Risk Management for Build-Transfer plus Land Usage Fee Reimbursement Delivery Method in China

Transcription

1 1871 Risk Management for Build-Transfer plus Land Usage Fee Reimbursement Delivery Method in China Wei ZHANG 1 ; Yong BAI 2 ; Yilei HUANG 3 1 Associate Professor, Department of Construction Management, Huazhong University of Science and Technology, Wuhan, China, ; zhang_wei98@126.com 2 Professor and Chair, Department of Construction Management and Engineering, North Dakota State University, Fargo, ND, Phone: (701) ; Fax: (701) ; yong.bai@ndsu.edu 3 Lecture, Department of Construction Management and Engineering, North Dakota State University, Fargo, ND, ; yilei.huang@ndsu.edu * Supported by National Natural Science Foundation of China ( ). ABSTRACT To meet the large demands for infrastructure and public facilities in the rapid urbanization process, the Chinese government has issued a series of regulations for promoting private investments and participations. Among different applications of private investment, build-transfer (BT) method was widely explored for not-for-profit infrastructure and public facilities. First, private investors finance and build infrastructure and public facilities, indirectly promoting urban area and house market development. Later, the government gets land usage fees (LUF) from real estate developers and pays the private investor back using LUF. This BT plus LUF delivery method is an innovative way to solve the dilemma between development and fund shortage in China. However, the risks such as long construction period, high investment, and obstacles in land acquisition make it difficult to implement. This paper attempts to illustrate the mechanism and risk management of this delivery method. An ecological small town located in central China was used as a case study. Based on literature review and characteristics analysis of the case, a list of initial risk factors was proposed. A questionnaire survey was then conducted, based on that, 28 risk factors were allocated between the government and the private investor, and ranked according to their significance scores. Furthermore, control measurements for the top four government-responsible risk factors were discussed. The results create a systematic risk management framework including risk identification, risk evaluation, and risk response, which can provide a reference for risk management of foreign or domestic investors in China. INTRODUCATION China is one of the largest developing countries in the world, with 1.37 billion people in 2010 and undergoing a rapid urbanization process, thus needs huge amounts of funds to improve house and infrastructure conditions. The funds are not only from tax, bonds, and other public sources, but also from private investors. It is usually called public-private-partnership (PPP) that private investors participate in public facilities development. There are two widely used PPP methods in China, namely, build-operate-transfer (BOT) and build-transfer (BT). BOT means private investors

2 1872 finance and build the facility, operate it for profits in a concession period, then transfer it to the government at the end of the period. BOT has been widely used in for-profit infrastructure projects for nearly 30 years in China. BT means private investors finance and build the facility, transfer it to the government immediately after it is completed, and the government pays back the investors in later years using the revenue generated from the facility. BT has been explored a lot in not-for-profit infrastructure projects such as schools and municipal roads in China. In the past decade BT method has faced many obstacles in real-world applications. The most critical one is how to generate the pay-back revenue. One of the ways to address this obstacle is to generate land usage fees (LUF), in addition to traditional tax and public bonds. In China, lands can only be state-owned or collectively-owned, so the government is able to require the real estate developers to pay LUF for the right of land use. Thus, the government can firstly authorize a private investor to build infrastructure to promote real estate development, then, the government collects LUF from real estate companies and pays the private investor back. It is an innovative method to solve the dilemma between development and fund shortage. However, the execution of this brilliant arrangement is not as easy as outlined in the blueprint. There are several issues needed to be addressed, for example, how much money is needed for the investment of infrastructure, how to control the project cost, and how much LUF should be collected to pay back the investor? Little research has been done in this area. This paper presents the results of a research project using risk management tools and a case study to address the challenges and related solutions in BT plus LUF delivery method in China. RESEARCH OBJECTIVE There are three research objectives including: (1) To interpret the mechanism of BT plus LUF delivery method used for infrastructure and public facility projects in China. A case study of a small town development was used to illustrate the processes, characteristics, preliminary cost estimation, and the main contract agreement of the case project. (2) To reveal the most significant risk factors of this delivery method. An initial list of risk factors was developed based on literature review. Then, a questionnaire survey was conducted to get an allocation scheme of the major risk factors between the government and the private investor and a significance ranking list of all the risk factors. (3) To propose a risk management framework for the most significant risk factors of this delivery method. Response measurements for the top four governmentresponsible risk factors were discussed based on the results of expert interviews. LITERATURE REVIEW PPP (including BOT and BT) is considered as an innovative project delivery method (PDM), namely, a new type of organization framework for construction project execution (Ibbs et al. 2003; Oyetunji and Anderson 2006). It covers the whole project life cycle including feasibility study, financing, design, bid, construction, operation, and maintenance. Therefore, it is more integrated than the traditional design-bid-build (DBB), construction management (CM), and design-build (DB)

