Accelerating Economic Structural Reforms in China: The participation of private-sector enterprises in public works

MENG Jianjun
Visiting Fellow, RIETI

Economic structural reforms of the new leadership

The central government's new leadership was instated in March 2013. The leadership is focusing its policy on new large-scale urbanization and, at the same time, embarking on economic structural reforms to break away from the dependence of public works on state-owned enterprises. Looking at railway projects, for example, in 2013, over 100,000 km of railways are expected to be in service across the country, and the central government officially announced on August 19, 2013 that railway management rights and ownership, which had been monopolized by the state, would be completely opened up to private-sector enterprises and local governments.

Prior to this announcement, Li Keqiang, the premier of the State Council, convened a work conference of the Standing Committee of the State Council on July 24, 2013, and stressed that railways and other infrastructure should be built first in the central and western regions as well as in the poor areas, and that the reform of investment and loan systems for railway construction by private-sector enterprises should be promoted by the full-scale opening up of the market for railway construction. To that end, Premier Li listed the following four steps for completing railway projects in the coming years; 1) obtain construction funds through various channels and means, establish railway development funds by absorbing private capital, and innovate the types and methods of railway bonds issued; 2) open up ownership and management rights for intercity railways, urban-suburban railways, and resource development-type railways to local governments and private capital; 3) support railway development through development revenue created by effectively using location resources for railways; and 4) get a quick start on the targeted railway projects established in the 12th Five-Year Plan (2011-2015) and ensure the quality and completion of these projects.

The purposes of these measures to promote the participation of the private sector are seemingly; 1) to further accelerate the opening of public works to the private sector after the dissolution of the Ministry of Railways in March 2013 and the official establishment of the China Railway Corporation; 2) to inquire into existing interest groups of state-owned enterprises, which is the most challenging reform, by encouraging the participation of the private sector as part of the economic structural reforms driven by Premier Li; and 3) to support the Chinese economy by expanding and accelerating public works and construction projects.

Abolition of the central government's administrative inspections and the delegation of authority to local governments

The new leadership is promoting the improvement of investment efficiency and the transformation of the industrial structure by reducing the heavy involvement of the central government and allowing private capital to participate in public works, which have been dominated by state-owned enterprises.

To meet these objectives, 117 points for abolishing administrative inspections and delegating authority to local governments were announced under a policy of "using the resource allocation function of the market and encouraging the autonomous investment decisions of enterprises" based on a decision by the State Council on May 17, 2013. More specifically, the purpose of these points was to abolish 71 items related to permit and approval inspections in investment and development projects for public works and to delegate 20 items related to permit and approval inspections to local governments. The projects to be covered by these items focus on energy sector-related fields and those related to airports, railways, communications, and mining resources. Particularly with regard to power projects, the inspection authority for renewable energy power generation projects, such as the construction of hydraulic plants on non-major rivers, wind power, and the construction of power distribution grids under a certain size, has been delegated to local governments across the board. Meanwhile, items related to the abolition of administrative inspections include projects such as airports, railway vehicles, pulp, gas field development, and satellite television broadcast-receiving equipment. On July 22, 2013, the State Council also announced its "Decision on the Cancellation or Delegation of 50 Items Pertaining to Administrative Permits and Approvals," and made it clear that it would cancel or delegate to local governments 50 items pertaining to administrative permits and approvals in areas including television, publications, health, energy, and railways.

The cancellation or delegation of these permit and approval items has already been conducted three times since the beginning of 2013, and over 160 administrative permits and approvals have been affected as of August 2013. This shows the new leadership's determination to pursue reform and growth by injecting a driving new force into the Chinese economy by breaking up the public works monopoly of state-owned enterprises and revitalizing the economy through the participation of private capital.

Causes and countermeasures

In 2005, the State Council published the "Several Opinions of the State Council on Encouraging, Supporting and Guiding the Development of an Individual and Private Economy and Other Non-Public Sectors of the Economy" regarding the participation of private capital. However, little progress has been made since then, and the efforts of the State Council have remained at the policy level only. In May 2010, the State Council published "Several Opinions of the State Council on Encouraging and Guiding the Healthy Development of Private Investment," and in July 2010, it issued a "Notice of the General Office of the State Council on the Division of Key Work to Encourage and Guide the Healthy Development of Private Investment," which contained specific policies for the Opinions. However, these initiatives failed to make progress regarding specific works in the country as a whole. Under these circumstances, the central government began working in 2012 to split up and specify the policies set out in the 2005 Opinions and the 2010 Opinions and Notice.

As far as the participation of private capital in railway projects is concerned, the then Ministry of Railways published its opinions on encouraging the participation of non-public capital in the construction and management of railways on July 22, 2005, and revealed its opinions on opening up in the following four areas: 1) railway construction; 2) railway management; 3) the manufacturing of railway transportation equipment; and 4) diversified management. On May 18, 2012, the then Ministry of Railways explained in more detail that private capital was allowed to participate in a broad range of areas such as the construction of railway routes and related facilities, passenger and cargo transport businesses, the development of railway technologies, and the authentication, inspection, and safety assessment of railway products, stating explicitly that the participation of private capital would be treated on par with public capital.

On July 23, 2012, Guangdong province announced that it would take the initiative in implementing 44 important projects for a total investment amount of 235.3 billion yuan through private competitive bidding. Among these projects, seven are for railways, of which five are intercity railway ones. In addition, the central government proposed the establishment of a railway industry investment fund, and the National Development and Reform Commission encouraged private investment in national and local railways for the purpose of developing resources, based on a policy of increasing the amount of private investment to 200.0 billion yuan under the 12th Five-Year Plan (2011-2015). Railway construction costs in China fell from 700.0 billion yuan (approximately nine trillion yen) in 2010 to 469.0 billion yuan (approximately six trillion yen) in 2011, but recovered to 630.0 billion yuan (approximately 8.5 trillion yen) in 2012. In 2013, the State Council increased the amount of railway investment in the existing budget by 10.0 billion yuan, to 660.0 billion yuan (approximately 10.5 trillion yen).

Returning to the starting point of the reform and opening-up policies

On November 21, 2012, five days after he was reappointed as a member of the Standing Committee, Li, the then first vice premier, asked the State Council to convene a Roundtable Meeting on Nationwide Comprehensive Integration Test Projects. At the meeting, for the first time, Li emphasized his idea that "reforms are the biggest bonus for China."

Although China has been accumulating considerable experience regarding economic management, as more than 30 years have passed since the launch of its policies for reform and opening up in 1978, the Chinese economy has already shifted its focus from quantitative expansion to qualitative improvement. As its economic structural reforms have reached a fairly mature stage as a result, the reforms in the next stage have to break down the existing structure of established interests in many areas and adjust the timing of the distribution of these interests. Also, to minimize resistance to reforms, it is necessary to move ahead moderately with optimizing established interests and reallocating the roles of state-owned enterprises and private-sector enterprises. The participation of private capital in speeding up public works is truly an important part of economic structural reforms. The new leadership rightly recognizes that to sustain economic development over the medium and long term, changing the method of development in the coming years is more closely linked to the beginning of reforms and opening-up policies than to the improvement of economic efficiency and the speed of economic development.

September 17, 2013

September 17, 2013