Building Beijing in line with market rules
Ba Shusong  Updated: 2004-10-02 09:05

Beijing's infrastructure facilities have long been known as insufficient to meet the demands of an increasing transport industry, especially as more and more cars are driven on the city's streets.

All over Beijing, roads and bridges are being built, but progress is slow thanks to an out-of-date financing mechanism.

Current investment is solely from the government and is far from enough. The industry must be opened up to private investment if there is to be an end to the daily nightmare of traffic jams for Beijing people.

The amount of investment in infrastructure has climbed from an average of 4 per cent of annual revenue in the 1980s to 13 per cent today.

Some of the cash is earmarked in the budget, the rest comes from issuing treasury bonds and loans from domestic banks. Total investment from central and local governments amounts to 1.2 trillion yuan ( US$145.10 billion) to date. But other sources, such as trusts and franchises, have been used far too little.

If an infrastructure project depends entirely on government investment, which comes largely from tax revenue, its construction will almost inevitably get interrupted as a result of insufficient financing. To speed up the construction process, the government will be forced to levy heavier taxes on taxpayers. The Greek Government had to levy taxes on its citizens to pay for the Olympic Games, a move some fear could happen in Beijing.

Government investment is not as efficient as private funding. Losses incurred by embezzlement of public funds, money squandering and unwise decision-making will burden taxpayers even more. Yet in a market-oriented financing system where private enterprises could be granted chartered rights to operate certain infrastructure projects, the government could charge higher taxes for their use of other public utility projects. The government could get a better yield by doing this rather than investing directly in certain projects. In the meantime, the tax burden would be eased.

This does not mean the government should have nothing at all to do with public utility projects. As private investors cannot be attracted by noble deeds without a capital reward, some industries that benefit society but do not make profit, such as the education sector, still need government support.

Beijing's metro construction is another example. It is also a kind of public welfare undertaking with a very slow and very small capital reward. There are no guarantees of any profit in this kind of immature marketplace. The government should therefore function as a market cultivator who retreats from the project only when the market has reached maturity. Real estate companies who own land near new underground lines are in line for juicy profits because of land appreciation once the lines are completed. These companies have the responsibility of supporting the government's infrastructure projects.

Banks are not showing an expected enthusiasm in lending money to such large-scale infrastructure because they know they will have to wait for a long time before the project is completed, and an even longer term to get their money back. The entire reimbursement period could last 20 or more years, nearly double the upper limit term of bank loans. Long pay-back terms notwithstanding, infrastructure projects also gobble up cash. Lenders would have to risk investing all their money in one single project, which is against their operation rules. Weak government supervision and regulations have increased the possibility that the companies who win contracts for projects later breach their repayment obligations to the bank.

Absorbing capital with long-term gains provides better financing compared with borrowing money from banks. This capital, for instance, pension funds and life insurance funds, are commonly characterized by its long repayment term, slow and stable yields. All these characteristics make it the best choice for infrastructure projects. As a result of a poor capital management system, most of this capital is currently being wasted in the treasury bond and stock market. Short-term gains by companies at a high risk are not suitable for such capital. As another financing innovation, funds play an effective role in turning short-term capital into long-term capital. Funds could thus be used in infrastructure project investment, provided a healthy market environment is guaranteed.

(China Daily)

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