Urban Infrastructure Financing and Delivery in China

Urban Infrastructure Financing and Delivery in China

Urban Districts CLC CLC CLC Suburban Districts Urban Districts

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Economic and Political WeeklyMarch 17, 2007968observes. The SOs enter into a fiscal contract with the districtgovernment regarding the funds they would receive from thelatter. These funds not being adequate, especially when the SOsand NCs are laden with large number of welfare functions(discussed below). The SOs have taken to income generatingactivities and, wherever possible, have set up street businessfirms. In Shanghai [Wu 2002: 1086], the SOs have set up jointventures with the foreign investors to take advantage of locationof land. Since 1990, street businesses have become second-largestlocal fiscal income generator for the SOs.Lastly, the NCs raise their own funds by providing some localconvenience activities to the residents. Daily convenience ser-vices include neighbourhood take-away fast food restaurants,public telephone counters, temporary domestic help, bicycle andauto-parking areas, range of neighbourhood shops such as bicyclerepair, plumbing, hairdressers, grocery stores, etc, various formsof shuttle transport such as minivan rental, and so on. The dailyconvenience services are key sources of income for the RCs.Thus, each tier of government and administration raises its ownresources. The governments up to the district level charge taxes,take user charges and develop lands for their resource mobilisation,the administrative units below the district level take up an arrayof small and large businesses and provide personal servicesthrough user-charges for raising their own resources. Each ofthe utility companies also imposes its own user-charges. Furtherstudies are required to get a sense of the amounts raised throughsuch methods.Passing Down of Expenditure ResponsibilitiesSince the mid-1990s, the urban districts have been given awhole array of administrative powers, including planning,maintaining public utilities, approval of local foreign trade,commercial administration and real estate development, for whichthey are required to raise their own funds, which they do, onceagain through business activities such as real estate development.The NCs/RCs were earlier run by retired people or housewives,what Benewick and Takahara (ns) call “Eight Grannies with NineTeeth between Them”, on a voluntary basis. With more and morepeople getting out of the SOEs to the private and self-employedsector (the latter not being covered by social security and welfaresystems), the increase in migrant and floating population andemergence of urban poverty, the need for new institutions to takeup the welfare role in place of the former danweis has beencreated. The SOs have taken up this role with the support of NCs/RCs. This means that the former form of voluntary services atthe SO level is not adequate and professionally trained staff isrequired. The funds allocated by the districts to the SOs for thelatter’s functions not being adequate, the SOs have to raise theirown funds, which they do so, through some business ventures,as discussed above.The SOs work through the RCs. The latter become the primaryprovider of welfare services such as (i) information and record-keeping, (ii) public safety and security, (iii) people’s mediation,(iv) public health and family planning, (v) environment andsanitation (especially solid waste collection), (vi) legal educationand protection, (vii) daily life convenience services, and (viii)socialwelfare services [Choate 1998]. In the planning period, the RCswere used for political mobilisation at the grassroots level. Inthe market era, the same institutions assumed the role of welfareprovider and maintainer of social order, such checkingillegalmid-1990s by the Beijing municipal government. The revenuesthus collected were used for not only Beijing municipal servicesbut also for a assorted list of activities such as air shelter raids,river cleaning, public festival decorations, and communist partypropaganda [Wong 1998 in Bahl 1999: 143].Further, the local governments also imposed (and continue toimpose) taxes and charges on the local enterprises, some legaland some not [Bahl 1999: 84], which were (are) retained by thedepartment and used for specific purposes. These are also extra-budgetary funds. “The local governments may collude with SOEsto determine use of these funds, or they may view the retainedearnings as a base for their own extra-budgetary taxation” [ibid:85].Since the local government officials (at provincial and city level)were and are powerful, they were (are) able to either get backthis revenue by imposing special charges or influence the SOEsto make expenditures on public purposes