Shou qing wang

PPP Conference 2003

PPP Practices & Research in China中国的 PPP实践与研究

Prof. Dr. ShouQing WANG (王守清 )Dept of Constr Mgmt, Tsinghua University, Beijing, China

北京清华大学土木水利学院建设管理系

Westleigh Conference Centre, Preston, UKMarch 18-20, 2003

Outline

• My brief bio and affiliation

• Economic growth and infrastructure development

in China

• PPP practices in China and challenges faced

• PPP research in China

• My recent research on “Equitable Risk Allocation

for PPP Projects in China”

My Brief Bio and Affiliation

• Brief Bio– Prof, Dept of Constr Mgmt, School of Civil Eng’g, Tsinghua University– Research mainly on PPP since 1996 and published 40+ English

journal papers on PPP and 100+ Chinese journal papers on PPP– Lectured off-campus 1000+ times on PPP in China– Chairman, National Network of 161 Universities offering M.Eng.(PM)

• Affiliation– Tsinghua University: Top 1 in China (cradle of engineers & national

leaders – Presidents Hu J.T. & Xi J.P., Premier Zhu R.J. etc)– School of Civil Eng’g: 1 of the 4 oldest majors in Tsinghua– Dept of Constr Mgmt: Top 1 in China (research funds, publications,

students quality, int’l programs/activities, etc)• Tsinghua Summer School for Int’l Constr (since 2007)• Innovation Competition on Constr Eng’g & Mgmt (since 2007)• GloNIC (Global Network for Int’l Constr) (since 2009)• FT English M.Eng. Program on Int’l Constr & Proj Mgmt (since 2012)

Tsinghua Summer School for International Construction



Construction Engineering and Management

Innovation Competition

Construction Engineering and Management Innovation Competition

Global Network for International Construction

Yu Kuan Chair Professors Group

Roger Flanagan (UK) George Ofori (S’pore)

Geoffrey Q.P. Shen (HK) Markarand Hastak (US) Chimay Anumba (US)

M.Eng. in Int’l Constr & Proj Mgmt

China: the Biggest Construction Site

• Land area: 9,600,000 km2 • Population: 1,370,536,875 (6th census in 2010)• Administration: 23 provinces, 5 autonomous

regions, 4 municipalities, 14 special cities (under central & local), and 646 cities (under provincial government)

• Social system: socialist ideology, socialist politics and socialist economy

• Economy: public (state/collective) + private (local/foreign); planned socialist market

• Economy growth: ≈10% in last 3 decades

Private Investments in Infrastructure in China1990-2011 (2 booms around 1997 & 2007)

Source: World Bank and PPIAF Project Database (http://ppi.worldbank.org), adjusted by CPI

0

20

40

60

80

100

120

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Year

New

Pro

ject

s

0

2000

4000

6000

8000

10000

12000

14000

US

$ B

illio

ns

New Projects Investment

3rd boom?

Development of PPP in China

• PPP projects have been developing and applying fast since late 1980s in China

• Milestone projects: – Shajiao B Power Plant (6/1984) – BOT– Laibin B Power Plant (9/1997) – BOT– Chengdu #6 Water Plant (8/1999) – BOT– National Stadium & Sub-Railways Line 4 etc for 2008

Olympic Games (2003~2008) – PPP

• Since 2000, BT dominated – will no sustainable– Officials’ short term objective – public finance relies heavy

on land-selling (resulted/ing from/in sharp escalation of housing price), and then local financing platform

– Private’s low confidence in local government’s credit

Challenges of PPP in China• No national PPP law/guidelines nor national PPP unit – vary

by region and/or sector and even government official– No sound cost auditing, tariff regulation, & definition of scope of

responsibility & remit of relevant regulatory agencies– No “one-stop” approval system – the approvals are time-consuming and

complicated, e.g. related to SC, SDRC, MoC, MoF, MoCom, SAIC, SAFE, SBLR, SAT, MHRSS at central and/or local levels

• No real PPP – dominate players are state-owned/holding contractors/bank (fake “Private”) – efficiency gains?– Hard to achieve limited recourse due to monopoly banking system

• Strong government vs weak “private” & community – good or bad?

– No community involvement in decision-making & no info transparent– To have asset for economics/Q of life or to have efficiency?

