www.TransformingTransportation.org

Urban Transport Financing in China: Ongoing reforms

to introduce sustainable financing mechanism

Binyam Reja, PhD, Transport Cluster Leader for China and Mongolia, World Bank

Presented at Transforming Transportation 2016

Urban Transport Financing in China: Ongoing reforms to introduce sustainable financing mechanism

Binyam Reja, PhD

Transport Cluster Leader for China and Mongolia

Transforming Transportation, January 2016

Urban Development in China: From rural areas to major metropolis

How did cities in China get the financing and the institutional capacity to develop their infrastructure in such a short time?

China’s fiscal system centralizes revenues, and decentralizes expenditure …

Key Elements of China’s Fiscal Framework governing urban transport financing: Central Government takes most of the fiscal revenue Local governments keep 40 to 50 percent revenue. Local governments are not allowed to borrow on

their budget Local governments are responsible for urban

infrastructure, including transport.

Given the imbalance revenue and expenditure framework, local governments have use innovative funding and financing mechanist to fill the funding gap.

Revenue and expenditure of subnational governments

Source Urban China Toward Efficient, Inclusive, and Sustainable Urbanization

Revenues used to Fund Urban Infrastructure

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Bill

ion

RM

B

Water Resource Fee

水资源费Land Transfer Fee

土地出让金

Other Revenues

其他收入

User Fee/ Fee for Use of Municipal Utilities

市政公用设施有偿使用费Fee for Expansion of Municipal Utilities

Capacity 市政公用设施增容配套费Extra-charges for Public Utilities

公用事业附加Urban Maintenance and Construction Tax

城市维护建设税Local Government General Budget

地方财政拨款Central Government General Budget

国家预算内投资

Land lease fees are the dominant source for local governments revenue for infrastructure financing, with average growth rate of 46.2%. Land lease fees in 2012 was 33 times higher than that in 2001. Central government’s transfer is minimal.

Source: China Urban Construction Statistic Yearbook

Capital investment is financed primarily through domestic loans and self-raised funds; local government budget accounts for 30% of total capital investment in urban infrastructure. Self-raised funds are generated from local government’s commercial activities. Bond-based financing is limited for local infrastructure

Source: China Urban Construction Statistic Yearbook

Revenues used to Fund Urban Infrastructure

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

900.00

1,000.00

1,100.00

1,200.00

1,300.00

1,400.00

1,500.00

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

Bill

ion

RM

B

Other Funds

其他资金

Self-Rasied Funds

自筹资金

Foreign Investment

利用外资

Bond

债券

Domestic Loan

国内贷款

Financial Allocation from Local Government Budget

地方财政拨款

Investment from Government Budget(Central and local)

Rapid Accumulation of Debt

Domestic Loan

• Borrowing is done through Urban Development Investment Companies (UDICs) to avoid “no borrowing” rule

• Debt financing increased sharply after 2008 – after stimulus package was announced

Source: China Urban Construction Statistic Yearbook

-

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

450.00

500.00

Bill

ion

RM

B

Domestic Loan

Local governments took 30 years to borrow RMB1.36 trillion

Borrowed RMB1.26 trillion

from 2009 to 2011

Traditional UDIC Financing Structure

Local Government

UDIC

UDIC Transport Company

BRT Company

Other Investment(self-raised funds)

Other Operating Revenues

Bank Loans

Corporate Bonds

Guarantee

Fare Box Revenues

Operating Subsidy

Land and Other Initial Capital

New Infrastructure Financing MethodTargeted Reforms Include:

Clear existing local government debt and government financing platform debt;

Strengthen local debt monitoring and budgetary control

Issue local government bonds:

--Provincial governments issue bonds on behalf of municipality/ county

--General Bond for non-revenue projects; repay through general budget revenue

--Specific Bond for revenue-generating projects; repay through fund budget revenue

Promote collaboration of government and social capital (PPP)

--Establish Special Purpose Vehicle (SPV) for project financing, construction and operation

--Local Government provides on-budget subsidy but not repayment of SPV debt

Project Financing Structure under the New Budget Law

Local Government

BRT Company

Contractor

Other Operating Revenues

Financial Institutions

Bond Market

Fare Box Revenues

Operating Subsidy

Capital Subsidy

Operator

Service Agreement

Payment

Bond/Loan/Equity

EPC

Public Private Partnership (PPP)

Local Government

BRT Concessionaire

Contractor

Other Operating Revenues

Financial Institutions/ Investors

Bond Market

Fare Box Revenues

Operating Subsidy

Capital Subsidy

Operator

Concession Agreement

Payment

Bond/Loan/Equity

EPC

Transport Department

Case Study:

Urumqi Urban Transport Project

Project Cost: US$560 million for BRT, ITS, Terminals, and Capacity Building.

• World Bank loan (US$140 million) The loan will be on-lent to UMG based on established procedures. UMG will repay the IBRD loan based on established procedures for IBRD loans in China.

• CDB Loan (RMB1.5 billion). This loan will be made to the Urumqi Urban Transport Investment Company (UUTIC). UUTIC is the sole owner of the BRT operator and smart card revenue clearing company. UUTIC will use the revenues from BRT operations and commission from smart cards to repay the CDB loan. However, the loan repayment obligation will reduce the revenues available to cover BRT service operating costs. Therefore, UUTIC will receive annual pre-determined subsidy from UMG. The subsidy will be recorded in UMG’s annual budget. Both UMG and UUTIC will sign a Service Agreement specifying their obligations and responsibilities. (See Section B below for details of the financial analysis of UUTIC.)

• UMG fiscal support (RMB920 million) will be used to cover remaining counterpart fund obligations.

Urumqi Urban Transport Project Financing ArrangementUnder the New Budget Law

Urumqi Urban Transport Case

Financial Analysis Results for Urumqi Urban Transport Company –With and Without Project

0.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

3,500.00

Total Revenue O&M Expenses Debt Services Deficit/Operating Subsidy Required

mill

ion

RM

B)

Without project NPV With project NPV

Subsidy includes debt service obligation

Conclusion

• China’s urban transport infrastructure has been traditionally developed through off-budget, commercial mechanism

• New Budget closes the financing mechanism that has been in place for the last 20 years

• But it opens new forms of financing, but to succeed:

New sources of revenue (beyond land lease) need to be identified specific revenue to support investment

User charges will be important

Subsidies need to be transparent and linked to service provision

Fiscal Commitments need to be properly managed

New skill sets in financial analysis and PPP will be required