JFMPC 14,2. The current issue and full text archive of this journal is available at

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1 The current issue and full text archive of this journal is available at JFMPC 152 SWOT analysis of domestic private enterprises in developing infrastructure projects in China Yongjian Ke, Xinbo Zhao, Yingying Wang and ShouQing Wang Department of Construction Management, Tsinghua University, Beijing, China Abstract Purpose The purpose of this paper is to help domestic private enterprises (DPEs) identify their strengths, weaknesses, opportunities, and threats (SWOT) in developing infrastructure projects in China. Design/methodology/approach The paper draws on extensive literature reviews coupled with brainstorming and interviews methodologies to compile a list of SWOT factors for DPEs in developing infrastructures. To validate the significance of the identified SWOT list, a questionnaire survey is thus carried out. Findings The paper identifies 16 strengths, 15 weaknesses, 16 opportunities, and 21 threats for DPEs in developing infrastructure projects in China. The opinions of respondents from different sectors are sought and evaluated to obtain the relative significance of these factors. A set of major SWOT hypotheses is then derived using factor analysis. Research limitations/implications The paper is limited to identifying SWOT factors in common, therefore the next step should be proposing an adjustment framework to support decision marking. Practical implications These findings should provide a valuable reference not only for DPEs but also for foreign investors who are planning to invest in infrastructure projects in China. Originality/value The investors in both rounds of infrastructure investments in China in the last two decades have limitations. Foreign investors acting as the major player in the first round usually charge higher and prefer operating projects in more developed regions, while state-owned enterprises as the principal player in the second round are inefficient in the operation and management, which largely restrained the advantages of public-private partnership model. Therefore, there is an urgent need to explore the potential of DPEs, another potential major player in developing infrastructure projects. To this end, this paper provides valuable information through a comprehensive SWOT analysis to the DPEs. Keywords SWOT analysis, Private sector organizations, Construction operations, China, Partnership Paper type Research paper Journal of Financial Management of Property and Construction Vol. 14 No. 2, 2009 pp q Emerald Group Publishing Limited DOI / Introduction Public-private partnerships (PPPs) are arrangements where the public and private sectors both bring their complementary skills to a project, with varying levels of involvement and responsibility, for the purpose of providing public services or projects (Efficiency Unit, 2005). In recent years, there have been increasing campaigns for PPP in the development and operation of infrastructure projects. PPPs present a number of recognized advantages, which include the ability to raise additional finance, bring the The authors gratefully thank the National Natural Science Foundation of China (project nos and ) for providing funding to support this research. Those who kindly participated in the survey are acknowledged with sincere thanks.

2 private sector operational efficiencies, reduce cost, and increase quality to the community (European Commission, 2003). In many developing countries, PPP financing modalities, with the ability of attracting foreign and private capital in the development of infrastructure, have been identified as innovative tools for financing major infrastructure projects. In China, the tremendous economic growth has resulted in an immense demand for basic infrastructure like roads, ports, and power generation facilities. To meet the development needs, the Chinese Government has promulgated some regulations for private investment in public utilities one after the other, and is moving towards adopting international contractual practices and working out an equitable risk-sharing scheme. Based on the above, the aim of this paper is to help domestic private enterprises (DPEs) identify their strengths, weaknesses, opportunities, and threats (SWOT) in developing infrastructure projects in China. 2. Infrastructure development in China Private participation in infrastructure development in China was first seen in power industry in 1980s. ShenZhen Shajiao B Power Plant, which came to operation in 1988, is regarded as the first build-operate-transfer (BOT) project. However, government and commercial banks in Shajiao B project took over too many risks due to the lack of BOT experience. Thereafter, several state-approved pilot BOT projects have been awarded in order to introduce BOT on a larger scale since late 1996, such as Laibin B power project, Dachang water project and Changsha power project. Since then, the involvement of private investors in infrastructural development of public utilities has improved greatly. However, at the end of last decade, the central government invested huge amounts of treasury bonds in infrastructure construction, and was determined to clean up the illegal projects, which lead to a termination of the first round of private investment (Shen et al., 2005). Stepping into the twenty-first century, the bottleneck effect of infrastructure shortage for the economy emerged and imposed budgetary pressure on the government. The investment in infrastructure development could not be completed by the government alone, which provides a good business opportunity for the private investors. In Beijing alone, some of the recently implemented PPP projects include Metro Line 4 Project, Lugouqiao Sewage Treatment Plant Phase 1 Project, Gaoantun Waste-to-Energy Plant, National Stadium Project, the Concession Project of natural gas in the East New District of YiZhuang Road, and, etc. (Beijing Municipal Commission of Development and Reform BMCDR, 2005). Wang (2005) pointed out that a new round of private investment in public utilities has started and the state-owned enterprises are the major player. However, it could be found that the investors in both rounds of infrastructure investments in last two decades have limitations (Wu, 2007). Foreign investors acting as the major player in the first round usually charged higher and preferred operating projects in more developed regions in China, while state-owned enterprises as the principle player in the second round were inefficient in the operation and management, which largely restrained the advantages of concession model. Therefore, there is an urgent need to examine the situation and future of DPEs, another potential major player in the economic market, in developing infrastructure projects. SWOT analysis of DPEs in China 153

