree of legal and structural

innovations have been made. The French PPP model has a very formal structure and this model has

been adopted in Europe. The French model makes categorical differences between public works,

delegation of public service. In UK and USA there are specific differences but the legal nuances are

the largest in France. For example when the private party directly collects revenues from users or

customers (i.e. highway tolls), it is not technically considered a PPP model in France. However, the

aim of this paper is not to go into the technical details but to analyze the Chinese context with a

broad understanding of PPP.

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It is to be noted that success of PPP projects varies across sectors as we shall in the Chinese context

itself. However, it should be emphasized that PPP is a very sophisticated tool that is not universal. It

cannot be replicated in every country and sector. It is something that needs to be adapted based on

the social, political and economic conditions prevalent. And the entire horizon of actors must be

scanned carefully to see the interest and capability of each actor. Centers of research and reflection

are required to evaluate objectively and suggest improvements. Today such centers exist in the

World Bank, UK and France. There are many criteria but not one solution. It is an public-private

knowhow (savoire-faire) that evolves with time and experience within each country. The main

advantage is to free up public finances. However, depending on the legal structure it can also mask

public debt especially in cases where the government becomes a guarantor in case revenues do not

accumulate as foreseen. If it is well managed then it aligns supply and demand. It harnesses

management skills from the private sector to the needs of the public. When well planned and

executed, it is a good marriage between public and private sectors. Today, many researchers have

started working on this subject. As we shall see later, if PPP is introduced more pervasively it would

have an immediate effect in cutting waste of public finances in China. Certain projects would never

find its entry into realization because the private parties would reject them upfront as the low

demand for the service simply does not justify the expenses involved (i.e. ghost cities mentioned

earlier). Introducing private players would thus prevent artificial GDP creation. The next sections

will discuss PPP in highways, railways and airports.

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PPP in highways: a look at Chinese experience

Sectoral outlook

From the late 1980's, China's government recognized that its neglected, underdeveloped road

network represented a major bottle-neck to its economy. So it embarked on a colossal 85,000 km

highway building program. It was designed to bring the country on par with the United States

within 30 years (Mackie: 2005). Although this is a multi-staged mega-project, the highways connect

but the most important cities of the country like Beijing, Shanghai, Shenzhen, Chongqing and

Guangzhou. The infrastructure requirements for the country’s economic growth plan only just about

start there. All of the mega cities need to be connected to the semi-urban and rural areas of the

country so that goods and people can flow smoothly. So, China soon came up with another mega-

plan to create a network of expressways to connect smaller cities and towns. And this network of

expressways would essentially be a second layer that would be connected to the upper layer of

highways. Towards this end, every year China is constructing around 4,000 km of expressways,

towards its target of connecting every city with a population of 200,000 or more to the 85,000 km

national highway network (Ibid). If ever there was a ‘great leap forward’ China’s roads construction

would certainly qualify for it. This huge network of highways across China is powering the

economy by linking the local rural population to market opportunities, social services and

employment. It also helps to woo investments deeper into the country. However, after 20 years of

non-stop construction, the country’s appetite for building roads has not abated in the least. Two

decades of road building has given China an extensive highway network, particularly in the densely

populated eastern regions. Since 2000, China’s expressway network, which is already the second

largest in the world, has been growing at an average of 20 percent per year (KPMG: 2009). China

continues to focus on the expansion of its road system, highlighted by the program in China’s 11th

Five-Year Plan for an extension of the country’s highways from around 41,000 km in 2005 to

65,000 km in 2010. The highway network (including expressways and class 1, class 2 and class 3

highways) is targeted to reach 3 million km by 2020, up from about 2 million km in 2008 (Ibid).

Key points to consider for PPP

Two of the key requirements in a PPP project is financial viability and a proper sharing of the

responsibilities encapsulated in legal form. Essentially, money has to be well spent. But how to

judge whether money is well spent? Normally, the market has a good answer to that because it

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balances supply and demand. If there is over supply for a service, a new project cannot be justified

as it would make losses. Similarly, if there is no demand for a service, high sums of money should

not be spent on creating it. When reasonably regulated, the market mechanism ensures a good

balance. The market “corrects” eventually the distortions of high speculation. However, essential

services such as roads cannot be privatized, sold and re-sold in the market. Some services are

deemed to be in the public interest and must remain public. However, the government can be

wasteful or lacking in managerial and technical capacity. It can be lacking in funds to invest in

important projects. All of these reasons justify a marriage between public and private. So, these are

the important considerations to conceive a project. But to invite private players entails in the public

sector to have accountability and transparency. If there is corruption within the government then the

private party who may have paid bribes will try to recover it through by compromising on quality of

the deliverables. The private player selected may not have the required managerial and technical

knowhow to deliver on the project. And it may overcharge the eventual users (public). Normally, it

would be a combination of the three issues mentioned. With these perspective let us look at the

Chinese context.

