LEGAL SYSTEM FOR PUBLIC-PRIVATE PARTNERSHIPS PROJECTS IN CHINA: INTERPRETATION, ANALYSIS AND RECOMMENDATIONS

Transcription

1 LEGAL SYSTEM FOR PUBLIC-PRIVATE PARTNERSHIPS PROJECTS IN CHINA: INTERPRETATION, ANALYSIS AND RECOMMENDATIONS Wu Di 1, Wang Shouqing 2 and Cui Qingbin 3 1&2 Department of Construction Management and Hang Lung Centre for Real Estate, Tsinghua University, Beijing, , CHINA 1&3 Department of Civil and Environmental Engineering, University of Maryland, College Park, MD, 20742, USA ABSTRACT Public-private partnerships (PPP) is a financing mode to ease the government s financial pressure and promote efficiency. The legal system is a critical success factor. A list of main decisions in PPP projects was built by using an established methodology and the software NVivo. Then twenty-eight PPP laws and regulations issued by different authorities in China were interpreted from the perspective of allocation of decision control. Proposing the concept of the Guiding Index, the statistical results of the control allocation were analysed from the perspectives of different laws, different decision-making processes and different allocation entities. The lack existed in China s PPP legal system was then pointed out, such as pertinence, allocation of monitoring and participation of enterprises and the public. Finally, some recommendations were proposed for the development of China's PPP practice and legal system, and would also be useful in other jurisdictions. Keywords: legal system, Public-Private Partnerships (PPP), China, decision-making; allocation. INTRODUCTION Public-Private Partnerships (PPP), a financing and managing mode, is widely applied in many countries. With the growth of economy all over the world, the urbanization process is promoting rapidly. This happens especially in developing countries. The government has to face a huge financial pressure of the development of infrastructure, public utility and public service in urban construction. The PPP mode can ease the financial burden of the government, create a market for construction companies and improve the efficiency of the project management, establishing a win-win situation (Wu, et al. 2013). In China, PPP is recently a very hot topic in both academic institutions and construction industry (Wu and Wang 2014). Only in the second half of the year 2014, the China State Council, the Ministry of Finance, the Development and Reform 1 Corresponding: di-wu10@mails.tsinghua.edu.cn, sqwang@tsinghua.edu.cn 3 cui@umd.edu

2 Commission and other local governments have introduced several policies to promote the development of PPP, such as PPP guidelines and PPP standard contracts. Compared to the traditional mode of government procurement, the PPP mode makes full use of the technology and management capacity of private professional companies and the efficiency of the market regulation, to achieve the result "Value for Money" (Ke 2014). But on the other hand, most of PPP projects provide public or quasi-public goods or services. The Public Economics Theory supports that the supply of such products or services should not rely too much on the market or private companies. So a contradiction forms in the allocation of the control of the project. Lessons from many cases showed that unreasonable allocation of control could result in controversy inside the project and even complete failure. Who to make decisions in the project is a direct reflection of who to have the control of a project. How to allocate the control of PPP projects is usually carried out by the concession contracts between the government (public) and the company (private). The laws and regulations in the legal system is a guidance for the contract designing. However, PPP is still new for China, and the legal system is not perfect. Therefore it is important to interpret China s PPP laws and regulations how to allocate the control and find out the current lack of China s PPP legal system. Recommendations promoted according to the analysis conclusions will be useful to improve the practice of PPP in China and other jurisdictions. LIST OF DECISIONS IN PPP PROJECTS The premise of the interpretation and analysis is to establish a list of decisions in PPP projects. In this section, a methodology to identify the decisions in PPP projects will be established. Based on current theory and research, there are several factors to describe a decision. Then the list of main decisions in PPP projects will be conducted. Establishing a Methodology for Decision Identification The identification process, extracting the list of decisions, is a kind of qualitative research. There are two methods with reference value. The first is the tool of Work Breakdown Structure (WBS) in Project Management Theory. Its basic idea is, according to certain principles, breaking down the project into tasks, then breaking tasks into work packages. It is a from top to bottom" process. The second is the Grounded Theory (GT). Its basic idea is, summing up experiences directly from the raw materials and rising to the systematic theory. It is a from bottom to top" process (Strauss 1987). WBS GT Established Methodology Figure 1. Methodology for decision identification