such as for the provisionof social services, local infrastructure development, local eco-nomic development and so on. All these local government rev-enues go unreported but expenditures made from these can beseen.Qian (2000: 7) argues that the fiscal decentralisation andfunctional devolution led to increased inequalities, reduced centralgovernment’s reallocative role and undermined centralgovernment’s fiscal policy. But, at the same time, it also led toincreased experiments at the local level and also incentives forthe local governments to collect revenues.Looking at these innovative mechanisms of evading tax sharingwith the central government, tax reforms were introduced in 1994which allotted specific taxes collected at the provincial level tothe central government. For example, the enterprise income taxis now fully assigned to the local government and the value addedtax (VAT) is administered by the central government, of which25 per cent is given back to the local (provincial) government.This has now placed larger resources at the disposal of the centralgovernment to be used for distributive purposes [Bahl 1999: 79].Nonetheless, extra-budgetary and off-budgetary fund collectioncontinues even now8 and the local governments continue tocontrol large financial resources for local purposes.A systematic source of urban infrastructure is the earmarkedtax called urban maintenance and construction tax (UCMT),launched nationwide in 1985 [Wu 1999]. This tax is collected,the full proceeds of which are retained by the municipal govern-ments for local infrastructure development. This was the onlytax that could be approximated as a local tax before the nationwidefiscal reforms of 1994. This tax is collected as a surcharge onthe consolidated industrial and commercial tax levied on theoutput of industrial and commercial enterprises and incomes ofenterprises in transport, hotel, catering and other services. It isnot applied to the public institutions [ibid]. However, over time,the importance of this source for infrastructure funding hasreduced, which we would observe in the next section, as theamounts were not adequate to meet financial requirements ofrapidly transforming cities, such as Beijing, Shanghai, Tianjinand so on. Another tax, called the public utility surcharge, is alsothe source of funds for the local governments. The tax rates areset by the central government.The district governments have taken to real estate projects andland lease or sale [Chan 1997] for raising funds for city beauti-fication and infrastructure construction.9 Administrative unitsbelow the district, namely, the SOs and even the NCs, too taketo generating incomes, as the study of Shanghai by Wu [Wu 2002]

Economic and Political WeeklyMarch 17, 2007969activities, etc. The RCs also began subsequently to implementcentral level policies such as one-child norm and also reportingof “illegal migrants” to public security bureau.The social welfare services include elderly care, the care ofphysically and mentally handicapped, charity and relief servicesto those below poverty line, and in recent year, training for re-employment. Chaote (1998: 27) states that the committee itselfraises about 70 per cent of the funds for all these functions while30 per cent of the funds come from the SO. Thus, the socialwelfare functions have been localised and passed on to thecommunity sector.Cook (2000: 1) states, “the government in China has beentransferring back to society and family many of the welfarefunctions for which it had previously taken responsibility”.According to Bahl, in the first half of 1990s, cities, counties andtownships were responsible for about 75 per cent of all theexpenditures of the provinces and 55 per cent of all expendituresin China [Bahl 1999: 140]. The situation is unlikely to havechanged now, with increasing pushing down of the expenditureresponsibilities, as discussed above.The outcome of such a system is that the city governments,particularly if these are national level cities, who do not haveto pass on their revenues to any higher order cities, get tocommand quite high per capita revenues. A comparison betweenBeijing, which is a national level city, and Dongguan, which isa PLC in Guangdong province, shows that the former’s revenuein the urban construction and maintenance fund (UCMF) was16.5 times that of the latter when the population of former wasjust double that of the latter in 2002 [Mahadevia 2005]. Thismakes it possible for national level cities such as Beijing, Shanghaiand Tianjin to make large investments in urban infrastructureand utilities. The outcome is that the basic utilities coverage inthese cities is quite high and far better than that of other cities.The second outcome of such fiscal and administrativedecentralisation is that the welfare