PPP in highways

During the last decade in China, public investments in building highways across the country have

seen consistent growth however public contribution represented only a declining proportion of the

total highway construction expenditure (World Bank, 2007; China Statistic Bureau, 2007). The gap

between public funding and actual project costs has been filled by raising money from private

sector, while transferring responsibilities of design, construction, operation and maintenance to the

private sector by means of PPP (Martin de Jong and Heuvelhof: 2009).

Since late 1990s, the growth in the number of PPPs in roads, especially for highways involved in

the Chinese National Expressway Network Plan (7918 plan), has increased, from 0 to 122 PPP

contracts in roads at present (China Audit Office, 2008). The underlying reason for PPP growth in

the Chinese road sector is massive growth in traffic and requirement to respond to this by means of

road reconstruction and extensions. As a result, it has become a challenge for the public sector to

invest so massively (Martin de Jong and Heuvelhof: 2009). Therefore, PPP as a solution for

alleviating the large burden on public finances fiscal has become essential.

Empirical research (Ibid) is showing that there has been different forms and degrees corruption in

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PPP projects, including in the following at the stages: tendering, construction, operation and

maintenance stages (Ibid). For instance, in the Shen-Da expressway 222 jerry-built (i.e. built

cheaply and flimsily) locations have been found after 10 years of operation, concentrating on

foundation deformation and cracks in and sinking of the road surface (Ibid). Also, 9 locations with

technical jerry-build were found with problems of low quality construction materials to save project

costs strategically in Le-Yi expressway (Ibid). Furthermore, the China Audit Office (2008) has

made public that 158 extra tollbooths were operated by private operators that did not have required

permits issued by the government under the contract. These were done to collect extra toll. In

addition, toll charges in many provinces of China have been unilaterally increased by private

operators, which resulted in more than 8.2 billion RMB of illegal profits.

And there are 12 provinces with problems of strategic extension in the charging period, which has

led to substantially higher costs for users. One of the principal reasons why PPP projects fail or

operate unfavorably is due to misconduct of government authorities. In the Xiang-Jing expressway,

the Hubei regional government distributed free-toll cards to people so the private operator was

deprived of a large portion of revenues and failed to generate a reasonable return on the what it had

spent. Additionally, a fair competition policy is lacking that can come to the defence of the private

actor and provide sufficient legal certainty and government support. For example, in Fujian

province unfair practices were implemented by the Quanzhou local government which operated

Quanzhou bridge against a private actor that operated the Citong Bridge. The Quanzhou

government had undue powers to influence the traffic and developed policies only favorable for the

Quanzhou bridge traffic so that there was deliberate but have a negative impact on the attractiveness

of the Citong Bridge. Finally, illegal transfer of managing rights of the He-Chao-Wu highway

resulted in a loss in public finances to the tune of 1.2 billion RMB. Statistics point out that 42 PPP

projects out of 106 definitely involve corrupt practices in transferring operating rights (Ibid).

Despite the laying down of corrupt practices in the last section, it must be pointed out that analysts

are very optimistic about PPP prospects in the highway sector. Some analysts have indicated that

the overall experience with PPP in China has been positive (Martin de Jong: 2008). Decision-

making processes have become more rapid and costs have gone down, especially where efforts have

been made to develop adjacent areas commercially and professional respectable contractors have

been selected. Still it is difficult to say anything conclusive since failure and corruption did occur in

many cases. However, the positive points to be considered are the following. Firstly, today there is

no barrier to entry for private players. This is a significant progress especially when compared to

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railways where private players have a very limited role and are certainly not considered as partners.

Secondly, the private players have all been profitable so this is a second reason to be optimistic

about. One report has concluded that heavy tolls and other factors have brought profit margins to 60% for China's

highway operators . This is And thirdly, the PPP experience has created a record that can be examined

and key areas for improvement can be identified. This gives scope to the government for evaluating

its own performance and making corrections and adjustments. Decision-makers at the highest level

can intervene based on quantitative information and introduce reforms.