3 JFMPC Research methodology The specific methodology of this research paper undertaken in China is based on a literature review, a brainstorming session, interviews and a questionnaire survey, as graphically presented in Figure 1. As shown in Figure 1, the research began with a literature review to compile a list of strengths and weaknesses of DPEs in developing infrastructures and a list of opportunities and threats that DPEs are likely to meet. The list of SWOT identified was then complemented and filtered after a brainstorming discussion among the research team members and interviews with some experienced academicians. To validate the significance of the identified SWOT list, a questionnaire survey was therefore carried out. After analyzing the survey results, the SWOT of DPEs in developing infrastructure projects were improved and documented. The questionnaire was designed based on the knowledge obtained from literature review, brainstorming discussion and interviews. The questionnaire encompasses all potential SWOT items that are likely to be encountered in privatized infrastructure projects in China (Table I). To improve the precision and reliability of the survey, a five-degree Likert scale for the significance of the SWOT list was adopted. Respondents were requested to indicate the significance with 1 being not important at all, 2 being not important, 3 being neutral, 4 being important, and 5 being exceptionally important. Literature review Identify potential SWOT Gain experiences in this field Interviews Revise the SWOT list Advise on the research method Brainstorm Identify potential SWOT Advise on the research method Pilot questionnaire Empirical questionnaire Data analysis Figure 1. Research framework for this paper Source: Chan et al. (2004) Mean ranking One way ANOVA analysis Conclusions

4 SWOT ID Descriptions 1. Strengths S1 High operation level S2 Capital/resource abundance S3 Clear property rights S4 High quality of staffs/managers S5 Innovative S6 Low manufacture/operation cost S7 Active S8 High management efficiency S9 Flexible organization S10 Strong adaptive capacity S11 Favorable management structure S12 Rich market experience S13 Service network adapted to domestic market S14 Effective resource management S15 Independent decision making S16 High market sensitiveness 2. Weaknesses W1 Limited understanding of infrastructures W2 Poor coordination ability W3 Poor financing ability W4 Restrained investment space W5 Lack of bargaining power with government W6 Long negotiation time W7 High negotiation cost W8 Lack of PPP experience W9 Low risk resistance capacity W10 Small scale W11 Loose organization structure W12 Low competitive power W13 Nonstandard operation behavior W14 Lack of long sight development strategy W15 High debt-equity ratio 3. Opportunities O1 Favorable changes of financing policy O2 Successful international PPP implementations O3 Increasing demand of government supervision O4 Increasing demand of innovative technologies O5 Enormous demand of public infrastructures O6 Budgetary pressure to the government O7 Government s incentives for PPP O8 Low efficiency of government investment O9 Promulgation of relative PPP laws/regulations O10 Sustainable development of national economy O11 Further improvement in living standards O12 Increasing understanding of PPP in the industry O13 Low efficiency of government operation O14 Stable industry development O15 Positive policy changes for non-public capital O16 Respectability of private enterprises 4. Threats T1 Availability of finance T2 Immature legal system T3 Immature social service system (continued) SWOT analysis of DPEs in China 155 Table I. Potential SWOT list identified

