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Journal of Transport Geography 19 (2011) 794806

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The rise and fall of PublicPrivate Partnerships in China: a path-dependent approach

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

a r t i c l e

i n f o

a b s t r a c t
Due to growing trafc demand, enormous investment requirements and high scal pressures, China has witnessed a reshaping of nancing policies in large transport infrastructure projects from public nancing to PublicPrivate Partnerships. As a result, the provision of transport infrastructure services in China has been steadily moving from the realm of government to that of private sector. In the same period, governments at the central and regional levels were actively engaged in this institutional transition by devising corresponding policies and enacting new laws and regulations. However, in late 2009 it became clear to the authors of this article that there has been a tendency of rolling back private participation in transport infrastructure and service because of various forms of opportunistic behavior on the part of some private players and malpractices among some governmental ofcials in their interaction with private players, and in relatively recent a number of large transport projects have been granted to state-owned enterprises. Therefore, the purpose of this article is to analyze and explain the processes of rise and fall of PublicPrivate Partnership in China. We argue that the adoption of PublicPrivate Partnership in China is a path-dependent process rather than some economic optimum advocated by a variety of international organizations. Specics of wider Chinese political, cultural and institutional context are recognized as important factors that inuence the performance of PublicPrivate Partnership. Effects of decisions made under transitory conditions can persist long after those conditions have vanished. In addition, these historical legacies are important in understanding contemporary use of PublicPrivate Partnership in China, and they are also the origins from which the sub-optimal statuses are often led. 2010 Elsevier Ltd. All rights reserved.

Keywords: PublicPrivate Partnerships Path-dependence Transport project nancing China

1. Introduction The mass of large transport infrastructure projects and enormous investments that go with it has led to a reshaping of nancing policies in the past decades in China. Until recently, one could observe a shift from public-nanced projects to a larger share of PublicPrivate Partnerships (PPPs), which became visible in subway construction (Cong et al., 2007; Zuo and Tang, 2007; Xie and He, 2006; de Jong et al., 2010) as well as in road construction and maintenance (Han, 2009; Chen, 2008; de Jong et al., 2010). After the founding of the Peoples Republic, the Chinese government adopted a state-centric and top-down approach to infrastructure development, which comprised the entire life-cycle; that is from planning, nance, design, construction, maintenance through operations. Initially, given the nature of network-bound infrastructures as public goods, these arrangements worked reasonably well, especially for the expansion of railway services. However, after decades 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
Corresponding author. Tel.: +31 (0)152781309.
E-mail addresses: (R. Mu), ( Jong), (J. Koppenjan). 0966-6923/$ - see front matter 2010 Elsevier Ltd. All rights reserved. doi:10.1016/j.jtrangeo.2010.10.002

and enlarge the capacity even faster than the already substantial public funds allow for. Confronted with scal constraints, the Chinese government then sought to attract private investment to ll the gap. Roughly speaking, from 1993 to 2007 the provision of transport infrastructure services in China has been steadily moving away from the realm of government to that of the private sector through PPPs. From roads to ports, and later to subways, state-owned, monopolistic enterprises gave way to a wide range of private players operating in a relatively competitive environment, accompanied by promising, but far from complete economic regulation (Huang et al., 2009; de Jong et al., 2010). Governments at the central and regional levels were actively engaged in this institutional transition by devising corresponding policy frameworks and enacting new regulations such as independent regulatory agencies (for instance, project tendering committees), competition law and adjusting property rights law. However, in late 2009 it became clear to the authors of this article during interviews with public ofcials with the Chinese National Ministry of Transport and regional governments (Shenyang; Dalian; Beijing) that a trend of rolling back private participation in transport infrastructure and service has set in due to harmful forms of opportunistic behavior on the part of some private players as well as malpractices seen among a number of governmental ofcials in their interactions with private players.

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From about 2007 to 2010, a large majority of new large transport contracts were granted to state-owned enterprises (SOEs). This shift can be largely explained by the fact that many projects granted to private contractors were either abandoned, eventually transferred to SOEs for successful completion or otherwise did not meet expectations. Compared to projects following the conventional approach a lot of effort has been put into (re)negotiations and monitoring deviant behavior by private sector players, thus enhancing transaction costs. Apparently, SOEs began to be perceived as a more reliable and stable solution. To explain the dissatisfaction with private involvement, it can be argued that the government should rst have put into place the institutional framework before relying on PPPs to do the job. For instance, effective legal preconditions such as the application of ruleof-law, transparency law, strict competition law, decent regulatory oversight, smart incentive mechanisms and an effective and efcient judiciary system to some extent are still lacking. Moreover, the relative weakness of the private sector in this area, the absence of substantial numbers of large-scale contractors in parts of the country, the disrespect paid to open tenders and their systematic application and the strong position of SOEs at the capital market and in their personal and organizational networks remind us of the specics of the wider Chinese political, cultural and institutional context. It shows the importance of considering this as a pathdependent process rather than one heading in the direction of some economic optimum advocated by international organizations such as the OECD, World Bank or IMF. History demonstrably inuences the performance of PPPs. Choices made on the basis of transitory conditions can persist long after those conditions have vanished. Understanding contemporary practices requires taking into account past conditions, the choices made in these circumstances and what their legacy means for the current situation and its policy dilemmas. This article will address the question how the rise and fall of PPP in China can be explained as a path-dependent process. By providing answers to the question above, the authors hope to contribute to: (1) the knowledge regarding the status quo of the use of PPPs in China, (2) the Chinese practice in carrying out transport project nancing, (3) a hint of how an evolutionary economic perspective can enlighten the understanding of the Chinese historical path of transport infrastructure reforms and its inuence on relations between the public and private sectors; and (4) an explanatory framework that puts future policy choices in China in this eld in perspective. We have based ourselves on existing literature on PPPs, a touch of policy network theory and evolutionary economics for the appropriate explanatory terminology, leading reports and documents published by various Chinese governments (national, provincial, local) and a number of interviews with policy-makers and experts working for governmental organizations and universities. In the next section the theoretical concepts and ideas we derived from the literature are presented. Next in Sections 3 and 4 the empirical developments making up the rise and fall of PPPs in China are described respectively. Section 5 interprets these events from an evolutionary perspective, by identifying the unique Chinese path towards the involvement of private parties in transport infrastructure, drawing lessons regarding the Chinese case, and exploring possible further developments, building upon this analysis.

