Chinese Urbanism in Global Context PLAN A6526 Columbia University Prof. Weiping Wu Land Finance and Infrastructure

China’s infra investment Barreda and Wertime 2013.

Pudong airport and maglev train

Shanghai Yangshan port

Shanghai metro network

Infrastructure financing Public investment (e.g. property tax as source) Municipal bonds Bank loans Private participation (PPI) Other official sources Multilateral institutions (e.g. World Bank) Development/INFRA banks (e.g. BNDES)

Industrialized countries Other developing countries Quick comparison Industrialized countries Other developing countries China Borrowing from capital markets (municipal bonds) Local taxes (e.g. property tax) Land lease / transfer fees Grants – internal and external Borrowing – mostly from state banks Grants & subsidies (e.g. DOT, FTA) Borrowing User fees Others

Sources of funding Barreda and Wertime 2013.

Local fiscal context Fiscal decentralization mismatch between expenditures and revenues between levels of government fiscal gap for local governments Local governments have neither adequate tax resources nor authority to borrow externally revenue-rich regions keep more (as result of 1994 tax reform) sharp rise in interregional disparities in fiscal spending

Impetus for land transfer Urban land constitutes Future extra-budgetary revenue Collateral for local borrowing Local fiscal context (Lu and Sun 2013)

“Land-infrastructure-leverage” Common source of financing borrowing through local government financing vehicles (LGFVs) backed by future land lease revenues Residential and commercial uses generates more revenues Driving forces Exhibiting achievement in economic growth Maximizing fiscal profit

Land revenue as % in 2009

Key instrument – LGFVs Treated as municipal SOEs (Source: Ueda and Gomi 2013)

Example: Beijing Capital Group Formed thru merger of 17 state firms Scope: infrastructure, real estate, financial services Invest in and outside of Beijing Infra projects largely thru BOTs Acquire land development rights for residential real estate

Private infra investment ($million)

PPPs in China

Implementing PPPs Management and Lease Contracts Concessions – private entity takes over SOE management Greenfield Projects – private entity or a public-private joint venture builds and operates new facility Divestitures  – private entity buys equity stake in SOE

Forms of greenfield projects Build, lease, and transfer (BLT) Build, operate, and transfer (BOT) Build, own, and operate (BOO) For BLT, BOT and BOO, government usually provides revenue guarantees thru long-term take-or-pay contracts for bulk supply facilities or minimum traffic revenue guarantees Merchant government provides no revenue guarantees

Management & lease contract Implementing PPPs Concession Divestiture Greenfield Management & lease contract Asset ownership Public Private Public/private Capital investment shared New services Yes No Typical duration 20-30 years indefinite 1-15 years

Select PPP projects in China

Select PPP projects in China

Risk premiums Regulatory risk Currency risk Demand risk “Regulatory environment is first-order issue: with transparent, published rules, and independent of politics” “Chinese infrastructure space is ‘a black box’ due to unpredictable regulations” Currency risk Higher than expected by domestic investors Demand risk General business risk