5 JFMPC 156 Table I. SWOT ID Descriptions T4 Immature management system for PPP projects T5 Inappropriate risk management of PPP projects T6 Lack of PPP professionals T7 Obstacles to equity guarantee T8 Intricate project approval and permit T9 Regional and sectional monopolization T10 Discrimination against non-public ownership T11 Lack of withdraw mechanism T12 Excessive restrictions on participation T13 Long time in contract transaction T14 Abnormal inflation T15 Abnormal interest rate T16 Legislative changes T17 Public opposition T18 Unclear definition of responsibilities T19 Absence of competitive and transparent bidding process T20 Lack of government stability T21 Abnormal exchange rate The survey was carried out from October to November 2007 targeting experts in China who are interested in the private participation in the public utilities. In total, 154 softcopy questionnaires were sent out by s to the experts who participated in 2005 PPP international workshop in Beijing organized by Tsinghua University, or 2007 PPP international conference in Dalian organized by Dalian University of Technology. A total of 58 respondents returned complete questionnaires. As presented in Table II, 34 respondents are from the industry and 24 from academic organizations. The survey results are meaningful as 24 respondents, about 41.4 percent, have rich experiences in PPP projects. The project information and the roles of respondents are shown in Figures 2 and 3. All the respondents have shown great interests in this research, have filled in the questionnaire carefully and provided a lot of valuable comments (Figure 4). Three statistical tools, mean ranking, one way analysis of variance and factor analysis, were used to analyze the data from the survey. The analysis was conducted using the SPSS for Windows software package. Mean ranking was used to determine the significance of each item rated by the experts, which is commonly adopted in similar studies, i.e. Wang et al. (2004). One way analysis of variance was used to PPP experience (project Working experience (year) number) Role, None Table II. Survey respondents information Industrial organization Academic organization Total

6 Paper making 3% Athletic facilities 3% Prison 3% Real estate 6% Power & energy 14% Refuse treatment 6% Others 6% Water 26% Transportation 33% SWOT analysis of DPEs in China 157 Figure 2. Survey respondents PPP projects (by type) Others 2% Government 2% Governement agent 2% Advisor 29% Project company 23% Supplier 2% Operator 7% Contractor 9% Designer 12% Financier 7% General contractor 5% Figure 3. Survey respondents roles in PPP projects examine whether respondents from different groups have significant different perspectives. This approach has been found to be acceptable in other construction management researches, such as Li et al. (2005a). analysis is a statistical technique to identify a relatively small number of factors that can be used to represent relationships among sets of many interrelated variables (Norusis, 1993). The Cronbach a reliabilities for DPEs SWOT are 0.783, 0.751, 0.779, and 0.796, suggesting that the data collected for the study are reliable (Norusis, 1993). Since the number of attributes in the SWOT list is greater than 7, x 2 is adopted to measure the degree of consensus amongst the respondents (Siegel and Castellan, 1988). The null hypothesis can be rejected if x 2 is greater than the critical value of x 2 at a ¼ 0.05, which means that respondents have some degree of agreement. The x 2 results of concordance test for the SWOT lists are , , , and , respectively, which are much greater than the critical values of 25.00, 23.68, 25.00, and

7 JFMPC Figure 4. Exchange rate of RMB per US$ from January 2005 to September Analysis to DPEs strengths The scores of the identified strengths are listed in Table III along with statistical indicators, the mean, the ranking and F-value, and sorted by ID numbers. It represents the perceptions of respondents from different sectors, as well as the perceptions of respondents with or without PPP experience. It could be seen that seven items scored mean values greater than 4 (important) and nine items displayed mean values between 3 (neutral) and 4. The seven most important strengths include high management efficiency, flexible organization, high market sensitiveness, strong adaptive capacity, independent decision making, clear property rights, and low manufacture/operation cost. However, it could also be found that experts with and without PPP experience have significant different perspectives on strengths S4 (high quality of staffs/managers) and S11 (favorable management structure). Respondents with PPP experience agree with these two items more. Industry vs academy With vs without PPP experience Total Industry Academy F-test With Without F-test ID Mean Rank Mean Rank Mean Rank F Sign. Mean Rank Mean Rank F Sign. Table III. Significance of the DPEs strengths S S S S * S S S S S S S * S S S S S