2. Basic explanatory concepts In this section the concept of PublicPrivate Partnership and factors that underlie its adoption and success or failure are introduced. Since PublicPrivate Partnership is an institutional practice that is taken from other settings and transplanted into the Chinese

context, inuencing Chinas development towards a new institutional reality, theoretical concepts and notions from evolutionary economics and institutional transplantation are discussed, in order to select concepts and theoretical ideas that will be helpful in understanding and analyzing the developments regarding PPPs in transport infrastructure in China. PublicPrivate Partnerships (PPPs) can be loosely dened as cooperative institutional arrangements between the public and private sectors; they have gained wide interest around the world (Hodge and Greve, 2007). Some see it as a new tool in public management that will replace the traditional method for public service delivery, thus being a revolution in infrastructure provision and project nance (Vincent-Jones, 2000; Mohr, 2004; Shen et al., 2006; Chinyio and Gameson, 2009), while others consider it merely a way to handle infrastructure projects constrained by the availability of funds or technologies absorbing strengths from both the public and the private sectors (United Nations, 1998; Black et al., 2000; Bank, 2004; Maskin and Tirole, 2008). From this perspective, each of the participants must bring something of value to the partnership such as the best available skills, knowledge and resources and transfer them to the arrangement to strive for a value for money in the provision of public infrastructure services. Cross-cutting the diverse interpretations, our denition here would be that PPP projects involve private actors in the design, nancing, construction, maintenance, operation and management of a public infrastructure on the basis of competitive tendering and long term contracts or arrangements (de Jong et al., 2010). In this process of intermingling public and private sector interests and strengths, a policy network of interdependent actors can be discerned, albeit one often strongly regulated by legal requirements for fair and solid contracting practices (Hodge and Greve, 2007; Klijn and Koppenjan, 2000; Koppenjan, 2005). These actors have different and often conicting objectives, interests and strategies (Kickert et al., 1997; de Bruijn and ten Heuvelhof, 2008), which leads to difculties in making a regulatory framework for PPP, applying PPP in specic cases and negotiating among the actors involved in contract formulation. In analyzing how private enterprises in China are contributing to the partnership and thus to the development of public transport infrastructures, we need to understand how the term private is dened and used. Appendix A gives an overview of different types of Chinese enterprises, which contribute different advantages to PPP. For instance, the involvement of private shareholding cooperatives and corporations, as well as foreign-funded enterprises, makes the infrastructure purchasing process more competitive, while state-owned and collectively-owned enterprises are more reliable in terms of capital chain, management, technological and personnel strength for government to contract with. Depending on different options of PPP and thus different responsibility allocation mechanisms in formulating the PPP arrangements, the involved private enterprise may bring different skills and resources to the partnerships. For instance, in the BOT (Build-Operate-Transfer) contract, the private partner contributes the partnership through construction skills, some private capital, operation and maintenance skills and personnel. However, in PPP contracts like TOT (Transfer-Operate-Transfer), the private partners only need to contribute their operation and maintenance skills. In BT (Build-Transfer), private partners are just construction companies with construction skills, but they do not provide capital. PPP contracts have very important repercussions for all signatories, making the drafting of contracts an often lengthy and costly process. As a result of PPP contracts being incomplete, the possibility of strategic behavior on both sides and possibly high transaction costs due to monitoring efforts and renegotiations remain high (Laffont and Tirole, 1998; Maher, 1997; Dixit, 1996, 2003; Parkera and Hartley, 2003; Williamson, 1996, 2008; Ho, 2009). In PPPs,