• For academic, hard to get data to conduct quantitative research

Key Differences in PPP from Western

e.g. Australia:• Public-Private Partnership• National PPP guidelines

• National PPP unit• Investment decision +

Procurement option– No more unsolicited

• Drivers: VfM with PSC evaluation

• Mainly social projects– School, health, court, water,

correction, road …

China:• Public-Public Partnership• No national but 20+ local

(province/city) guidelines• No national nor local unit• Investment decision but no

procurement option– Solicited + unsolicited

• Drivers: capital constrain w/o PSC evaluation

• Mainly economic projects– Road, power, water, waste,

urban-rural co-devp’t …

Key Differences in PPP from Western (con’t)

e.g. Australia:• Scale >$A50 million• Leading player: bank• Debt: bank & pension

fund• Concession period: no

regulated• Seldom upfront payment

by private• Bid cost: relative high

– Whole-life cost: low• Process: relative long• Demand risk by private

China:• Scale no regulated• Leading player: contractor• Debt: bank (no pension fund

before 2010)• Concession period: usually

regulated, eg road 30→25yrs• Frequent upfront payment

by private• Bid cost: relative low

– Whole-life cost: may high?• Process: short• Demand risk by public

1994 Local administrative measures on the concession of municipal public utilities in Huherhaote and Hainan1995 Circular Concerning the Issues of Absorbing Foreign Investment through BOT1995 Circular Concerning the Issues of the Approval and Administration of Experimental Foreign-invested Concession

Projects2000 Temporary Provisions of the Ministry of Construction on Utilizing Foreign Capital in Municipality Public Utilities2001 Several Opinions of the State Development and Reform Commission concerning the Promotion and Guidance of

Private Investment2001 Local administrative measures on the concession of municipal public utilities in Jilin and Dalian2002 Notice of the General Office of the State Council on the Relevant Issues concerning the Appropriate Handling of the

Existing Projects Guaranteeing the Fixed Return from Investments by Foreign Parties2002 Opinions of the Ministry of Construction on Accelerating the Marketization of Urban Utilities 2003 Local administrative measures on the concession of municipal public utilities in Beijing, Jiangsu, Sichuan, Hebei,

Chengdu, etc2004 Administrative Measures on the Concession of Municipal Public Utilities2004 Decision of the State Council on Reforming the Investment System2004 Sample Document for the Franchised Operation of Urban Water Supply, Gas Supply and Waste Disposal2004 Local administrative measures on the concession of municipal public utilities in Ji’nan, Guizhou, Shanxi, Xuzhou, etc2005 Several Opinions of the State Council on Encouraging, Supporting and Guiding the Development of Individual and

Private Economy and Other Non-Public Sectors of the Economy2005 Local administrative measures on the concession of municipal public utilities in Tianjin, Dongguan, Gansu, Qingdao,

Xinjiang, etc.2006 Sample Document for the Franchised Operation of Urban Heat Supply and Waste-water Disposal2006 Local administrative measures on the concession of municipal public utilities in Hu’nan, Shanxi, Hefei, Wuhan,

Shenzhen, Beijing, etc.2007 Local administrative measures on the concession of municipal public utilities in Shanghai (draft)2008 Research Reports of PPP Legislation in Infrastructure Development2010 Several Opinions of the State Council on Encouraging and Guiding the Healthy Development of Private Investment2012 Evaluation Guidelines for Concession Projects (under drafting), PPP Law (under feasibility studying)

China Central Government Documents on PPP

Case Study: The National Stadium

The Project’s Brief

• The 1st PPP Sport Project in China– The Project Company is responsible for the financing, building,

operation & maintenance of the Stadium for a concession period of 30 years after which transfers it to the BMG.