3 Both methods have their own advantages. Combining the WBS tool and Grounded Theory, a new method was established with the advantages of each method to identify the decisions in PPP projects as the following three steps (Wu, et al. 2015): 1. Semi-open Coding; 2. Systematic Coding; and 3. Repetitive Coding. (Figure 1) Factors of a Decision A complete decision-making process has four steps (Fama and Jensen 1983): Step 1. Initiation: generation of proposals for resource utilization and structuring of contracts; Step 2. Ratification: choice of the decision initiatives to be implemented; Step 3. Implementation: execution of ratified decisions; and Step 4. Monitoring: measurement of the performance of decision agents and implementation of rewards. Therefore, a decision could be described by the four factors above from the perspective of decision-making process. The entity who have control in step 1 is a proposer, in step 2 is an approver, in step 3 is an implementer and in step 4 is a monitor. Besides, a decision could also be described by objectives of the decisions and schemes or plans. In order to find out what are the main decisions from PPP contracts, what should be focused on the textual material is: if some contract terms are telling who are the proposers or approvers or implementers or monitors, that is probably a decision; if some are telling the reason for doing something or how to do it, that is probably a decision. Identification Process and Decision List Six standard PPP contracts issued recently by the China s Government are selected for identifying the decisions. Since the amount of the textual material is so large including as many as 150 thousand words, the software QSR NVivo 10 is used to assist the coding process. The software can establish Free Nodes and Tree Nodes in the semiopen coding process to achieve data encoding completely covered. In the systematic coding process, it can also assist in merger and reorganization of the encoding nodes, by applying the the function of classification extraction. Besides, it is possible to use quantitative statistical tools to summarize the encoded information nodes for further study. Twenty-eight main decisions were finally identified composing a list for PPP projects in Table 1. The objectives and schemes of each decisions are also summarized based on the information in the standard PPP contracts. Taking Pricing and modification (D25) as an example. Its objective is to ensure that the price of the products or services

4 at a reasonable range, and to ensure that investors are able to obtain a reasonable profit. Its scheme is pricing principles, modification arrangement, etc. Due to the page limitation, the table only shows the decisions in the list and the numbers of resources and reference points of each of the decisions. Table 1. List of main decisions in PPP projects Decisions Resources Reference Points D1 Selection of designer 5 26 D2 Engineering investigation 2 11 D3 Preliminary design and its modification 5 28 D4 Construction design 5 27 D5 Design of financing scheme 5 38 D6 Funds using 6 39 D7 Guarantee and insurance 6 46 D8 Selection of supervision 5 18 D9 Selection of construction company 6 28 D10 Selection of supplier of equipment and materials 6 20 D11 Land acquisition and traffic relief 5 19 D12 Construction site preparation 4 11 D13 Design of organized construction 5 15 D14 Construction progress control 6 41 D15 Quality control of materials, equipment and construction 6 38 D16 Engineering Change 6 38 D17 Price settlement and payment 3 30 D18 Safety Management 6 37 D19 Dispute Resolution 6 24 D20 Completion and final test 6 39 D21 Commissioning and trial operation 5 19 D22 Selection of supplier of operation, maintenance 5 14 D23 Operation management 6 49 D24 Warranty repair and maintenance management 6 43 D25 Pricing and modification 5 33 D26 Delivery management of product and service 5 42 D27 Transfer of engineering and related information 5 28 D28 Payment for repurchase 5 27 A follow-up expert questionnaire was conducted for further study. The list is included in the questionnaire in order to ask for suggestions from invited experts. The list was recognized by the experts, which verified the accuracy of the list. INTERPRETING CHINA S LAWS AND REGULATIONS OF PPP In China s legal system, laws and regulations with PPP background include concession management approach, implementation policy, etc. Twenty-eight PPP regulations issued by the governments were selected to be interpreted, of which one was issued by the nation government, twelve issued by provinces or municipalities and fifteen by cities or towns (see Table 2). Interpreting how the laws and regulations allocate the control of the PPP projects is actually finding out whom the laws and regulations suggest to be the proposers, approvers, implementers and monitors in each decision of the list. It is generally believed that the approver of one decision can only be one entity because of the special nature of the ratification process, while proposers, implementers and monitors of one decision can be more than one entities (Fama and Jensen 1983; Du and Wang 2013).

5 In addition, for some decisions, the laws and regulations do not tell who should be the proposers, approvers, implementers and monitors, but give out the schemes or plans of the decisions. To some extent such terms can be seen to have completed pointing out who are the approvers and allocating the control of related decisions in PPP projects. It is also an important part of interpretation. Table 2. PPP Laws and regulations in China Laws/Regulations and Scope Issue Date Issue Institution L1 The Nation Ministry of Construction L2 Municipality: Beijing Municipal People's Congress L3 Municipality: Shanghai Municipal Government L4 Municipality: Tianjin Municipal Government L5 Province: Yunnan Provincial Department of Construction L6 Province: Shanxi Provincial People's Congress L7 Province: Qinghai Provincial People's Congress L8 Province: Xinjiang Provincial People's Congress L9 Province: Guizhou Provincial People's Congress L10 Province: Hebei Provincial Department of Construction L11 Province: Hunan Provincial People's Congress L12 Province: Gansu Provincial Department of Construction L13 Province: Guangdong Provincial Department of Construction L14 City: Shenzhen City People's Congress L15 City: Jinan City Government L16 City: Wuhan City Government L17 City: Lanzhou City Government L18 City: Hefei City Government L19 City: Qingdao City Government L20 City: Chengdu City Government L21 City: Hangzhou City People's Congress L22 City: Jilin City Government L23 City: Dongguan City Government L24 City: Handan City Government L25 City: Chifeng City Government L26 City: Tieling City Government L27 City: Yinchuan Legal Office of City Government L28 City: Huizhou City Government By using the method mentioned above, each of the laws in Table 2 were analyzed clause by clause. The software QSR NVivo 10 assist this process. If the government or the public institution has the control of one step of the decision-making process, denote this step as G. If the enterprise or the private company has, denote E. If the approver of one decision was not pointed out but schemes or plans were suggested, denote approver as 0. If the laws or regulations do not give suggestion to control allocation of one decision-making step, denote nothing. Due to the page limitation, the statistical results about the laws regulations in Table 2 were not showed out, but in next section, some analysis will be conducted based on the results. ANALYSIS FROM THREE PERSPECTIVES According to the statistical results, it is found that, although these laws and regulations are specifically for the PPP mode, each of them is difficult to provide a complete

