PPP application in infrastructure development in China: Institutional analysis and implications

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Highlights

  • Guided by a theoretical framework, the Chinese institutions for PPP are analyzed.

  • PPP application was accompanied by changes in the institutions in China.

  • Piecemeal policies attracted PPP investors but could not guarantee sustainability.

  • The institutional framework for PPP in China, though still evolving, is far mature.

  • Suggestions are made to governments and investors for PPP implementation.

Abstract

Public–private partnership (PPP) has been applied more and more widely for the past two decades. Questions still remain as to how to cultivate a facilitating institutional environment for developing PPP projects success. This paper examines such a question, focusing on the institutional analysis of the Chinese context. A theoretical framework of PPP governance is first developed, identifying the logics and interactions of the differentiating levels in the PPP system. Then, the institutional framework of China is presented with regard to its cultural, legal, and administrative characteristics, as the embeddedness of PPP development. Thereafter, the evolution of Chinese institutions with particular regard to PPP is analyzed. Findings show that changes in the institutional arrangements have to go in tandem with introduction of PPP, and performance of PPP is closely related with its institutional environment. Suggestions are put forward to enhance China’s institutional arrangements for healthy PPP promotion, and the implications for governments and investors in other countries are described.

Introduction

Infrastructure is considered to be “life supporting services” (Noel and Brzeski, 2005) and has long been under the monopoly of government. However, insufficient infrastructure has been a problem for almost all countries; this problem is exacerbated by the lack of funds available in the public sectors (Matos-Castaño et al., 2014, Qiu and Wang, 2011). Further, the monopoly of government over infrastructure has been seen as a cause of low efficiency in the development and operation of infrastructure facilities. Public–private partnership (PPP), as an innovation of project delivery alternatives, has been widely applied in many countries in the past two decades, attempting to resolve the problems (Chan et al., 2011); now it is, arguably, the most significant, worldwide trend in the public sector (Garvin and Bosso, 2008, Koch and Buser, 2006), and good governance is an important factor for the success of PPP projects in terms of developing sound economic policy and administrating projects (Li et al., 2005).

Over the past two decades, the Chinese government has been embarking on an ambitious programme of large investments on infrastructure development. To facilitate urbanization in China, the funds required for urban infrastructure development during the first 20 years of the twenty-first century are expected to be around 3500–5000 billion RMB (Wu, 2007). Funds from government alone are unlikely to be available to finance such large investments and so, reforms need to be undertaken by the Chinese government regarding the investment and financing of infrastructure projects. PPP was thus introduced in China to alleviate this problem (Chan et al., 2009, Feng and Luo, 1999, Ge and Zhang, 2009, He, 2001, Wang, 2006). In fact, PPP, in its modern form, was applied in China in the late 1980s, first in industrial development projects, and later other sectors, particularly infrastructure. According to the World Bank (2013),1 the total number of infrastructure projects with private participation from 1990 to 2012 reached 1064 in China, ranking first worldwide, with a total investment commitment being 119,330 million US dollars, ranking fourth worldwide, after Brazil, India and Russian Federation.

China is characterized by unique political, economic and cultural features (Buderi and Huang, 2006, Mu et al., 2011, Tan and Bian, 2013). Before the 1980s, China adopted a pure socialist economy, highly centralized and planned. Infrastructure investment and development was the sole responsibility of the government. With the introduction of PPP in its infrastructure development, and considering the complexity of such economic transactional activities, the PPP practice in China has become a focus of study by scholars in recent years, particularly with regard to PPP risks (e.g. Cheung and Chan, 2011, Ke et al., 2010, Song et al., 2013, Wang et al., 1999),potential problems(e.g. Chan et al., 2010a), critical success factors (e.g. Chan et al., 2010b, Zhao et al., 2010) and case studies intending to draw lessons and experience from the implementation of real PPP projects (e.g., Chen, 2009, Chen and Hubbard, 2012). These studies offer us a better understanding of the current status, problems and constraints encountered in PPP projects in China. They also suggest or imply that sound institutions are very important for PPP success and that there is a need for China to create a PPP-enabling institutional environment (Wang et al., 2012). However, our literature review shows that there still exists a lack of systematic institutional analysis, especially from the dynamic evolution perspective, to address the following question: how have China’s institutional arrangements evolved to accommodate the new project financing and delivery approach in infrastructure development?

This paper, with a view to contributing new knowledge on PPP administration, conducts an in-depth analysis from an institutional perspective. It is structured as follows: Section 1 is introduction. Section 2 presents a theoretical framework for guiding the analysis by taking the perspective of the new institutional economics. Section 3 provides an in-depth analysis of the evolution and changes in the institutional arrangements by investigating the development trajectory of PPP in infrastructure in China. Section 4 concludes with the findings identified from the analysis and presents topics for further studies with regard to governance issues of PPP.

Section snippets

Conceptual issues of PPP

The literature offers many definitions of PPP and debates over how the term should be defined (Ball, 2011); it is even suggested that trying to define such a term is of little use (Hall et al., 2003). This phenomenon can be explained, at least partially, by the fact that PPP is a vague construct that is used by the international community. The term PPP is of a very general nature, with various origins from different countries, regions, and organizations, for example, private finance initiative

The general institutional framework in China

Institutions are the norms and rules of a society and affect the performance of economies by reducing uncertainty in guiding human interactions and structuring incentives in such exchange (North, 1990). These institutional rules are rooted in and reflected by the cultural system (informal institutions), and the legal and administrative systems (formal institutions).

Conclusions and suggestions

This paper develops a theoretical framework for PPP development, followed by an intuitional analysis of PPP governance within the Chinese context. Findings from the analysis indicate that the introduction of PPP, as a new transaction approach in infrastructure, proceeded in tandem with changes of the institutional arrangements, and performance of PPP models is closely related to its institutional environment, formal and informal. Piece-meal policies and documents issued by the Chinese

Conflict of interest statement

The authors declare that there are no conflict of interest.

Acknowledgement

We would like to thank NSFC for its financial support for this research (Grants No. 71172149 and 71231006). We are also grateful to the three anonymous reviewers for their critical but constructive comments. Thanks also go to Professor Richard Fellows, Loughborough University, for his proof-reading of the manuscript and constructive comments.

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