• Total Investment/Cost: 3.13 billion RMB≈0.44 b.US$– BMG (the Public) authorizes the BSAMC as a shareholder in the

Project Company undertaking 58% of the total investment

– CITIC Consortium (the Private) undertakes the remaining 42%

• Plot Area: 20.29 hectares (ha.)• Parking Capacity: >1000 cars

Pro

ject

Str

uctu

re

Government’s Supports & Incentives• BMG provides land at very low cost (1040 RMB/m2 for gross land

development - c.f. 10,000 RMB/m2 for other land nearby)• BMG contributes 1.8154 billion RMB, 58% of total investment

(3.13 billion RMB) but gets no dividend• BMG provides necessary infrastructure• During the Test Competitions/Events and the Olympic Games,

BOCOG to pay the amount = (actual operation fee – daily operation fee)

• BMG to pay all expense of the special equipment used for the opening and closing ceremonies

• During the concession period, BMG will not permit to develop new competitive stadium or to expand any existing competitive stadium in northern area of Beijing

• BMG issues new relevant Policies and Regulations …

Disputes Among the Project Company’s Shareholders

• Construction is divided into three parts to the CITIC, BUCGC and Golden State as per their % equities, resulting that the Project Company has no good control on construction.

• Unit price contract for construction signed due to the structural characteristics and not available detail design by then, the general contractor (BUCGC) considers more its own profit, progress and safety than the overall, leading to construction cost overrun.– e.g. BUCGC asking for “technical measure fee”

Disputes between the Project Company and the BMG

• Original no. of parking lots is 2000 but BMG later asks the Project Company (PC) to cut 1000 because BMG to construct a large parking area for the whole Olympic Park.

• BMG asks the PC to cut commercial area.• BMG cancels the retractable roof.

All above changes reduce the PC’s sources of revenue.• BMG sets tight deadlines (financial closing, construction

commencing & completion on Dec 15, Dec 24, 2003 and Dec 31, 2006 respectively) but changes design >>> actual financial closing delayed for 2 months and actual completion to delay 6 months.

Allowing not enough time for economic construction.

Disputes between the Project Company and the Designer

• BMG hasn’t got copyright of the Stadium’s design and therefore asked the Project Company to follow the designer.– This leads to the Project Company’s weak status when

negotiating with the Designer resulting the Stadium not good enough for commercial use.

• As the Stadium is for 2008 Olympic Games & also due to China’s system, BMG has played a more important role in deciding the blue print.– This constrains the Project Company in maximizing the

commercial and efficient use of the Stadium.

Impacts of Cancelling the Retractable Roof

• Pros:– Reduce the material (mainly steel) used– Reduce difficulty in the steel structure construction– Reduce safety risk in construction– Reduce the operation cost

• Cons:– Incur the Designer’s claim (40 million RMB, about 1/3 of

total design fee)– Delay construction schedule (0.5 year) and cause cost

overrun (technical measure fee to accelerate progress)– Affect the operation

• Reduce the revenue of holding large performance etc events• Reduce the Stadium’s brand value

Lessons Learnt: Key Risks

• Legal Risk: Lack of relevant laws on and enforceability of contractual claim to protect investors

• Political Risk: Government’s strong influence• Construction Risk: change in design/scope and complex

structure causes schedule delay and cost overrun (the latter also due to in-proper design or construction contract, escalating price of raw materials and underestimated cost of work).

• Market Risk: Small market for the Stadium and non-guaranteed revenue

• Operation Risk: Lack of experience in operating large sport facility technically and commercially

Lessons Learnt

• Project scope to be well defined (& better to D&B)• Project Company shareholder agreement and

design/construction contracts to be well formulated• All parties to have life cycle & common project objectives• Proper risk management is critical, especially:

– Align interests with the Public, e.g. share profits or bring other benefits to the Public and community.

– Rely on published policies/regulations/laws and written contracts rather than oral promises.

– Clear/strong contractual arrangements and enforcement– Maintain good relationship with the public sector– Sometimes re-negotiation with government is more efficient

than mediation/arbitration/lawsuit.

Lessons Learnt from other Projects

• Government’s supports & commitments are important

• But Government’s over or direct involvement in PPP projects would reduce efficiency

• Government better to oversight only:– Price and fees (tariff)

– Quality of service

– Adequacy of service

Key Political Risks in China’s PPP Projects

• Change of local government and her key officials• Change of government’s attitude on PPP• Government’s fiscal situation & capability to purchase

guaranteed output (especially of power/water/gas)• Government’s poor knowledge & high expectation• Government under pressures from society/public• Relationship (guanxi) between private & public sectors• Creditworthiness of local government & partners• Immature legal system (change of law)• Enforceability of law

PPP Research in China

• More & more in recent years eg funded by NSFC• No much difference from international top 7 research

interests in recent years (Ke, Wang & Chan, 2009)