6 contract design for a PPP project. In fact, it is because allocation of control of different PPP projects might be different due to different conditions of economy, market, region, etc. In order to further analyze the results, learning the ideology of the incomplete contract theory, this paper proposes the concept of Guiding Indicator (GI), defined as the percentage of the number of control having been allocated by the laws or regulations. Proposing Restricted Guiding Indicator (RGI) defined as the percentage of the number of control having been allocated and 0 allocated. GI and RGI reflect the useful degree of guiding contract designer, and reflect the level of detail of the laws or regulations. Perspective of Different Laws or Regulations Calculate GI and RGI of all the laws and regulations (see Figure 2). Figure 2. GI and RGI of laws (Scope) In theory, the smaller the scope of regulations, the higher degree of detail. But from Figure 2, it shows no significant difference in the degree of detail between different scopes. Some city regulations are even less detailed than the province ones. For example, the city of Lanzhou is a part of Gansu Province, their GI are 22.32% and 23.21%. The reason might be: Firstly, local PPP lawmakers may have a low level of PPP knowledge. As can be seen from Table 2, provincial laws or regulations are issued by institutions more professional, such as People's Congress and Construction Department. Meanwhile, the majority of the city laws or regulations are issued by the city governments; Secondly, China s PPP legislation is at present in the stage of exploring universal principles. Observe the data in Figure 2 from the time dimension, and order the list from early to late in the issued date (see Figure 3). It is found that GI and RGI are increasing with the date. This shows that lawmakers to some extent referred to other laws or regulations having been issued when they make new laws.

7 Figure 3. GI and RGI of laws (Issued Date) Perspective of Different Steps of Decision-making Calculate GI of the four steps of a decision-making process (see Figure 4). Overall, the level of detail of laws and regulations are rising with the time. GI of step 2 (ratification) is the most, that means laws and regulations focus more on who should be the approvers of the decisions. Following are step 3 (implementation) and step 1 (initiation), and that means who are the implementers and proposers. The least is step 4 (monitoring). Figure 4. GI and RGI of four steps of decision-making (Issued Date) Perspective of Different Control Entities Calculate the total numbers of decisions controlled by the public and private sectors (see Table 3). It shows what the roles the laws and regulations tell the two entities to play:

8 The government acts more as a role of the approver and the monitor. Most decisions require approval from the government before they can be put into action; and The enterprise implements more in decision-making process, usually according to a given scheme, and also takes part in designing the schemes plans of the decisions. Table 3. Decisions controlled by different entities Step (role) Initiation (proposer) Ratification (approver) Implementation (implementer) Monitoring (monitor) Government Enterprise Both CONCLUSIONS AND RECOMMENDATIONS According to the analysis results and conclusions mentioned above, three main recommendations are proposed for the development of legal system for PPP projects: 1. Establishing a more structured legal system; 2. Strengthening the supervision of PPP projects, detailing the content of monitoring, and encourage users and citizens to enroll in the project; and 3. The government should pay greater attention to the partnerships with enterprises in PPP projects, and appropriately transfer the control. REFERENCES Du, Y. L., Wang, J. Y. (2013). Research on the Proper Allocation of Rights of Control in the Projects under BT Mode. Soft Science (in Chinese), 27[5], Fama, E. F., Jensen, M. C. (1983). Separation of Ownership and Control. Journal of Law and Economics, 26[2], Ke. Y. (2014, July). Is public-private partnership a panacea for infrastructure development? the case of Beijing National Stadium. International Journal of Construction Management. 14[2, 3], Strauss, A. (1987). Qualitative analysis for social scientists. Cambridge University Press: Cambridge. Wu, D., Wang, S. Q. (2014, December). Research Development and Trend of Public- Private Partnership in China. Journal of Engineering Management (in Chinese). 28[6], Wu, D., Wang, S. Q., Feng, K., Zhang, Z. (2015, January). Decisions Breakdown Structure in PPP Projects. Project Management Technology (in Chinese). 13[1], Wu, D., Wang, S. Q., Ma, S. H. (2013) 'Negotiation Scheme for a High-Speed Railway Station Redevelopment Project', In: Wang, J., Ding, Z., Zou, L., Zuo, J., (eds) Proceedings of the 17th International Symposium on Advancement of Construction Management and Real Estate, Nov , 2012, Shenzhen University, Shenzhen, China, pp