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private actors might make strategic bids, deliver lower service quality where this is not easy to spot, reduce maintenance activities or increase the service price in obscure ways. Meanwhile, public actors may offer public transport facility as serious alternatives that badly compromise the viability of private facilities, they might intentionally reduce monitoring efforts in the contract period, or disclose 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 jeopardize partnerships. In addition, transaction costs would rise if projects were stopped because private actors went bankrupt and the government had to take over the project and nd a new developer. When looking at the interactions within PPP-related policy networks from an institutional and evolutionary economics angle, the institutional setting that players end up in can be seen as an equilibrium among several others, which denes the rules of the game and which can be more of less optimal from an efciency point of view (Aoki, 2000; Greif, 2006). Institutional equilibria are socially constructed states from which actors in the network are not motivated to depart as long as others also do not change their positions and strategies. When reforming regulatory frameworks, the issue becomes one of dealing with the issue what mechanisms constitute opportunities (incentives for players) to jointly move from one institutional equilibrium to another hopefully more efcient one. By going beyond the static analysis of comparative equilibria, the concept of path-dependence enters centre stage, referring to dynamic systems whose motions remain under the inuence of conditions which are themselves contingent legacies of events and actions in its history. Put simply, it means that what happened in the past inuences what happens today. (David, 1994; David and Thomas, 2003; Arthur, 1989, 1994). This makes it easier to explain why the actor decisions do not necessarily lead to optimal solutions and sub-optimal choices are often made. Path-dependent institutional transitions can either take either the shape of a punctuated equilibrium or of an incremental equilibrium. In the process of reaching a punctuated equilibrium, a sudden dramatic change will radically break earlier patterns of pathdependence, and in the process of arriving at an incremental equilibrium a slow continuous process of change will take place where attention is focused on learning in relation to adaption (Magnusson and Ottossone, 2009). Streeck and Thelen (2005) criticize the punctuated equilibrium model for drawing heavily on exogenous shock explanations for institutional change, but external forces such as economic crises and calamities often are a strong push for rapid transitions. Incremental transitions are regarded as the most common case of change due to gradual conceptual learning processes among actors and/or gaps that arise between initial designs for institutional 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 including China follow their individual path-dependent trajectories for institutional change thus facing their own challenges. Put otherwise, PPP in China is unlikely to mean the same thing as PPP in the countries where it originated, the Anglo Saxon countries, and the early adopters such as Finland or Spain, even though they may draw their ideas from the same global pool of ideas disseminated in international expert networks (Altamirano and de Jong, 2009; Altamirano, 2010). In recent years, PPP as a concept and approach for managing infrastructure projects has been diffused from Britain and Australia to countries as diverse as Chile; Japan; Russia; India and China, often under pressure of growing demand for services and limited public funds. This PPP diffusion can be regarded as 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, whether such transplants prove effective both in terms of legal adoption, actor application and desirability in terms of policy outcomes is to be studied on a case-by-case basis. Nation-specic characteristics as well as exibility, creative and an independent stance in its adoption process play a role here (Jacoby, 2000; Mamadouh et al., 2002). In conclusion, successfulness in applying PPP in Britain, Finland or Chile has no direct and general bearing on the optimality of PPP in other countries whose political and administrative structure, culture, and specic implementation trajectory among the actors is different. The attempt to transplant PPP policies to China in recent decades has led to the emergence of two signicant institutional transitions (the rise of PPP from 1993 onwards, and its subsequent fall about 2007) resulting in two new equilibria. Neither of these equilibria was optimal in the strict economic sense of the term, but both can be seen as meaningful choices made by policy actors given the path-dependent challenges they were facing along the way. In the next two sections an empirical description of these transitions and the new equilibria that followed from them is given, followed by a more in depth interpretation in Section 5. 3. The rise of PPP (19932007) 3.1. Initial conditions and driving forces Until the 1980s, China had a top-down and state-centric approach to transport management in place. The source of transport project nance was mainly the central state budget. Other tasks than nance, including design, construction, operation and management, were assigned to 100% state-owned enterprises (SOEs). This state-centric approach generated a number of starting conditions for the newly evolving equilibrium. First, experience with delivering transport service was limited to what was commonly practiced within a command economy. In other words, there was no experience with contracting out, forming partnerships or alliances, or carrying out competitive tenders for the selection of optimal project developers. Second, the long duration of living in a command economy and lack of effective evaluation of SOEs performance led to accountability, transparency and efciency problems within the public sector. However, a trend of growing demand for transport services and limited infrastructure capacity could already be witnessed and operated as a bottleneck hampering economic development. A strong external driver for the shift from the command-and-control approach to the private sector driven approach was the global trend to apply privatization and liberalization to infrastructures and its apparent success in leading world economies. A strong internal force was Deng Xiaopings Southern Tour in 1992, in which the initial opening-up reforms in China were 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 level through the State Council and spread out around the country, many inefcient SOEs were closed down or privatized; new private enterprises (PEs) entered the transport sector engaging in project construction, nancing, operation and management. The sources for project nance were enlarged by involving private capital and thus the physical network was expanded enormously. A new institutional practice of infrastructure provision emerged centering around government procurement through PPPs. Among them were

R. Mu et al. / Journal of Transport Geography 19 (2011) 794806


Publish bid invitation notification and general project information online Bid Invitation 14 days Collect the qualified bidding proposals Qualification Examination

Accreditate the collected bidding proposals


Allocate detailed tendering documents and project introduction

Organize project field visit Publicity is not passed Not less than 20 days Pre-tendering negotiation meeting for making adaptations in the proposal monitoring Open tendering Discipline-Inspection Commission

Bid Evaluation and Selection

Determine experts, evaluate and select bid


Publicity 30 days Contracting Send notice letter to the winner

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

the Tendering Law; the Contract Law; the Government Procurement Law; and some mode-specic regulations such as special Measures for Railway Construction; and Regulations on Toll Roads. The tendering process for large transport projects in China was mainly adapted from the UKs 13 stages of contractor selection and is given in Fig. 1.1 The entire process consists of three major phases: (closed or open) bid invitation, qualication examination, and bid evaluation/selection. First, the governments at the central and regional levels publish bid invitation notications on the ofcial websites of China Tendering and Government Procurement and Provincial Governments. Connected to this invitation notice, project information is also published, including the project introduction, initial design instructions, technical specications, and qualication requirements on potential bidders. And there are 14 days for interested parties to submit their application and qualication documents. Second, the bidders are accredited by the tendering committee in terms of their qualications as candidates for bid evaluation. This accreditation process is monitored by the DisciplineInspection Commission. The selected candidates are allocated and charged with the production of detailed tendering documents and project specications. And project eld visits are organized for them. After the visits, they have an opportunity to make some reasonable adaptations in their application documents which may include estimated project costs, completion date and technical applications. This process is obviously full of negotiations. Third, the evaluation process begins with randomly selecting experts from the expert-pool who constitute the evaluation committee. The evaluation committee

then compares the bids and determines the winner. The selection criteria may differ for different projects, but normally include estimated project costs, project quality level, the technical standards to be applied and the proposed nancing methods. Normally, they are all considered to determine the winner but subject to different priorities for different projects. The evaluation process is also monitored by the Discipline-Inspection Commission. Once the bidder is selected, participants are notied and the decision is put online to make it public (30 days). The purpose of making it public is to give competitors and the wider public the opportunity to put forward objections against the intended course of action. If this process does not lead to any complications, the contract is signed between the government 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 a risk-return basis (Ye, 2009). There are various options for each aspect, so their combinations will lead to different nancing structures of PPP projects. The optimization of capital structure mainly concerns nancial sources, ratios of different types of funds and the timeframe for fund usage. There are three general categories of funds used in nancing transport infrastructures in China: public funds (30%), debt (60%), and equity (10%).2 In the 30% public funds, around 10% is from the Central Government (the Ministry of Finance) and the other 20% comes from regional governments (Provincial Departments of Finance). In addition, the 60% debt is mainly from state-