– Equitable risk allocation

– Comparison between PPP and traditional procurement(Feasibility studies, Public auditing & accountability…)

– Value for Money, Public Sector Comparator

– Output specifications for PPP projects

– Improving relational contract for PPP projects

– Decision making for public sector

– Knowledge management

PPP Related Research – 4 dimensions

Decision-Maker

The Private

The Society

Decision Process

ProcureBuild

O&M

Decision Issue

The Public

……

Transfer

• Risk management related• Financing related eg equity structure, D/B ratio• Reasonable return/charge related• Project governance with unincomplete contracts• Early termination related• Transfer & post-transfer related• Legal & institutional framework related• ……

Other Stakeholders Some are common for all Sectors while others Sector-specific

Initiate

The relationship between them

• Research Contents– Related to Economics, Finance, Law & Engineering, e.g.

Sector-specific application, model selection, capital structure, risk management, legal issues, the Public/Private behavior, the Public supports, contract structure & key clauses, evaluation of the Private, performance evaluation, concession, adjustment mechanism, etc

• Research Types– Qualitative (eg risk identification & mitigate, CSFs, government’s functions)

toward Quantitative (eg government’s creditworthy, evaluation of guarantee, determination of concession period and adjustment, tariff structure and adjustment mechanism)

• Research Process & Methods– Problem identification (literature, practice)→Data collection (literature,

case, interview, survey)→Problem analysis (statistic, experiment, case, modeling, simulation, theories eg agency by agreement, public goods, external benefit, game, real option, fuzzy, system eng’g, AHP, governance, contract, SNA)→Justification (workshop, interview, comparison, application)

PPP Research in China

Active PPP Researchers in mainland China

• By International Journal Papers (Ke et al 2009, etc):– Myself (PostDr of Robert TIONG at NTU) & my former

PhD student Yongjian KE, Tsinghua (now in NUS)– Sudong YE, Beijing Jiaotong University– Bing LI, Xiamen University (Akin’s former PhD students)– Jianfeng YUAN, SouthEast University– Jingbo SONG, Dalian University of Technology

• By No. of NSFC Funded Projects (see next):– Individual: Jingbo SONG (2007, 2010, 2012), myself (2004,

2007), Zhe ZHANG (2009, 2012), another 22 researchers (1 each)

– Institution: Tianjin U & DUT (4 each), Tsinghua (3), SEU, XJTU & CQU (2 each), another 12 universities (1 each)

PPP related Research Funded by NSFC

█ No. of Projects Funded ● Sum of Fund in 104 RMB

A Research Co-funded by NSFC (Mainland China) and RGC (HKSAR, China)

Equitable Risk Allocation for PPP Projects in China

Principal Investors:

Prof. Dr. WANG S.Q.Dept of Constr Mgmt, Tsinghua University

Prof. Dr. Albert CHANDept of Constr & Real Estate, The Hong Kong Polytechnic University

中国 PPP项目风险合理分担机制Reasonable Risk

Allocation Mechanism for PPP

Project

Research Design

Interview

Actual Allocation

Difference in all

sectors?

Difference in one sector?

No

Difference in one

project?

No

Fair Risk Sharing

Contract Clauses Suggestion

Risk Adjustment Mechanism

Delphi Survey

Preferred Allocation

Yes

Risk

sharin

g p

reference

for this

sector

Yes

modify

Factors

affecting

risk sh

aring

Yes

Risk criticality

Risk List Risk cause/ result analysis

Risk management status

Literature review

Interview

Past research

Risk allocation practice

Risks in past cases

Risks w/o clear allocation

Differences in risk allocation

Filing

Research Outcome Research Process

Fair Risk Allocation Mechanism in China

Risk Identification

• Critical risks in China's PPP projects• Risks with unclear or different allocations

Preliminary Risk List

Literature Review

Interview

Previous Studies

Existing Allocations

Critical Risk in Past Projects

Risks with unclear allocation

Risks with different allocations

1st Round Delphi

Final Risk List

Risk List

Risk Group

Expropriation and nationalization Country

Government's reliability Country

Government's intervention Country

Poor political decision-making Country

Land acquisition Country

Corruption Country

Approval and permit Country

Change in law Country

Immature juristic system Country

Public/Political opposition Country

Force majeure Country

Environmental protection Country

Ground/weather conditions Country

Risk List (con’t 1)