8 A correlation matrix of 16 strengths indicated that strengths S2 (capital/resource abundance) and S6 (low manufacture/operation cost) have few correlation with others, which are suggested to be eliminated for factor analysis (Norusis, 1993). After removing the aforesaid strengths, the correlation matrix was recalculated. The result (Bartlett s test of sphericity ¼ ; sig. ¼ 0.000) suggested that the other 14 strengths are satisfied in terms of factor analysis. The KMO value confirmed this (Norusis, 1993). Table IV contains the details of factor analysis on the DPEs strengths. SWOT analysis of DPEs in China ability to explore a new market This factor accounts for 18.6 percent of the total variances and consists of five strengths that focus primarily on the ability to explore a new market. The components of factor 1 are high market sensitiveness, independent decision making, innovative, flexible organization, and high management efficiency. Compared to state-owned enterprises, DPEs are more sensitive to new business opportunity, innovative, flexible and also efficient to invest in the new market. Taking the domestic exploration and design market for example, the number of DPEs in 2005 was three times greater than the total in 2004 (EQS & IDD, 2006). The rapid increase demonstrates the favorable ability of DPEs to enter a new market. 2 independence of business operation In this factor, there are three strengths regarding the independence of business operation including active, clear property rights and service network adapted to domestic market. 2 is responsible for 16.8 percent of the total variances. For instance, due to this independence, private cultural enterprises have played an important role in the culture and education industry, as said in an investigation of MoC (2007). Strengths High market sensitiveness Independent decision making Innovative Flexible organization High management efficiency Active Clear property rights Service network adapted to domestic market High quality of staffs/managers High operation level Favorable management structure Effective resource management Rich market experience Strong adaptive capacity Capital/resource abundance Low manufacture/operation cost % of variance Cumulative % of variance Table IV. analysis on the DPEs strengths

9 JFMPC organization structure and management ability Four items, namely high quality of staff/managers, high operation level, favorable management structure, and effective resource management, comprise the elements of factor 3 concerning the organization structure and management ability. This factor accounts for 15.3 percent of the total variances. The rapid development and the high wage of DPEs can attract better educated employees. According to the investigation on the status of college graduate employment in 2007 conducted by Institute of Economics of Education (IEE), Peking University, the major choice of graduates in 2007 is DPEs, about 34.2 percent (IEE, 2007). 4 market competition ability This factor is responsible for 13.1 percent of the total variances and has two items that emphasize the market competition ability of DPEs. DPEs that are willing to invest in infrastructure projects may have rich market experiences in their own industries. The strong adaptive capacity is the other high loading component. During the reform and development of Chinese economic community, DPEs may encounter several obstacles, such as financing limitation, discrimination policy. These strengthen the ability of DPEs to seek investment opportunities, and adapt themselves quickly to the new market. 5. Analysis to DPEs weaknesses Table V shows the respondents perceptions of the significance of the DPEs weaknesses. It could be seen that there are only two items scored mean values greater than 4, and 13 items displayed mean values between 3 and 4. The weaknesses, namely poor financing ability, low risk resistance capacity, lack of PPP experience, lack of bargaining power with government, nonstandard operation behavior, are regarded as the most important. It could be also found that weaknesses W4 (restrained investment space), W6 (long negotiation time), W11 (loose organization structure), and W12 (low competitive power) received significantly different perceptions for experts from different factors. Experts from the academic sector scored W6 greater, and less for the other three items. Industry vs academy With vs without PPP experience Total Industry Academy F-test With Without F-test ID Mean Rank Mean Rank Mean Rank F Sign. Mean Rank Mean Rank F Sign. Table V. Significance of the DPEs weaknesses W W W W * W W * W W W W W * W * W W W

10 A correlation matrix of 15 weaknesses was calculated. The result indicated that weakness W1 (limited understanding of infrastructures) has few correlation with others and is removed to improve the quality of factor analysis. After eliminating it, the correlation matrix was recalculated. The result (Bartlett s test of sphericity ¼ ; sig. ¼ 0.000) suggested that the other 14 weaknesses are satisfied in terms of factor analysis. The KMO value confirmed this (Norusis, 1993). The details of factor analysis on the DPEs weaknesses are presented in Table VI. 1 internal structure and management This factor accounts for 19.0 percent of the total variances and insists of four items which focus primarily on the internal structure and management of DPEs. The financial situation of DPEs is deemed as a notable weakness, as most DPEs have a high debt-equity ratio. Besides, nonstandard operation behavior and loose organization structure also lead to a low competitive power (Li, 2007). 2 poor negotiation ability 2 is responsible for 14.5 percent of the total variances, and includes two items regarding the poor negotiation ability of DPEs. Owing to the government s erroneous and unfair view of private enterprises, especially DPEs, i.e. discrimination against non-public ownership (Li, 2007), it would cost DPEs long time and high transaction expenditure to achieve an agreement with government. 3 financing and investment problems Poor financing ability, lack of bargaining power with government and restrained investment space comprise the elements of factor 3 concerning the DPEs financing and investment problems. This factor accounts for 14.0 percent of the total variances. Although the Chinese Government has promulgated a series of relative regulations, which aims to encourage commercial banks to increase the debt service to DPEs, the difficulty of financing for DPEs still exists due to their high debt-equity ratio and low SWOT analysis of DPEs in China 161 Weaknesses High debt-equity ratio Low competitive power Nonstandard operation behavior Loose organization structure Long negotiation time High negotiation cost Poor financing ability Lack of bargaining power with government Restrained investment space Lack of PPP experience Poor coordination ability Low risk resistance capacity Small scale Lack of long sight development strategy Limited understanding of infrastructures % of variance Cumulative % of variance Table VI. analysis on the DPEs weaknesses