3 1873 methods which only concentrate on design, bid, and construction processes (Garvin 2003; Touran et al. 2011). In the past decades, PPP has become a hot research field for different construction types and in different countries. Some researchers care about one certain aspect of PPP/BOT application, such as critical success factors (Chan et al. 2010a; Dulaimi et al. 2010; Tang et al. 2013), performance evaluation (Yuan et al. 2010; Raisbeck et al. 2010; Cheung and Chan 2011), implementation obstacles (Chan et al. 2010b; Yuan et al. 2012), and risk management (Wang et al. 2000a, 2000b; Choi et al. 2010; Ke et al. 2012; Hwang et al. 2013), and try to find a reasonable execution scheme for PPP/BOT projects. The questionnaire survey method is frequently used so as to widely hear experts opinions and suggestions. While another group of researchers (Chen and Messner 2005; Mahalingam 2010) try to study different aspects of PPP/BOT application as a whole and prefer to use the case study method. This paper presents a research project using the case study and questionnaire survey methods to explore the BT plus LUF delivery method in China. BACKGROUND OF CASE STUDY Chinese central and local governments have tried different ways in different periods to finance the infrastructure developments. Right after China s reform and opening in 1978, the government encouraged foreign investments by tax reductions, land usages, and other policies (Chen 1997). Since the 1990s the domestic private entities matured, and the government issues a series of regulations to encourage domestic private investments. Case Project Information The selected case study was named as the Wu Li Jie (WLJ) Development Project. WLJ is a satellite town of Wuhan, the biggest city of central China as well as the capital of Hubei Province. It has a 2.57 km 2 area and 18,000 residents in 2009, and is planned as an integrated ecological small town with low-carbon, high-tech industries, convenient urban facilities, and 50,000 residents by To achieve this objective, land acquisition and infrastructure developments are very urgent tasks, as shown in Table 1. Table 1. Infrastructure Development and Corresponding Investment Main Project 1. Land acquisition and compensation 2. Road network 3. Water supply and drainage system Description MU (a Chinese area unit) land acquisition; m 2 house removing and compensation Four main roads and nine normal roads, including road beds, surfaces, sidewalk and road greening construction. Water supply pipelines, stations, drainage pipelines and wastewater treatment plants. Cost Estimation (RMB) 985 million 200 million 132 million 4. Electricity Electricity transmission lines, power stations, 44 million

4 1874 transmission transformation stations, electricity distribution stations, etc. 5. Telecommunication Telecommunication cables laying and stations. 14 million 6. Gas supply Gas supply pipelines and stations. 23 million 7. Greening projects Parks, producing green lands, fence green lands, supplementary green lands. 79 million 8. Street lighting Street lighting lines and poles. 23 million 9. Management fee Loan interest, inflation cost and management cost. 105 million Total Land acquisition, compensation and infrastructures in the 2.57km 2 area 1.61billion The local government could not afford the huge investments, thus authorized a private company, named as D, to finance, design, and build roads, water supply, electricity, telecommunication, and other necessary infrastructure facilities, and promised to pay company D back using the LUF. The project processes can be illustrated as Figure 1. Figure 1. Mechanism of BT plus LUF delivery method Basic BT Agreement of WLJ Project The main contract agreements between the local government and company D can be described as follows. Company D is responsible for: (1) in-putting equity fund and financing the required money for land acquisition and infrastructure facilities, totally estimated as 1.61 billion RMB; (2) taking over lands as construction sites from local farmers and residents and compensating them according to the Land Law; (3) employing designers, general contractors, and professional consultants to complete the design, bid, and construction and meet the requirements of time, quality, cost, and safety control and environment protection; and (4) delivering the developed infrastructures to the local government after completion.