1 This gure is abstracted from the Chinese tendering regulations and instructions at

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


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

owned banks. And the borrowers could be either the public sector (the government) or the private sector (the private constructor and/or operator). The 10% equity is usually fully private capital from private partners. In some special cases, there are also funds from foreign direct investment, such as loans from the World Bank and Asian Development Bank. Moreover, the capital structure also includes the time factor: when will the money come in. Normally, money comes in along with the development of the project lifecycle. Sometimes, PPP projects are rst nanced with construction funds, in which the interest rate of loans is higher than the loans for operation. After the project is completed, operation funds are nanced. Considering the fact that transport projects are normally large in size and capital requirement, and usually exposed to various risks, a single investor is often unable to fund the project or unwilling to take all the risks alone. Consequently, transport projects are usually jointly nanced by a consortium of interested parties. In China, these parties could be both state-owned enterprises and private enterprises. These enterprises, together with governmental agencies, therefore, form a new organization to develop the PPP project. In the Chinese transport sector, the encountered organizational structures include incorporated companies and joint ventures. The incorporated company is an independent legal entity with limited liability, constraining investors from directly controlling project cash ows, but providing them with a higher degree of insulation from nancial risks and liabilities of the project. In contrast, joint ventures allow investors to manage exibly and set rules within the agreement, but they do not provide any limited liabilities of a project. Among the two, incorporated companies are currently the most popular ones in the transport sector, acting as a project owner.3 In some more complicated cases such as the subway projects in Beijing that were designed especially for the 2008 Olympic Games, two or more organizational structures were used in combination: one joint venture for construction, one incor3 This information is obtained from interviews with government ofcials from Transport Research Center, the Ministry of Communications, and Shenyang Development and Reform Commission, Shenyang Municipal Peoples Government.

porated company for operation and management, and one more for the purpose of leasing equipment. The formulation of a contractual structure pertains to the selection of the PPP option, according to which a bundle of rights, responsibilities and risks will be transferred from the public sector to the private sector. Traditionally, Chinese governments often used DB (Design-Build) and DBB (Design-Bid-Build), and operated the infrastructures by themselves. Before the advent of PPP, major responsibilities such as initial design, operation, maintenance, management and ownership remained with the government, while only a part of the design and construction tasks were handed over to 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 an incorporate company, then greater risks will be assumed by banks. Banks thus need to take measures to secure their debt. A common view on debt security is that the banks can take security over the project as an asset in order to sell/auction it if its loan was in default or if the project company went bankrupt. That is to say, the project 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. Therefore, the banks always ask the borrowers (both state-owned enterprises 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 has been occupied by ve major state-owned banks: the Agricultural Bank; the Commercial Bank; the Bank of Communications; the Construction Bank; and the Bank of China. When they provide loans to borrowers for a new transport project, they will initially look at the protability of the project for the repayment and reliability of the contractor in terms of past creditworthiness. Apart from these considerations, the borrowers creditworthiness will be enhanced if governments can act as their guarantors.4

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

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The complete organizational structure for a typical PPP applied to transport infrastructure projects in China has been nicely summarized by Sudong Yes framework (2009) below in Fig. 2. 3.3. Weaknesses appearing in the informal practice The setting described above enables private actors to participate in some of the transport service tasks. However, interviews with government ofcials and experts revealed that within this equilibrium the Chinese PPPs actually did not provide a good record: strategic behavior was often found in the project life-cycle as 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 problems in construction and making illegal excessive prots from users during operations were found more than once; and malpractice on the side 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 behavior also emerged around (re)negotiation processes with bidders having the intention to extend the concession period, asking for supplementary investments, or raising fares. The China Audit Ofce (2008) has concluded that jerry-build problems are usually caused through subcontracting with cheaper sub-constructors which are more likely to revert to strategic behavior. Among a project sample in 34 provinces, 36% projects were jerry-built for a total amount of 9.035 billion Yuan. For instance, the Xinjiang Road-Harbour Construction Enterprise won the contract for an expressway from Bengbu to Guangming. It signed sub-contracting contracts with 36 small construction rms that rarely qualied for their jobs and thus economized 19.46 million Yuan on the actual project costs (down from 84.97 to 65.51 million Yuan. Of course, the subcontractors used fewer and lower-quality materials. Even more dramatically, in Chongqing, the Chang-Wan expressway (from Changshou to Wanzhou) was transferred to subsubsubconstructors, thus reducing the amount available for project construction by 69% because each of the players was taking a cut, adding no real value, and passing the real work onto others. The China Audit Ofce further reveals many examples of strategic behavior during project operation and maintenance. It writes that the most serious problem in China is the increase in the number of tollbooths. The investigation was conducted in 18 provinces, and 16 of them turned out to face these issues. The gures indicate that in these 16 provinces, 158 illegal tollbooths were detected (that is, without license permits) and until late 2005 the incurred user fees from them amounted to 14.9 billion Yuan. It was estimated that if these illegal tollbooths had not been cancelled, operators would have charged 19.5 billion Yuan extra until the expiry dates of their operating rights. And for some expressways the charging periods of which have not yet expired, still 66 illegal tollbooths were still operating at the time of writing the report (China Audit Ofce, 2008). Other empirical evidence is found in subway procurement in large Chinese metropolitans (de Jong et al., 2010). Taking the rst subway line in Chongqing as an example, this project was initially contracted out by the Chongqing government on a PPP basis in 1992 with a Hong Kong construction rm without competitive tendering due to the absenceof enough qualied bidders. Five years later in 1997 the PPP contract was terminated because of the constructors capital structure problem and there was not sufcient legal ground for negotiations. Therefore, the private actor withdrew and left the project unnished. After the Chongqing government took over the project, it took it 10 years to nd a new developer. In 2007 a SOE, the Chongqing Metro Group, took the responsibility for construction, a large part of the nancing, and operation. And so far, this new partnership appears quite success-