Firstly, one of the principal reforms would be to introduce a transparency law which could control

corruption, misconduct and illegal decision-making by public officials. Monitoring the public sector

reduces the incentives to become involved in corrupt practices. This would ameliorate public sector

functioning and improve the business environment in general, as underlined by the World Bank

Enterprise Surveys (Djankov, 2007). Transparency law may ensure that the institutional

environment is strengthened with clear and readily accessible rules and procedures that can be

maintained by all involved players. In addition, it will enable potential investors to estimate their

benefits, costs and risks (United Nations Commission on International Trade Law, 2001). The

objective of introducing transparency legislation would be to put protection mechanism against

corruption and to help build an environment of trust in the PPP framework.

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The case of high-speed rail (HSR)China’s railway system is at the core of China’s growth strategy. It is soon to become the world’s

largest network, with 6 percent of the world’s track length and rapidly increasing. It carries a quarter

of the world’s traffic. Further, of the total network, 59 percent of passenger turnover and 35 percent

of freight traffic is carried by just 13 percent of tracks, further increasing traffic density on key

lines.

This dense and growing traffic is a huge challenge for scheduling trains and managing average

traffic speeds. With added funds from the stimulus package, the Ministry of Railways is attempting

to improve the overall infrastructure through:

• expanding the railway network to 120,000 km by 2020 from 78,000 km in 2007, of which more

than 60 percent is to be electrified

• investing RMB 3.5 trillion in projects starting during the next three years, of which RMB 1.5

trillion will be for the construction of 80 new projects starting in 2009 (BOC International: 2009)

• investing in 800 high-speed trains over the next several years and upgrading old trains at an

investment of RMB 300 billion (KPMG: 2009)

The story of high-speed rail is the most significant. It is the one that caught the imagination of the

world for all the good reasons at first. But a terrible accident in recent times has brought to surface

terrible failures. Until around 2004, China was mainly investing in expanding its highway network

to accommodate the growing demand for cars and trucks. Rail was largely used for freight, largely

to transport minerals from the West to the manufacturing centers in the East. From 1997 to 2002,

expenditure on building highways was seven times the amount invested in rail (Richburg: 2010).

Starting in 2004, the amount spent on rail has steadily risen, and in October 2008 the government

decided to invest a further $100 billion.

In 2010, China will have spent around $120 billion in high-speed rail construction while continuing

to expand its highways. China has also been rapidly constructing and spending large amounts on

metro rail infrastructure that will be linked up with high-speed trains in cities. China currently has

about 60 metro rail projects underway in more than 20 cities. Shanghai already possesses the fastest

"maglev" train, the German-built "magnetic levitation" technology that propels the wheel-less train

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using a magnetic technology. The maglev makes the 18-mile trip to Shanghai's airport in less than

eight minutes, reaching top speeds of just over 250 kmph.

A disaster

Thomas Friedman likened China’s high-speed rail project as a moonshot (Friedman: 2010). Liu

Zhijun a very powerful man in the CCP was head of the Ministry of Railways for until he was

sacked after a terrible train accident. As minister of railways, Liu Zhijun ran China’s $300  billion

high-speed rail project. Foreign journalists such as Thomas Friedman were fascinated and praised

China’s latest high-tech achievements. Today, Liu Zhijun is ruined, and his high-speed rail project is

in trouble. On Feb. 25, he was fired for “severe violations of discipline” — code for embezzling

tens of millions of dollars. His ministry created a staggering $271  billion in debt — roughly five

times the level that bankrupted General Motors (Ibid). However, revenues from ticket sales is

miniscule compared to the losses which will be about $27.7  billion in 2011 alone (Lane: 2011).

Safety concerns have become a major issue. Faced with a financial and public relations disaster,

China put the brakes on Liu’s program. On April 13, the government cut bullet-train speeds to

improve safety, energy efficiency and affordability. The Railway Ministry’s botched up finances are

being investigated. Construction plans, too, are being reviewed.

A major trigger was a fatal accident between two high-speed trains on 23 July 2010. The high speed

rail accident claimed dozens of lives, hundreds of injured, and destroyed the rosy image of the

project. It was a tragedy for the people killed and major public-relations disaster for the

government. The government punished 54 officials and ordered the railway ministry to improve

management of its high- speed rail system after a government investigation found a fatal train crash

was caused by mismanagement and design flaws (Nair 2011).