11 JFMPC 162 credit rating (Li, 2007). The key reasons for limited investment space may include excessive restrictions on participation in public utilities, regional and sectional monopolization, etc. 4 lack of management capability in infrastructure projects There are three items pertaining to the management capability in infrastructure projects, including lack of PPP experience, poor coordination ability and low risk resistance capacity. This factor is responsible for 12.4 percent of the total variances. Privatized infrastructure projects have inherent disadvantages, such as high risk, lack of appropriate skills and experience, complicated and expensive tender procedure, etc. (Chan et al., 2006), which required from the private consortium a strong management ability. Unfortunately, DPEs normally have few PPP experience (Zhang, 2005b) and poor coordination ability (Wu et al., 2007). 5 unsustainable development This factor explains the possibility of unsustainable development that some DPEs would encounter, as they are small and lack long-term development strategy (Li, 2007). 5 accounts for 10.9 percent of the total variances. Unsustainable development may result in a poor risk resistance capacity, but on the other side, it is also the driving force for the DPEs to participate in infrastructure development so as to obtain long-term stable cash inflows. 6. Analysis to DPEs opportunities Significance of the DPEs opportunities to develop infrastructure projects is listed in Table VII. There are three items scored mean values greater than 4 and 13 items displayed mean values between 3 and 4. Among them, opportunities O5 (enormous demand of public infrastructures) and O1 (active changes of financing policy) obtained a much higher score, 4.34 and 4.29, respectively. The result also indicated that experts from different groups share the same opinions on the potential of PPP market in China. Industry vs academy With vs without PPP experience Total Industry Academy F-test With Without F-test ID Mean Rank Mean Rank Mean Rank F Sign. Mean Rank Mean Rank F Sign. Table VII. Significance of the DPEs opportunities O O O O O O O O O O O O O O O O

12 A correlation matrix of 16 opportunities was calculated. The result (Bartlett s test of sphericity ¼ ; sig. ¼ 0.000) suggested that all opportunities are satisfied in terms of factor analysis. The KMO value is satisfactory as well (Norusis, 1993). The analysis produced a six-factor solution explaining 71.1 percent of the total variances, as shown in Table VIII. SWOT analysis of DPEs in China 1 macro industry environment This factor is composed of four items that mainly focus on the macro industry environment in China. It explains 13.4 percent of the total variances. Government supervision function is demandingly increasing and the implementation of PPP scheme will then be able to release the government from the construction and operation (Li et al., 2005b). The stable and sustainable industry development in China also presents a good opportunity for DPEs to participate in the infrastructure development. Successful international and domestic PPP experiences and increasing demand of innovative technologies are the other high loading components macro economic development 2 accounts for 13.1 percent of the total variances and consists of two items, including further improvement in living standards and sustainable development of national economy. In Beijing alone, the average gross domestic product growth rate registers 11.9 percent, and the per capita disposable income of urban dwellers has increased annually by 10.4 percent (BMCDR, 2006). With this improvement of material Opportunities Increasing demand of government supervision Successful international PPP implementations Increasing demand of innovative technologies Stable industry development Further improvement in living standards Sustainable development of national economy Positive policy changes for non-public capital Respectability of private enterprises Favorable changes of financing policy Government s incentives for PPP Enormous demand of public infrastructures Promulgation of relative PPP laws/regulations Low efficiency of government investment Budgetary pressure to the government Low efficiency of government operation Increasing understanding of PPP in the industry % of variance Cumulative % of variance Table VIII. analysis on the DPEs opportunities