ful. Similarly, subway projects in Beijing and Harbin ran into trouble when initially targeted as PPPs, but when transformed into PUPs (PublicPublic Partnerships), they proved far more stable and could be completed more quickly. This is not to say that all PPPs suffered from such adversity. In fact, the same article gives a few examples of successful projects too, such as the Beijing Olympic Lateral and the Beijing International Airports Terminal 3, but these were often high-prole ones and none of the involved actors could therefore afford to let things go wrong. The reason is that the political and economic attentions inuence positively project implementation and projects that are of signicant emphasis from the central government and/or are of international focuses are easier to success. However, the seeds were sown for the rising dissatisfaction with the new institutional equilibrium. 3.4. Strong and weak and governing principles in the Chinese PPP practice The post-1993 era provided private actors with an enlarged market. Normally private actors utilize their professional skills, allowing to sell these at a prot. Consequently, it provides private actors with more opportunities to make a prot. They regard PPP projects as low-risk investments because they are often backed by government agreements, providing a long term yield while most risks are sub-contracted. In contrast to nance projects in other areas, private actors are exposed to market risks only to a limited extent (e.g. demand for transport which continues to rise dramatically). On the public side, it had also reduced the risks borne by the government since most technological and management risks have been transferred to the private sector. Furthermore, it had resolved the governments problem of limited resources through the call on users to pay for the facility rather than the government (Hodge and Greve, 2007). In other words, PPP is simply a buy now and pay later scheme, and does not inherently reduce the call on the government budget. It can only do this by either superior efciency (so that long term repayments are less than they might otherwise have been) or through the more usual attraction for most governments that this PPP arrangements for facilities like toll roads require users to pay for the facility directly rather than governments to fund the infrastructure. However, on balance, the rise of PPP in China seems to have generated higher transaction costs. The costs of organizing tendering, evaluating and selecting bids have proven quite high. In addition, in the contract period, costs have increased due to extensive monitoring and the search for adequate incentives to prevent or mitigate opportunism. Moreover, its weakness also lies in the risk of private contractors going bankrupt and the government needing to take over the unnished project and having to nd new project developer, which both pushes up project costs and hampers the continuity of the project. Mu (2008) made a detailed study of these adversities and perversities and found various forms of strategic behavior and formulated recommendations to mitigate their negative effects. For instance, to prevent bidders from colluding in the bidding process, she proposed a disclosure system and extremely heavy penalties for the perpetrators. Such a disclosure-penalty system has in reality even been set up, the Administration Ordinance on Opportunistic Bidding, and made effective from January 1st, 2009 onwards. Even the most challenging problem here, which is to prove collusions, has also been stipulated in this Administration Ordinance. It stipulates that the bidders whose strategic behavior has been disclosed should be transferred to provincial or national judiciary departments and if they are condemned for disturbing the order of tendering procedures and thus inuence the tendering results, the disclosure-penalty system will be started up. Nevertheless, the effectiveness of these measures has been insufcient to


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stem the changing tide away from PPP. Other proposals she formulated such as opening the bidding process to a broad range of bidders and to larger territories to avoid collusive communication among contenders, or to compare the bidding price with the bidders proven capacities were rarely tried or never implemented. 4. The fall of PPP (20072010) 4.1. Initial conditions and driving forces The seeds for the fall of PPPs popularity were largely sown in the previous phase when a host of projects in which private contractors were unable to deliver a nal product at reasonable conditions and state-owned enterprises were found to replace them. Although the basic institutional conditions had been established to distinguish the responsibilities and risks of various involved parties and basic legislation for tenders, contract formulation and contract enforcement had been put in place, the net result was insufcient to preclude instability, opportunism and high transaction costs. The failure to enact other key pieces of legislation, such as transparency law and effective enforcement mechanisms did little to improve the situation. The success that a number of signicant and highly visible projects, such as the Beijing Olympic lateral and Beijings International Airports Terminal 3 had engendered was insufcient to turn the negative image around. Finally, the Global Economic Crisis in 2008 caused the bankruptcy of many private construction companies.5 Twenty percent of the private enterprises in Beijing closed down; 90% of small and medium sized private enterprises in Guangdong province have nancial problems and are close to bankruptcy (Jiang, 2009). Especially for the private construction and operation enterprises, problems have emerged concerning about construction quality and safety because staff are less motivated due to the income reduction (Zhao, 2009). Statistics show that during the period of the crisis the number of serious accidents has been increased by 20.7% (Yan, 2009). As a consequence, a lot of PPP contracts were terminated halfway,6 leading to immediate turmoil. Therefore, since about 2007, we observe a shift away from PPP adoption towards the use of SOEs7 to deliver transport infrastructure. In other words, there is a movement away from PPP and towards PUP. This movement can be interpreted both narrowly and broadly. In a narrow sense, it means that the market share of state-owned economy in a certain industry is increasing, while the market share of privately-owned economy in the same industry is diminishing. However, broadly speaking, it also refers to the situation that the macro-economic control is more intensied through enacting more strict regulations on market access. In the transport sector, although there is no an exact measured sample which can indicate the denite overall movement from PPP to PUP, more strict regulations on the market access to large transport projects indeed emerge. For instance, the demands for the qualications (e.g. certificated technical skills and experiences) over the enterprises are increased, which is unfavorable for private enterprises because most of them do not have those qualications. In addition, it newly regulates that the contractors need to pay for the project guarantee deposit in advance of project construction, 5% of the total project cost, which is also adverse for private enterprises because few of them can afford this fee.
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. and government ofcials from Shenyang Municipal Peoples Government. 7 Although the overall industry pattern in China cannot be called state-owned economy dominating, the transition of PPP adoption in the transport sector of China from 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 but in Chinese:

4.2. A formal picture of the institutional practice The policies enacted by the Chinese national government in the wake of the 2008 nancial crisis target the promotion of economic development through state investments in large transport infrastructures. The purpose of the Chinese Economic Promotion Program 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 various public policy areas, of which no less than 1.5 trillion Yuan has been allocated to transport.8 In addition, several market entry regulations have been established. In future, to avoid situations in which the government is forced to make additional expenditure on projects which are terminated halfway or quality of which is not in line with promised standards, contractors will have to pay 5% of the total project investment up front as an advance payment. Besides, contractor qualications (i.e. technical strength; number of experts; proven expertise; creditworthiness; past experience) are emphasized more than before and will play a decisive role in winning contracts. These adjustments make market entry more difcult and constrain the participation in large transport projects for some small and medium sized private enterprises.9 In contrast, this new policy is favored by SOEs, since they have the critical mass to match requirements in terms of capital and expertise. China Entrepreneur, a professional organization dedicated to fostering the growth of entrepreneurship in China, launched a survey concerning the degrees of participation of both state-owned and private enterprises in the transport sector, showing that recent concessions for large transport projects were nearly exclusively granted to SOEs with bank loans backed up with governmental guarantees. Borrowing money from banks has become hard for private players even if they are creditworthy; most tenders were held in closed circles among SOE candidates (Liao and Sohmen, 2001; China Entrepreneur, 2009). As a result, a new nancing pattern (Fig. 3)10 has emerged which differs markedly from the one shown in Fig. 2. The project is normally divided into two parts: operation/management and civil work/construction. About 70% of the total investment consists of civil work such as track laying, tunnel and station construction, including land acquisition and relocation of residents or farmland. About 30% of the total investment is spent on rolling stock, trafc control system and power supply facilities. The two parts are granted by governments to two separate project companies largely on a basis of invited tendering among SOE candidates. The tendering procedures are largely the same as the ones illustrated in Fig. 1. The main sources of project nancing are from the Central Ministry of Finance (i.e. public funds) and banks (i.e. loans). Often, loan agreements are signed between banks and state-owned actors who are often provided with governmental guarantees for loan repayment and/or the right of land use as an example of these guarantees. In addition, state-owned constructors very often subcontract with smaller constructors. And stateowned operators need to sign lease agreements with facility suppliers. We can take the Beijing Metro Line 10 as an example. This metro line is 32.9 km long, running in a circle that covers a large area of Beijing city centre, with 28 stations along its way.11 Its total investment is about 3 billion Yuan, and its development was
8 This gure is collected from special reports of the Chinese 4 trillion investment plan. Available online: 9 This information is obtained from interviews with road infrastructure designers from Liaoning Road Design and Planning Institute. 10 This gure is abstracted from interviews with government ofcials from the Ministry of Communications, and the Ministry of Housing and UrbanRural Development. 11 This information is collected from CCTV at: 20071212/104176.shtml.

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

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

awarded to state-owned enterprises. A part of this project has been opened to trafc in 2008 and the remaining part is now under construction and will be in operation in 2013.12 Its nancing structure is shown in Fig. 4.13 Two SOEs (BII and BMCC) were selected through invited tendering by the Central Government and the Beijing Local Government, the rst as operator and manager, and the second one as constructor. With governmental guarantees, the BII signed a debt agreement with Taiping Insurance Co. Ltd. (Taiping) which is also a SOE, providing the entire investment through debt for BII to nance the project. This project is then the rst example in China where an insurance company as a consortium is used instead of a bank. BMCC made a loan agreement with a governmental guarantee with banks to make up for the 5% project quality deposit. BII and BMCC have a turnkey relationship, in which BII will periodically pay BMCC for construction costs after examinations on project quality and timetable. Once the project is nished, it is transferred to BII for operation. During operation, BII pays back the debt with interest to Taiping. This can be regarded as a successful project because construction costs, schedule, project quality and service quality have re-

ceived positive appraisals to date, except for the landslip accident in construction in 2007 due to inadequate geological surveys by BMCC.14 4.3. Weaknesses appearing in the informal practice? Do large transport projects without private involvement help to increase project quality and reliability and thus protect the public better than PPP after all? Stability and reliability have denitely been enhanced, but the answer to this question is not straightforward, because in China the main shortcoming of using SOEs is the lack of mechanisms for enforcing accountability, namely the loosely dened appraisal methods, the absence of clear objectives, weak performance measurement and often the absence of rewards and penalties for good or poor performance (Holz, 2002a; Huang et al., 2010; Cauley et al., 1999; Bajona and Chu, 2010; Tang et al., 1999). In addition, another problem of the Chinese SOEs is overstafng, which will seriously affect the protability of projects and thus efciency (Yin, 2001; Holz, 2002b). Overstafng is a prevalent phenomenon in Chinese SOEs because the governments often value output targets higher than efciency and protability.
14 The evaluation on the success or failure of Beijing Metro Line 10 is based on the information obtained from China Metro:

This information is collected from Xinhua News at: The nancing structure for Beijing Metro Line 10 is abstracted from the information obtained from China International Bidding:



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Table 1 An overview of the institutional equilibria of PPP adoption in China. Historical period Actors Prior to 1993 traditional state-centered stage 1. Government organizations 2. Traditional state-owned enterprises (SOEs) (100% state-owned) 3. Township and village enterprises (TVEs) (not state-owned but collectively-owned under local governments) 1.Governments make the plan, design the project, allocate resources, and operate the project From 1993 to 2007 PPP stage 1. Government organizations 2. Commercialized state-owned enterprises (at least 51% state-owned) 3. Private enterprises (PEs) (evolved from small scale activities in retail and service business known as getihu, de-collectivized TVEs, and privatized SOEs) 1. Governments make a design for the project, and conduct feasibility studies; governments also organize tenders, and evaluate and select bids 2. Both SOEs and PEs can take part in design, construction, operation and maintenance of the project After 2007 PUP stage 1. Government organizations 2. Upgraded state-owned enterprises (at least 51% state-owned) 3. Private enterprises (PEs)

Actor roles

2. SOEs investigate geographical conditions and construct the project 3. TVEs play a role in maintaining the project and governments pay them for the maintenance work Institutional environment 1.Socialist command economy 2. Tasks and resources in transport service are directly allocated to SOEs

1. Governments make a design for a project, and conduct feasibility studies; governments also organize tenders, and evaluate and select bids; sometimes they directly assign projects to certain SOEs 2. SOEs design, build and operate the project 3. PEs are sometimes involved as subcontractors