Private players missing

Private players have seen a massive barrier in the entry into this industry. They have been used as

suppliers of various products or been given contracts. However, railways have held the monopoly

over all its activities. The powerful minister controlled the ministry with an iron-fist. Ironically,

private players are left out where they are needed the most. Many of the lines created are simply not

viable and private players would not enter into such projects. When a private player is not interested

in a project, it normally has a very good reason after having considered the risks and financial

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viability. In fact, high-speed rail project are extremely capital intensive and revenues for only cover

losses for several years. High-speed rails are successful over shorter distances but over long-

distances the competition with airlines kills both industries to an extent. In the competition, the

high-speed rail suffers the most. In short, if PPP model was selected for these projects, it would

prevented all the financially risky projects from kicking off in the first place. The minister was in a

great hurry in many of the projects and quality suffered as a result. The managerial experience

would have smoothened many of the rough edges concerning time and technical details. China

seems to have taken this into account or rather has been forced to accept this reality. It has plans to

increase private investment in railway related projects. However, it remains to be seen to what

extent this can be successful.

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Conclusion

China is fascinating and contradictory country: a one party system with huge huge growth. Its a

country that pretends to be communist where economy is dominates more than anything. Big public

companies have listed but remains major shareholder. China has introduced market mechanism

however retains a lot of control. There is a complex family relations and power that influence

issues.

The PPP model is at different stages of development. It has made major advances in the highways

sector. By allowing PPP into the sector, the private and public sectors understand each other’s

capacities and behaviors much better. This is the key progress that has been made. Most ironically,

the PPP has been left where it is needed most: in the high-speed rail projects. The PPP would have

moderated expectations of public officials who wanted progress at break-neck speeds. It must

reiterated here that the private sector is extremely pragmatic and efficient. It is a good idea to marry

this capacity of the private sector to the demands of the public. The private sector would have been

the first to ask the most relevant question. Who will actually use HSR services? How much would

they be willing to pay for it? What is the financial viability of the project? These key questions were

not sufficiently reflected upon by the initiator of the project and therein lies the core of the issue.

The Euro tunnel project to connect Paris and London through high-speed rail is a good example of a

PPP project that went through considerable problems and restructuring. The private sector has learnt

from this. The Euro tunnel was totally PPP based on a franco-britannic partnership. the project went

bankrupt twice and had to be restructured for the same reasons. It was too expensive investment.

The companies that spend money need cash-flow to remain in good health. However, in such long

and expensive projects, the revenues do not start trickling in until after several years. When there

are too much delay from the start of the project to the point where revenues start accruing, it

becomes financially unviable. This is why a good balance between private and public to balance out

expectations in the first place. And secondly, to get better professional managerial capacities during

the implementation phase.

In comparative terms, there have been several PPP projects successfully completed in the highways

sector. This has benefitted the public ultimately. However, a transparency law is required to further

boost prospects for PPP in the sector. It would require an intervention from the highest levels of

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Chinese authorities. The new leadership which is seen to be keen in curbing corruption can use the

PPP as an instrument for improving corruption. The experience from the highways sector could

serve as a good example. There is sufficient experience at the government level to understand the

complexities and nuances involved. In effect, the private and public priorities are not so different

after all if the right balance can be found in a project. Ultimately, if the public cannot use the

services, no revenues will accrue so the private sector has an in-built interest in making the project

successful. The PPP can serve as useful model for easing public finances. This is the positive lesson

learnt from the highways sector which should be implemented in the railway sector which is very

capital intensive. The lack of maturity in the high-speed railway projects have cost China dearly and

will continue to be a drain on public finances. It must be admitted that China is a pragmatic country.

Earlier they have made experiments and then generalized and theorized (i.e. Shenzhen experiment

before opening up economy). So, the PPP model can be and ought to be successfully applied to

railways after a careful study. It is the sector where it is needed the most.

However, this paper has not touched on airline travel. And even more importantly, Mostly all the 3

sectors need to be studied in a holistic manner. The main points to ponder would be while

competition amongst the three sectors (roads, rail, air) is good, excessive competition should not

kill any one sector. Finding the right balance will be crucial. Then there are also safety and

environmental concerns which are on the rise in China. It is important to look at all these issues in a

holistic manner. These questions do not have easy answers. But a comprehensive look at the three

sectors would be a good idea to start with. Essentially, this will ensure a shift from a quantitative

strategy to a more qualitative strategy and this would require coordination between various

ministries which is a big challenge in the Chinese context where are turf-wars amongst ministries.

The NDRC could play the role of a coordinator but it has to be given additional powers for playing

such a role. However, looking at the three sectors in isolation will not be wise. Most studies look at

the sectors in isolation and it is time that the direction of research changes direction.

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