13 JFMPC 164 life and the transformation of development concepts, urban and rural residents are demanding more diversified and differentiated consumption. Similarly, the economic growth also exerts a lot of pressure on the infrastructure development. 3 favorable environment for private enterprises There are two items in this factor group regarding the favorable environment for private enterprises, namely positive policy changes for non-public capital and respectability of private enterprises. 3 is responsible for 12.4 percent of the total variances. The Chinese Government has promulgated some regulations to permit and encourage private enterprises to invest in public utilities, such as Decision of the Central Committee of the Communist Party of China on some issues concerning the improvement of the socialist market economy adopted on October 14, 2003, Several opinions of the state council on encouraging, supporting and guiding the development of individual and private economy and other non-public sectors of the economy issued on February 19, These legal improvements provide the permission and possibility for DPEs to participate in the public utilities development. 4 government s support and incentives This factor, which explains 12.2 percent of the total variances, has four items that emphasize the government s support and incentives for private participation in public projects. These four items are favorable changes of financing policy, government s incentives for PPP, enormous demand of public infrastructures, and promulgation of relative PPP laws/regulations. According to the findings of several previous researches, risks related to the government are considered as the most critical risks to PPP projects, such as political and legal risks (Wang et al., 1999, 2000). In particular, the macro-economics control and intervention on investment and market from the central government may also impose risks to PPP projects (Sachs et al., 2007). Support and incentives from Chinese Governments are, therefore, significant to the implementation of PPP projects. 5 government s shortages Three items comprise the elements of factor 5 concerning the government s shortages, including low efficiency of government investment, budgetary pressure to the government and low efficiency of government operation. This factor accounts for 12.2 percent of the total variances. For example, the forecast of the total investment on environmental construction and protection in the 11th five-year is 1,375 billion Renminbi (RMB), including 660 billion RMB on urban environmental infrastructures, which may impose budgetary pressure to the government (Zhou, 2005). The shortages of government in the construction and operation of public utilities become a driving force of the adoption of PPP (Li et al., 2005b). 6 increasing understanding of PPP This factor explains that PPP concept is increasingly understood and accepted by both the government and the private enterprises. As mentioned above, a new round of PPP investment tide is emerging in China again. About two-third of the 32 sport venues including the main stadium for the 2008 Beijing Olympic Games and the Lines 3-5 subway routes in Beijing were developed with PPP vehicle (Beijing Evening News, 2003).

14 In line with the wide application, several PPP relative workshops, conferences and training programs are organized and held in China, like 2005 PPP international workshop in Beijing organized by Tsinghua University, 2005 International Forum on Infrastructure Marketization in Beijing organized by BMCDR, 2007 PPP international conference in Dalian organized by Dalian University of Technology, etc. Unlike in last decade, the concept of PPP is now regarded to be well known in China (Sachs et al., 2007). However, it is still far behind other developed countries, and it is urgent to investigate and publicize the measures to achieve value for money in PPP projects. SWOT analysis of DPEs in China Analysis to DPEs threats The significance of the DPEs threats is presented in Table IX. It could be seen that there are five items that displayed mean values greater than 4, and 16 items scored mean values between 3 and 4. The most important threats of DPEs are availability of finance, immature legal system, lack of PPP professionals, immature management system for PPP projects and inappropriate risk management of PPP projects. It could also be found that respondents from academic organizations consider T13 (long time in contract transaction) more critical than industry practitioners; experts with and without PPP experience have significantly different opinions on threats T2 (immature legal system) and T16 (legislative changes). Those who participated in PPP projects believe these two items are important to the successful PPP implementation. A correlation matrix of 21 threats calculated shows that all the items have high correlation with each other. The result (Bartlett s test of sphericity ¼ ; sig. ¼ 0.000; KMO ¼ 0.560) suggested that it is satisfied to proceed a factor analysis. A seven-factor solution is obtained as presented in Table X. Industry vs academy With vs without PPP experience Total Industry Academy F-test With Without F-test ID Mean Rank Mean Rank Mean Rank F Sign. Mean Rank Mean Rank F Sign. T T * T T T T T T T T T T T * T T T * T T T T T Table IX. Significance of the DPEs threats