1. Socialist market economy with Chinese characteristics 2.Reform policies on privatization (loosening restrictions on market entry), commercialization, and decentralization 3. Tasks and resources in transport service are allocated to the winner of open tenders through contracting 1. Central and local government funds 2. Debt by governments 3. Debt by SOEs and PEs 4. Equity by SOEs and PEs

1. Socialist market economy with Chinese characteristics 2. Reform policies on stricter market entry and nancial requirements 3. Tasks and resources in transport service are allocated to the winner of closed or invited tenders among SOEs through contracting 1. Central and local government funds 2. Debt by SOEs from banks or stateowned insurance companies

Financial resources

1. Traditional central government funds


1. No experience with contracting or partnerships 2. Need to expand the physical network

1. Little experience with contracting and partnership 2. Private sector is increasingly dominating the economic output of the transport sector 3. Strategic behavior is evoked in the service provision process

1. SOEs act as a public sector and play a role in protecting transport service delivery 2. Public sector dominates the economic output of the transport sector 3. Accountability and efciency issues appear to be problematic for SOEs

3. Potential inadequacy of public funds

The ignorance and neglect of production efciency encourages SOEs to employ as many resources, including human resources, as possible to fulll the target. Therefore, for many large transport projects in China, one could still rightly dispute whether SOEs really do the best possible job. For China, placing projects on a SOE guidance during the nancial crisis can be regarded as a strategy to safeguard the delivery of transport service, but it may not hold out as a national strategy to sustain economic growth in the long term.15 Once economic recovery becomes evident and private entrepreneurs grow stronger, bigger, stable and more reliable, their involvement may become increasingly attractive again. It is far from inconceivable that once policies are put in place that remedy the still existing weaknesses in the PPP legislation and privileges SOE still have over others have been removed, the current equilibrium may prove to be another sub-optimal ad short-lived one.

4.4. Strong and weak and governing principles in the Chinese PUP practice PublicPrivate Partnerships cannot often promote project continuity and quality given the fact that there is insufcient prior knowledge and experience with private participation in public infrastructures. Also, it is still uncertain whether PPP in China works in terms of value-for-money because of higher transaction costs. In such circumstances, SOEs prove more reliable for governments because they cannot go bankrupt or simply terminate contracts (Heald, 2003). However, as mentioned in Section 4.3, the downside of setting up more PUPs is the emergence of problematic accountability and efciency. Private sector partners are generally more motivated to make optimal use of the facilities/assets to maximize return on investment, certainly in China. A possible further institutional shift in China may benet from advice given by Flyvbjerg (2003) and the OECD (2003). The rst advice is to introduce a transparency requirement, which means that all documents and other information prepared by the government and its stateowned actors should be made available to the public. A transparency law needs to be established to legally formulate formal procedures of communication between the government and the public and early participation of the public and special expert group such as environmental, technical and economic stakeholders. The

15 This is the opinion held by many Chinese professors in the eld of Institutional economics who argue that sustaining long-term economic growth in China should be achieved by promoting competition in private sector and shifting the investment responsibility to private capital and multiple nancing methods, while state investing in 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 obtained through interviews.

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second advice is the use of a performance specication approach, which means that all requirements of a project (e.g. economic performance; environmental sustainability; and safety performance) need to be identied before approving the project. Both instruments should then not be limited to the management of in-house projects, but especially become important for projects in which the public as well as the private sector are involved. By means of summary, Table 1 gives an overview of the dominant features in the three phases or institutional equilibria.

5. Discussions and conclusions In the previous Sections 3 and 4, we have described the results of two institutional equilibria in recent decades (19932010) resulting in two new equilibria in the way transport infrastructures are funded and managed in China. In this section these equilibria and their transitions will be interpreted in the light of evolutionary theory. Prior to these equilibria, a long-lasting equilibrium was in place characterized by a top-down/state-centric approach which was the initial condition for the evolutionary path. China had a command economy where the public sector produced projects in-house and thus little experience and regulations were available regarding contracting and establishing partnerships. In spite of institutional inertia and low speed of infrastructure construction, trafc demand and the need for expanding the physical network continued to grow. The viability of this equilibrium therefore tended to become increasingly problematical. This historical equilibrium really began to break down around 1993 due to the global input of ideas on the desirability of PPP and the wider domestic trend to open up the economy to private enterprise. These external forces changed the path of transport infrastructure management in China towards private sector solutions and induced a new institutional equilibrium, in which a series of new bodies of legislation was enacted to promote private participation in nancing and delivering transport services. As such this transition was the cumulative result of

both internal and external factors coming together, top-down initiatives to introduce new practices inspired by international examples, and local and regional initiatives aimed at the realization of concrete transportation projects. However, this new equilibrium that allowed for new practices of private involvement was not to last for more than about 14 years. Its attractiveness was gradually weakened by multiple occurrences of strategic behavior from both private and public players (such as collusive behaviors in tendering, jerry build and lack of maintenance on the private side, and poor competitive arrangements, the building of alternative cheaper toll roads on the public side) which necessitated high transaction costs to monitor malpractices, address renegotiations, rescue projects the contracts of which were terminated and install new more and productive incentives along the way. The advent of the 2008 nancial crisis led to the bankruptcy of many PEs involved in PPP projects. As a consequence, the government took over the highway projects by re-granting them to SOEs and intentionally developed new projects within SOEs. This rearrangement implied a severe blow to the viability of PPPs, because it was accompanied by new regulations on much stricter market entry requirements and higher levels of public investment. As result, PublicPublic Partnerships (PUPs) large replaced PublicPrivate Partnerships (PPPs). Again the transition was a result of an interplay of internal and external developments, bottom up initiatives and top-down policies. A gradual build-up of dissatisfaction and local responses to problems 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 investments obsolete), resulting in a new practice becoming dominant and being sanctioned and supported by new formal policies and regulatory changes. Actually, the direction of these transitions may be interpreted as an attempt to transplant an institutional practice into the Chinese context, followed by an imminent response from the old system, resulting in a new equilibrium somewhere in between the rst and second equilibrium. The introduction of PPP could not result in a stable situation given its mismatch with the indigenous