Risk Group

Tax regulation changes Country

Exclusive right Market

Inflation Market

Foreign exchange and convertibility Market

Market demand change Market

Third party reliability Market

Interest rate Market

Financial risk Market

Supporting utilities risk Project

Uncompetitive tender Project

Tariff change Project

Payment risk Project

Risk List (con’t 2)Risk Group

Insufficient financial audit Project

Subjective evaluation Project

Improper contracts Project

Construction/operation changes Project

Residual assets risk Project

Organization and coordination risk Project

Consortium inability Project

Private investor change Project

Delay in supply Project

Construction completion Project

Operation cost overrun Project

Technology risk Project

Delphi Survey

• To analyze the risks and identify preferred allocations

• Dec. 2008 - Jan. 2009, First Round of Delphi– 203 invitations sent, 47 replies received, 23.2% response rate

• Jan. 2009 - Feb. 2009, Second Round of Delphi– 46 replies received, 97.9% successive response rate

Delphi Survey Outcome

• Ranking of risk probability and consequence

• Preferred risk allocation(based on experts’ perspectives)

2.0

2.5

3.0

3.5

4.0

2.0 2.5 3.0 3.5 4.0

Probability

Con

sequ

ence

Country Risks Market Risks Project Risks

Moderate

Top 10

Interview

• To identify actual risk management and risk allocation• March – May 2009, face-to-face interview

– Experts having extensive working experience in PPP projects

– Evaluate actual risk management according to PPP experience

– Identify actual risk allocation in the successful PPP projects

Interview Outcome

• Current status of risk management– Absence of risk management culture

– Lack of historic data to support risk mgmt

– Late start of risk management

– Managers lack knowledge in RM

– Poor considerations of RM in contracts

– Rely only on qualitative analyses

• Actual risk allocation– Experts from 38 different cases

– Water, power, transport, etc.

Reasonable Risk Allocation

Mechanism

Preferred vs. Actual Risk Allocations

Actual Allocation(Interview)

Preferred Allocation(Delphi survey)

In all sectors?

YesSuggested Allocation (common)

Difference

Only in one sector?

No

YesSuggested Allocation (specific sector)

Only in one Project?

No

YesInfluencing Factorsof risk allocation


Risk Allocation Framework

Suggested Contract Design

Suggested Risk Allocation (Common)

Risk Suggested Allocation

Expropriation and nationalization Public

Government's reliability Public

Government's intervention Public

Poor political decision-making Public

Land acquisition Public

Corruption Public

Approval and permit Public

Supporting utilities risk Public

Uncompetitive tender Public

Exclusive right Public

Change in law Public

Immature juristic system Public

Suggested Risk Allocation (Common) Con’t


Public/Political opposition Shared

Tariff change Shared

Force majeure Shared

Payment risk Shared

Environmental protection Shared

Insufficient financial audit Shared

Subjective evaluation Shared

Improper contracts Shared

Inflation Shared

Foreign exchange and convertibility Shared

Ground/weather conditions Shared

Market demand change Shared

Tax regulation changes Shared

Suggested Risk Allocation (Common) Con’t 2


Third party reliability Shared

Interest rate Shared

Construction/operation changes Private

Residual assets risk Private

Organization and coordination risk Private

Consortium inability Private

Private investor change Private

Delay in supply Private

Construction completion Private

Financial risk Private

Operation cost overrun Private

Technology risk Private

Risks by the Public

• Expropriation and nationalization, Government's reliability, Government's intervention, Poor political decision-making, Land acquisition, Corruption, Approval and permit, Supporting utilities risk, Uncompetitive tender, Exclusive right, Change in law, Immature juristic system

• Risk Commonness– Most are country risks– Related to government or officers’ behavior

Key Points on RM for the Public

• PPP is NOT to transfer all risks to private

• Enough supervision– Specifications on project input (incentives, guarantee, etc.)

– Specifications on project output (service, price, quality, environment protection, etc.)