is passed on to the city residentsthemselves as it requires a fairly decentralised system, while thecity government takes on the responsibility of financing physicalinfrastructure development. The impact of such a system can beobserved on fairly good coverage of basic utilities in urban China,which is discussed next along with infrastructure investments andsources of infrastructure funds.IVInfrastructure Levels and InvestmentsLevels of basic infrastructure in China’s cities are quite good.For example, per capita water consumption in all the urban areastogether is 213 lpcd (Table 2) and 78 per cent of the urbanpopulation is covered by the water supply network. Sixty-sevenper cent of population is covered by the gas network; gas beingused not just for cooking, but also for water heating round theyear and room heating in winter. More than half the populationhas access to flush latrines and 68 per cent of the night soilcollected is disposed. For all the public utilities, the situation isfar better in the eastern provinces of China as compared to otherprovinces.Beijing, Shanghai and Tianjin, which are called national levelcities (definition discussed in next section), have higher achieve-ments; 100 per cent water coverage, 237 lpcd in Beijing and 266lpcd in Shanghai of per capita water consumption (Table 2).Tianjin is in a dry region and has lower per capita waterTable 2: Basic Public Utilities Coverage, 2002Popu-UCMFWaterWaterGasFlushedNight SoillationPerCon-Cover-Cover-LatrinesDisposal(million)Capitasumptionageage(PerRate(RMB)-Lpcd(Per Cent)(Per Cent)Cent)(Per Cent)All China*352.2089621377.8567.1751.7067.60East171.011,37822586.2382.2560.7976.45Central111.2244620675.8458.5734.4654.48West69.9643418560.5943.9866.4554.02Beijing9.502,099237100.0099.5765.1530.64Shanghai12.704,049266100.00100.00100.00100.00Tianjin6.16831133100.0095.1166.58100.00Notes:*This figure will not tally with all urban as it is the total of urbanpopulation of cities only.UCMF=Urban construction and maintenance fund (will discuss about thisfund later on in the article).Lpcd=Litres per capita per day.Source:From China, Department of Finance and Ministry of Construction(2003:5).consumptionof 133 lpcd, which is still higher than most Indiancities. Gas coverage ratio in all cities is cent per cent or nearingthat. Among the three, Shanghai has the best infrastructure.Beijing does not have cent per cent flushed latrines and a nightsoil disposal rate mainly because of these networks not existingin the historical central parts of the city, which has the imperialcity surrounded by traditional courtyard housing called ‘hutongs’.10Other two cities, Tianjin and Shanghai do not have this constraintas both of them developed during the colonial occupation.Further noticeable in Table 2 is the difference in per capitaamounts available in the UCMF, a fund that is meant for capitalinvestments in infrastructure. Cities in eastern China have percapita UCMF of RMB 1,378, which is far higher than RMB 896per capita for all cities.11 The per capita UCMF in Shanghai isRMB 4,049, which is 4.5 times the average of all cities and nearly10 times that of cities in west China. Beijing’s per capita incomeof UCMF is half that of Shanghai. No wonder, the infrastructuredevelopment level in Shanghai is world-class and impressive forall those who visit the city. The Beijing Olympics of 2008 isslated to change all the figures for the city and the city mightovertake Shanghai in this regard.The non-tax methods of financing infrastructure are on theincrease in all and the three cities. The share of domestic loanshas increased in the total UCMF revenue from just 8.6 per centin 1991 to 27.7 per cent in 2002 (Table 3). Also, the contributionof self-raised funds, that is the urban utility company’s ownefforts to collect funds, has increased, its share going up fromnil in 1991 to 19.0 per cent in 2002. Over time, the UCMT asa source of urban infrastructure has decreased, its share decliningfrom 26.1 per cent in 1991 to 10.0 per cent in 2002. So theallocation from the central government too has decreased. Centralallocation remains high only in the western provinces (11.4 percent of the provinces’ total UCMF revenues). Noteworthy is thevery low proportion of funds coming as foreign investment intothe urban infrastructure, and it is mainly going to the cities insouth and east China.Currently, the largest source of funds for infrastructure isdomestic loans (28 per cent), coming mainly from the bankingsector, through government guarantee. The second source is theother resources (25 per cent), mainly consisting of sale or leaseof lands. The third highest source is the funds raised by theenterprises and institutions of public utility provision (19 per cent)through user charges and contribution, and other sources.