5 1875 The local government is responsible for: (1) paying back Company D using the LUF collected from real estate developers; (2) coordinating land acquisition and compensation issue and resolving potential conflicts; (3) supervising Company D s project management and the design, bid, and construction processes; and (4) providing other necessary cooperation. RISK IDENTIFICATION AND EVALUATION Initial Risk Factors List Traditional risk management includes risk identification, evaluation, response, and monitoring, for which, many techniques can be used (Tang et al. 2007). In this research, the methods of expert interview and questionnaire survey were used to conduct the studies for risk identification and evaluation. First, the characteristics of WLJ project can be summarized as follows: (1) WLJ is a group of infrastructure projects in an area, instead of a single project; (2) The investment is huge, 1.61 billion RMB, and difficult for cost control; (3) The construction period lasts from 2010 to 2015, which lead to a high risk of inflation; (4) Company D was promised to be paid using LUF; (5) Due to the large project size, it is difficult for time, quality, and safety control; (6) Without an operation stage, the infrastructures and public facilities will be delivered to the local government soon after completion. Then, a total of 28 risk factors were identified according to the characteristics of the case project and based on a literature review (Lam et al. 2007; Ke et al. 2010; Hwang et al. 2013), as shown in Table 3. Several risk factors were not applicable for the project, such as nationalization, operation cost overrun, and high maintenance cost. While some special risk factors, due to the particularity of the project, were considered, such as government s payback ability and land unavailability. Data Collection and Analysis A questionnaire survey was conducted in a meeting. The 25 respondents were mostly experienced in construction management and familiar with the case project. In the survey, two types of questions were asked. One was about risk allocation. For each risk factor, the respondents were asked to select one from three options including government, private investor, and shared. The selection frequency and percentage were calculated to get the risk allocation results. The other type of questions was about significance ranking, for that the five point evaluation method was used. For each risk factor, 1 means not significant, 2 means normal, 3 means significant, 4 means very significant, and 5 means extremely significant. The median scores of all respondents evaluation were used to develop the risk factors significance ranking list. The risk allocation and significance ranking results are shown in Table 2. Six risk factors were classified into government category, 13 risk factors were classified into private investor category, six risk factors were classified into shared category, and the last three factors were classified into need negotiation category. All of the risk factors were ranked according to their median significance scores. The survey results can serve as a basis for the further discussion of risk control measurements.

6 1876 Table 2. Risk Allocation and Significance Ranking of WLJ Project Responsible Party Government Private sector Shared Need negotiation Risk factors Risk allocation Significance Government investor Private Shared Rank Government s payment ability 88% 0 12% Government s default 64% 28% 8% Corruption 84% 4% 12% Public/political opposition 60% 8% 32% Land unavailability 68% 12% 20% Supporting infrastructure Unavailability 56% 8% 36% Private investor reliability 12% 72% 16% Financial availability and cost 0 88% 12% Land acquisition cost 16% 56% 28% Design deficiency 0 88% 12% Time delay 20% 64% 16% Construction cost overrun 8% 72% 20% Quality defects 4% 88% 8% Safety and health 0 92% 8% Technology 0 84% 16% Material supply delay 0 100% Interest rate change 8% 72% 20% Bad weather 0 56% 44% Unexpected geological conditions 0 60% 40% Immature juristic system 24% 12% 64% Change in law 20% 8% 72% Inflation 8% 36% 56% Environment protection 28% 20% 52% Excessive contract variation 24% 16% 60% Organization and coordination 32% 8% 60% Approval and permit 40% 32% 28% Third party reliability 24% 32% 44% Force majeure 48% 8% 44% RISK RESPONSE The traditional risk management theory divides risk response techniques into four groups, namely, risk avoiding, risk reducing, risk transfer, and risk retaining. Due to the length restraint of this paper, the response measurements were discussed only for the top four government-responsible risk factors, namely, corruption, government s payback ability, government s default, and land unavailability. Corruption In China, public projects are usually large-size and heavily invested, and the employers of them are public sectors, which are government organizations and have political power to interfere project management, e.g., trying to raise project standard, to get better functions, and to ask for bribe. Thus, public projects tend to be a serious corruption-breeding area. To restrain corruption, first, duties should be clearly and