Key Points on RM for the Public – con’t

• Effective competition in bidding

• Incentives for private sector involvement

• Punishment against opportunists

Risks by the Private

• Construction/operation changes, Residual assets risk, Organization and coordination risk, Consortium inability, Private investor change, Delay in supply, Construction completion, Financial risk, Operation cost overrun, Technology risk

• Risk Commonness– Most are project risks

Key Points on RM for the Private

• Transfer risks to more professional partners

• Choose appropriate partners

• Evaluate objectively the Public support

• Guarantee certain monopoly in a certain area

Key Points on RM for the Private – con’t

• Evaluate objectively the market demand

• Prepare a precise financing scheme

• Pay attention to risks behind highly leveraged financing

Risks Shared

• Public/Political opposition, Tariff change, Force majeure, Payment risk, Environmental protection, Insufficient financial audit, Subjective evaluation, Improper contracts, Inflation, Foreign exchange and convertibility, Ground/weather conditions, Market demand change, Tax regulation changes, Third party reliability, Interest rate

• Risk Commonness– Single party (the Public or Private) not able to deal with alone

– Risks may caused by both the Public and the Private


Mechanism




In all sectors?


Difference

Only in one sector?

No



No





Reasonable Risk Allocation for Power Projects

• Change in law

• Power sector reform is a hot issue in China

• in Oct 2009, the Government’s announcement to regulate power tariff

• Change in law is out of local governments’ control

• Borne by the Public, if contract with Provincial government

• Shared, if contract with Municipal government


• Exclusive Right

• Not to build any type of power projects which are against the national long-term policy of encouraging new energy

• Great competitive pressure caused by policy support to new energy

• Share the risk of exclusive right by signing a Take-or-Pay power purchase agreement (PPA)


• Organization and coordination risk

• Fuel supplier, power purchaser, dispatching station and some other partners are government agencies or state-owned companies

• Government’s involvement or interruption

• Shared, but to define the timing and process of the government’s involvement or interruption

Reasonable Risk Allocation for Transport Projects

• Exclusive Right• Borne by the Public for urban rail and bridge projects

• Less competitive pressure (few alternative transport)

• Shared for toll road projects• Great competitive pressure

• Evaluate the expected traffic volume objectively

Reasonable Risk Allocation for Water Projects

• Change in law• Water sector reform is also a hot issue in China

• Policies on marketization, tariff adjustment, water quality standard, etc.

• Borne mainly by the Public, if contract with Provincial government

• Shared, if contract with Municipal government


Mechanism




In all sectors?


Difference

Only in one sector?

No



No





Influencing Factors of Risk Allocation

• Risk allocation in contracts

• Right and obligation

• Risk control capability

• Comparative advantage

• Government incentives

• Tariff design and compensation

• Responsibility principle

• Risk premium

• Government incentives



(1) Risk control capability?

(2) Comparative advantage?

(3) Government incentives?

Risk Allocation in Concession Agreement

(5) Risk premium

(6) Government

incentives

(4) Responsibility

principle

Right and obligation

Tariff design and compensation

Yes

Yes

No

No

No Yes

Adjust Allocation

Thank you for you attention!

All of you are welcome to Tsinghua!

Please drop me a line in advance [email protected]

Key References• Wang S Q, Ke Y J & Xie J (2012), PPP Implementation in China,

in Winch G M et al (ed.) Taking Stock of PPP & PFI Around the World, ACCA, 29-36.

• Ke Y J, Wang S Q & Chan A P C, Cheung E (2009), Research Trend of PPP in Construction Journals. J. of Constr Eng’g & Mgmt, ASCE, 135(10): 939-1113.

• Liu Y W, Zhao G F & Wang S Q (2009), The National Stadium BOT Project for Beijing 2008 Olympic Games, in Alfen H W, Kalidindi S N, Ogunlana S et al (ed.), PPP in Infrastructure Development – Case Studies from Asia and Europe, Publisher of Bauhaus-Universitat Weimar, 130-153.

• Ke Y J, Wang S Q & Chan A P C (2010), Risk Allocation in PPP Infrastructure Projects: Comparative Study. J. of Infrastructure Systems, ASCE, 16(4): 343-351.

• Ke Y J, Wang S Q, Chan A P C & Lam P T I (2010), Preferred Risk Allocation in China's PPP Projects. Int’l J. of Proj Mgmt, 28(5): 482-492.