Economic and Political WeeklyMarch 17, 2007970RMB 27.59 billion (US$ 3.36 billion or Rs 14,347 crore) wasthe revenue of the UCMF of Beijing in 2002 (Table 4), of whichabout 80 per cent (Table 5) is used for capital investments. In2004, the size of UCMF in Beijing increased to about Rs 30,000crore. In 2002-03, the total budget of Mumbai was Rs 5,516 crore,of which just 19 per cent or Rs 1,049 crore was spent on capitalprojects. In 2004-05, Mumbai’s total budget size increased toRs 7,000 crore with the capital budget increasing to Rs 1,613crore or 22.9 per cent of the total budget.12 The revenue of UCMFin Shanghai in 2002 was about Rs 27,000 crore (RMB 51.56billion) and in 2004 was Rs 25,600 crore (RMB 49.30 billion).How is it possible to compare Shanghai and Mumbai whenShanghai’s capital investments in 2002 were 26 times and in 2004were 16times that in Mumbai? The Mumbai Vision 2010 planput forward by Bombay First-McKinsey (2003), envisagesRs20,000 crore annual investment in Mumbai, which is quiteclose to the annual capital investments made in Shanghai. Tianjin,a city of 6.16 million, could be compared to Bangalore (popu-lation 5.69 million in 2001). Bangalore’s total budget in 2001-02was Rs 679.40 crore (RMB 1,306.53 million) and in 2005-06proposed budget was Rs 1,571.74 crore (RMB 3022.58 million)(BMP Statistical Department 2005), which was one-sixth ofTianjin’s UCMF.More than all cities (Table 3), these three national level citiesare able to access domestic loans. In 2002 in Beijing and Shanghaiand in 2004 in Tianjin, domestic loans have been the largestcontributor to the revenues of UCMF fund. These loans aremainly from China Construction Bank. In 2002, domestic loanscontributed 40.5 per cent of UCMF revenues in Beijing and 36.5per cent of the same in Shanghai. In Tianjin, 25 per cent of UCMFin 2002 and as much as 62.9 per cent in 2004 of UCMF revenuecame from domestic loans. The next important source of theUCMF revenues in the three cities is self-raised funds by theenterprises and institutions. In Chinese cities, as we have alreadyseen, each of the urban functions is carried out by a companyset up by the municipal government. These companies have beenable to raise the funds on their own for capital investments. In2002, the utility companies raised 15.8 per cent in Beijing, 32.9per cent in Shanghai and 27.2 per cent in Tianjin, and in 2004,46.5 per cent in Shanghai of UCMF funds. In 2004, Beijing raised90 per cent of UCMF funds through sale/lease of lands. InShanghai some increase in the contribution of this source canbe seen in 2004 as compared to 2002.The UCMT is contributing less than 10 per cent to the UCMFin these three national level cities, when for all cities it contributed10 per cent in 2002. The central government is either contributingTable 3: Revenue of Urban Maintenance and Construction Fund, ChinaTotalUCMTFeesCentral FinancialLocal FinancialWaterDomesticForeignSelf-raised FundsOtherTaxof UtilitiesAllocationAllocationFeeLoanInvestmentby EnterprisesRevenuesand InstitutionsAll China1991100.026.110.13.810.41.38.64.00.035.62000100.011.92.75.810.50.520.94.316.826.72001100.010.71.93.512.80.429.42.216.222.72002100.010.01.62.412.40.427.71.919.024.5By regions in 2002East100.08.51.41.012.70.429.12.019.925.1Central100.015.22.33.712.20.321.11.920.023.3West100.013.51.711.411.10.227.71.810.722.0Note:UCMT = Urban construction and maintenance tax.Source:From China, Department of Finance and Ministry of Construction (2003:83-85).Table 4: Urban Maintenance and Construction Fund, Sources and Amount, 2002 and 2004ItemBeijingShanghaiTianjin200220042002200420022004Total revenue of UCMF (RMB billion)27.5957.9751.5649.308.0417.34Total revenue of UCMF (US$ billion)3.367.076.296.010.982.11Total revenue of UCMF (Rs crore)14,34730,14426,81125,6364,1819,0171Urban maintenance and construction tax9.06.05.98.88.04.72Additional fees imposed for use of public utilities3.72.00.00.00.50.43Central financial allocation3.10.00.10.02.90.14Local financial allocation5.70.07.29.218.512.75Domestic loan40.50.036.524.825.062.9a– National debt financed with local budget2.60.00.00.02.80.06Foreign Investment1.20.02.50.60.34.4a– Foreign direct investment0.20.00.00.00.20.07Bonds0.00.00.00.00.00.08Stock financing2.50.00.00.00.00.09Water resource fee2.01.80.00.00.00.010Self-raised funds by enterprises and institutions15.80.032.946.527.27.411Fees for expansion of municipal utilities capacity0.90.00.00.00.33.812Fees for use of municipal utilities2.60.23.12.20.10.0a– Toll on roads and bridges0.20.00.02.20.00.0b– Wastewater treatment fees1.90.20.00.00.00.0c– Garbage treatment fees0.00.00.00.00.10.013Land transfer fee3.690.02.56.40.00.014Other revenue9.60.09.41.517.23.7Total revenue100.0100.0100.0100.0100.0100.0Source:Data from China, Department of Finance and Ministry of Construction (2003, 2005).

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