7 1877 properly distributed between the government and the public investor, to make the officials know what shall or shall not be administered by them and restrain unreasonable interferences. Second, the special government supervising departments, such as the Development and Reform Committee (DRC) and the Bureau of Finance (BOF), should conduct strict inspection and auditing to discover corruption behaviors and give corresponding punishments. Third, project information and progress should be open to public. Finally, public supervision such as media reporting and hearing meetings for important issues is necessary. Government s Payback Ability As mentioned before, how the government payback after completion and delivery is a key question for BT project. Delayed or reduced payback amount may bring destructive damage to the private investor due to the huge investment. Five measurements are proposed to protect the private investor. First, a detailed estimation for the project is desired. Second, the real estate land area should be calculated and agreed by both the government and the private investor, which can serve as a basic blueprint for later payback. Third, the private investor can require the government to provide a payback assurance/insurance. Fourth, the private investor can prepare a certain amount of Preparative Fee, so as to keep its financial condition healthy once the payback is delayed. Fifth, if the government breaks its promise of payback, the private investor has to seek juristic protection through legal ways, such as arbitration and litigation. A key question for the case project in the financial aspect was: how much LUF needs the local government collect to payback Company D? The government employed a quantity surveyor to make a detailed land area estimation and land price forecast, the results of which are shown in Table 3. The real estate development area was 1.58 km 2, which was the total area of 2.57 km 2 deducting areas of houses and infrastructures. It is worthy of notice that MU is a commonly used land area unit in China, and 1 km 2 equals 1,500 MU, thus the real estate development area was 2,374 MU. Table 3. Real Estate Development Area Estimation No. Land category Land area (m 2 ) Percent 1 Total area 2,576, % 2 Infrastructures 752, Road 489, Water supply stations 2,250 29% 2.3 Green lands 260,691 3 Land acquisition and public houses 240, Returning houses 141, Public houses 93,100 9% 3.3 Sanitation and fire control stations 6,340 (1-2-3) Real estate area 1,582,847 62% Notes: Water supply and drainage pipelines, gas pipelines and telecommunication cables were buried along roadside, thus occupied no space.