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


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circumstances (e.g. inadequate institutional framework, absence of market conditions and strong private parties, unfamiliarity with new roles requirements and a lack of incentives to keep actors to these). What is called strategic behavior might well refer to behavior repertoires that stem from the older equilibrium. In this light the transition to the third equilibrium may be viewed as a fall back to older well known and still present practices: governments taking the lead, preferring invitations to participate above competitive tendering, and involving SOEs rather then PEs. Although our analysis was not designed to reveal this and therefore did not provide any data on this, perhaps the transitions may even be perceived as power games, in which for instance proponents of old practices waited during the new consensus of the second equilibrium for failure and new opportunities. Perhaps they actively pushed in that direction. Anyway, the transition that did occur did not result in a return to the original equilibrium, given the dynamics at the various system levels that had occurred since then (e.g. changes in the positions of SOEs, legislative developments and so on), but in a process in which elements of the second equilibrium were merged with elements of the inheritance of the former equilibrium, resulting in a new mixture, probably more adapted to the unique Chinese environment. Although this newly evolved equilibrium has largely stabilized the situation, enabled the completion of several transport infrastructure projects and the starting up of new ones, it still does not provide an adequate response to the low efciency of most state-owned enterprises, the advantages they enjoy over private players in terms of personal networks and borrowing opportunities and government guarantees. In this sense, the most recent institutional equilibrium is a logical response to the problems that had emerged, but not an optimal one from an economic viewpoint. Fig. 5 gives a graphical overview of these transitions. At the same time suggesting solutions as the introduction of more transparency and more competition to improve the current practice, does not seem to t the above analyses. Perhaps these measures may be appropriate in the future, when the drawbacks of the new equilibrium will become apparent, but currently they can be viewed as just another institutional transplant, vulnerable to the same path-dependent response as the introduction of PPPs and untimely given the current disappointment with the former attempts at institutional transplantation. Given the fact that none of the equilibria is optimal in a narrow economic efciency sense, it appears they all carry within them the roots of their own demise. The question is not whether but when these internal pressures within the institutional equilibrium become unbearable for players to accept (for instance leading to changes in their preferences) and/or are strengthened by outside pressures in such a way that breakdown is imminent and reform is bound to follow. Theoretically speaking, optimal equilibria are conceivable (OECD and International Transport Forum, 2008), but given the restraints on economically efcient performance as they are left each time from previous equilibria, it becomes understandable why they never seem to emerge. Apparently, each national institutional system, China in this case, evolves in path-dependent ways towards the equilibria that suit its own spatial and temporal context and can best be understood as the result from previous possibilities and limitations that leave their mark on subsequent developments. Outsiders, such as international organizations, orthodox economic theorists or independent observers such as us, may promote seeking objective optima that include higher transparency, level playing elds in the bidding process, a reduction in the role of SOEs, more equality in the opportunities for players to borrow at the capital market, the disappearance of informal networks and more attention paid to feasibility studies, economic and environmental

appraisal and risk analysis. However, these considerations will only matter in a possible future transition towards yet another institutional equilibrium if actors within the Chinese system adopt these ideas and are willing to take them further in the evolution of their own transport infrastructure management system. Some aspects that prevail now may be deeply ingrained in the Chinese setting 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 in some cases and therefore not to be sacriced, or alternatively merged or combined with inuence from the outside world. Sketching an objective optimum that players should strive for remains a theoretical option the merits of which cannot be determined in concrete institutional reality. The institutional reality now is that private players have at least seen their role reduced to that of subcontractor or subsubcontractor within conditions decided by public clients that order works and state-owned enterprises that act as main contractors. Whether they will be able to use this role to grow nancially stronger, become technologically more advanced, acquire organizational prociency, act in more honest and reliable ways and/or merge with foreign construction rms or state-owned enterprises to reclaim an important position in the world of transport infrastructure management in China, only the future can tell. If so, they may tip the institutional balance at some point and shift it to yet another new equilibrium. Appendix A Classication of Chinese private enterprises (Sources: Asia Development Bank, 2002; All-China Federation of Industry & Commerce: 1. Siying qiye are dened as for-prot organizations owned by individuals (natural persons) and employ more than eight people. Siying qiye can take many forms Proprietorship: wholly individually owned private enterpresises registered under the Provisional Regulations for Private Enterprises issued by the State Administration for Industry and Commerce in 2000 Partnership: private enterprises owned by natural persons sharing unlimited liability for the enterprise and registered under the Law Governing Enterprises under Partnership and Methods for Registration by Partnership Private limited liabilities companies and private shareholding corporations: limited liability companies registered under the Company Law and Provisional Regulations for Private Enterprises 2. Shareholding cooperatives are enterprises that are collectively-owned by employees of the enterprises. These enterprises are in fact at an intermediate stage, transiting from the formerly collectively-enterprises into privatelyowned enterprises. Although they are not legally private enterprises, they are self-governed and solely responsible for salaries and dividend payouts. So they can be treated as private enterprises 3. Shareholding Corporations are enterprises that are publicly listed on the stock exchange. Theoretically, they should be considered one form of private ownership as long as the state is not a majority shareholder 4. Foreign-funded enterprises are those that have foreign investors (including Hong Kong, Macau and Taipei) or operate with foreign partners. Many of them should be considered part of the private sector in China since foreign investors often hold the control rights, especially for the wholly 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 rms Cooperatives with domestic rms Shareholding corporations Wholly foreign-funded enterprises

Notes 1. Getihu: Individual business that denotes a single industrial and commercial proprietor. These individual businesses cannot employ more than eight people and are commonly referred to as individual-employed or self-employed. Although Getihu businesses are owned by private individuals or households, they are not legally considered enterprises and therefore they are 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 stateowned and then privately-owned by selling the enterprises to natural persons. And they can take any forms of the private ownership above 3. The traditional state-owned and the commercialized stateowned enterprises are all categorized into the state-owned ownership 4. Township and village enterprises (TVEs) are collectively-owned enterprises which fueled rapid industrial growth in rural China and absorbed millions of surplus farm workers

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