8 1878 The forecasted land price can be calculated using the formula: TI LP REA*80% LP means land price, TI means total investment of 1.61 billion RMB, REA means real estate area of 2,374 MU, 80% means only 80% of the LUF can be used to payback Company D, while the other 20% was tax and administration fee. Thus LP was determined as 844,900 RMB/MU. The result matched well with the local market and lands price in the same area. Government s Default The government has strong political power but sometimes interferes with the private investor s operation or delays in providing support and cooperation. The private investor can hardly avoid or transfer this kind of risks, but can try to reduce this risk through two ways. First, the private investor can require the government to issue special policies and clearly state its duties. Second, both parties can sign a detailed and proper contract agreement. If the government has default, the private investor can firstly claim for compensation, and secondly seek juristic protection through arbitration or litigation. Land Unavailability During the Chinese urbanization and real estate development processes, some farmers have to leave their farms and some local residents have to move from their houses, since the land will be used for infrastructure purposes. As a result, land acquisition becomes the most conflictive issue and usually faces great resistance in the Chinese construction industry. To make the land acquisition process smoothly and then ensure the success of the BT plus LUF method, six measurements were proposed. First, the government and the private investor should make a proper land acquisition plan together; second, since conflict may become severe if compensation is late or low, the private sector should prepare the compensation money in advance; third, the investor should try to take over land early to avoid land cost increase; fourth, the investor should provide some incentive measurements, such as give bonus for the early movers; fifth, the government should coordinate the relationships of related parties during land acquisition; and six, the private investor can prepare some Preparative Fee to remedy the cost overrun problem. CONCLUSIONS This paper presents a study on the BT plus LUF delivery method in China utilizing a case study project, WLJ small town development. BT method can help resolving the fund shortage problem for infrastructure developments. However, according to the project characteristics such as large scale, multi projects, hugeamount investment, and obstacles in land acquisition, risk management is extremely important for the success execution of the BT plus LUF delivery method. To identify and evaluate the risks in the WLJ project, a questionnaire survey for a total of 28 risk factors was conducted in a meeting. Both risk allocation and significance ranking were performed, according to the result of that, six risk factors were classified into government category, 13 risk factors were put into private

9 1879 investor category, six risk factors were considered in the share category, and the left three factors were classified into need negotiation category. The top 10 risk factors were ranked as private investor reliability, corruption, government s payback ability, safety and health risk, immature juristic system, government s default, land unavailability, quality defects, construction cost overrun, and time delay. To promote risk control in the WLJ project, measurements are proposed for the top four government-responsible risk factors, which contain four categories, namely, risk avoiding, risk reducing, risk transfer, and risk retaining. For example, in order to control the government s payback ability risk, firstly a detailed estimation for the project should be made, secondly the real estate land area should be agreed by both the government and the private investor so as to get a basic blueprint for the further payback, thirdly the private investor can require the government to provide a payback assurance/insurance, and fourthly the investor can prepare a certain amount of Preparative Fee so as to keep its financial condition healthy. These risk control measurements were based on the results of expert interviews and may provide a good reference for the similar projects in China. REFERENCES Chan, A. P. C, Lam, P. T. I., Chan, D. W. M., Cheung, E., and Ke, Y. (2010a). Critical success factors for PPPs in Infrastructure Developments: Chinese Perspective. J. Constr. Eng. Mgmt., 136(5), Chan, A. P. C, Lam, P. T. I., Chan, D. W. M., Cheung, E., and Ke, Y. (2010 b). Potential obstacles to successful implementation of Public-Private Partnerships in Beijing and the Hong Kong Special Administrative Region. J. Mgmt. in Eng., 26(1): Chen, C. and Messner, J. I. (2005). An investigation of Chinese BOT projects in water supply: a comparative perspective. Constr. Mgmt. and Eco.(Nov. 2005) 23, Chen, J. J. (1997). China s construction industry and foreign investment. Building Research and Information, 25(1): Cheung, E. and Chan, A. P. C. (2011). Evaluation model for assessing the suitability of public-private partnership Projects. J. Mgmt. in Eng., 27(2): Choi, Jae-ho, Chung, J., and Lee, Doo-Jin (2010). Risk perception analysis: Participation in China s water PPP market. Int. J. Project Mgmt. 28 (2010) Dulaimi, M. F., Alhashemi, M., Ling, F. Y. Y., and Kumaraswamy M. (2010). The execution of public private partnership projects in the UAE. Constr. Mgmt. and Eco. (April 2010) 28, Garvin, M. J. (2003). Role of project delivery systems in infrastructure improvement. Construction Research, 2003, 1-8. Hwang, Bon-Gang, Zhao, X., and Gay, M. J. S. (2013). Public private partnership projects in Singapore: Factors, critical risks and preferred risk allocation from the perspective of contractors. Int. J. Project Mgmt. 31 (2013) Ibbs, C. W., Kwak, Y. H., Ng, T., and Odabasi, A. M. (2003). Project delivery systems and project change: quantitative analysis. J. Constr. Eng. Mgmt., 129(4),

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