15 JFMPC Threats Table X. analysis on the DPEs threats Regional and sectional monopolization Intricate project approval and permit Discrimination against non-public ownership Absence of competitive and transparent bidding process Immature social service system Inappropriate risk management of PPP projects Lack of PPP professionals Immature management system for PPP projects Abnormal interest rate Abnormal inflation Abnormal exchange rate Public opposition Unclear definition of responsibilities Lack of government stability Obstacles to equity guarantee Availability of finance Excessive restrictions on participation Lack of withdraw mechanism Immature legal system Legislative changes Long time in contract transaction % of variance Cumulative % of variance government management issues This factor accounts for 13.8 percent of the total variances and consists of five threats that focus primarily on the government management issues, including regional and sectional monopolization, intricate project approval and permit, discrimination against non-public ownership, absence of competitive and transparent bidding process and immature social service system. Similar conclusions have been seen in several studies before, such as Sachs et al. (2007) and Li (2007). The collected data from Sachs et al. s (2007) survey confirms the importance of government to the performance of PPP projects and perceives legal and regulatory risks to be the greatest obstacle for successful PPP implementation. 2 provisional deficiencies of PPP application This factor has three items explaining the deficiencies of PPP application so far, and is responsible for 11.8 percent of the total variances. Inappropriate risk management is considered as a major reason for the failure of many existing PPP projects (Zhang, 2005a). Lack of PPP professionals and immature management system for PPP projects in China are also other negative factors influencing the attractiveness of PPP for DPEs (Li, 2007). This factor also implies that there is still needed education of the PPP participants, including the public, private, bankers, users, and the society.

16 3 economic fluctuation There are three threats related to the economic fluctuation in this factor that explains 11.5 percent of the total variances. Although China has a persistent economic growth these years, influential economic event is still deemed as a potential risk in a PPP project (Li, 2005c). For instance, RMB Yuan has been appreciating rapidly since late 2006 (PBC, 2008), which enterprisers would be suggested to pay attention to, if currency exchanges exist in their business. However, the World Bank (2008) is confident to China s economic growth and states that China is likely to grow robustly and is well-positioned to stimulate demand if needed. 4 macro social environment Three items, public opposition, unclear definition of responsibilities and lack of government stability, comprise the elements of factor 4 regarding the macro social environment. In traditional public project procurement, the public client assumes most of the risks and responsibilities. The concept of transferring risks away from public clients is frequently misunderstood by government, private investors and also society (Liu and Wang, 2006), and therefore bring along the social pressure to the adoption of PPP, such as project-specific objections or general resistance to the entire PPP program. 5 restrictions on infrastructure projects In this factor, there are four items concerning restrictions on infrastructure projects, namely obstacles to equity guarantee, availability of finance, excessive restrictions on participation and lack of withdraw mechanism. The risk factors associated with PPP projects in China in terms of financing and institutional frameworks distinguish themselves from those in developed countries. For example, the arrangement of floating charge on project assets as a guarantee needed for innovative project financing is not well established legally (Li, 2005); the corporate bond market is not sufficiently mature compared with sovereign bonds (Yuan, 2004). Equity of private sectors participated in infrastructure projects is therefore not guaranteed. Restrictions on participation as well as lack of withdraw mechanism are also encountered in infrastructure projects. 6 immature legal system This factor includes two items pertaining to the immature legal system in China. Although Chinese Government has promulgated some regulations relative to PPP implementation, the existing legal and regulatory regime of China is still considered as inadequate to allow successful implementation of PPP model. For instance, there is a lack of legal regulatory clarity and consistency in the existing regime; there are also uncertainties on the permissible form of government guarantees and assistance that may be provided to a PPP project company (ADB, 2008). 7 long contract transaction time This factor focuses on the long contract transaction time in PPP projects. Much management time in contract transaction and lengthy delays in negotiation are ranked as the most negative factors associated with PPP procurement in a questionnaire survey conducted by Li et al. (2005b). The situation in China is assumed to be critical, as even in the UK, 98 percent of the selected projects had overrun their pre-contract SWOT analysis of DPEs in China 167

17 JFMPC time estimates ranging from 11 to 166 percent (Ahadzi and Bowles, 2004). This threat would lead to a delay of the timing of cash inflows, which may present a lot of financial pressure to the project company Conclusions In line with the tremendous economic growth in China, the immense demand for basic infrastructures has presented a good business opportunity for private investors. However, characteristics associated with PPP financing mode, which typically involves huge investment, long concession period, high risks and complicated contractual structure, present the necessity for DPEs to examine their SWOT when they enter the infrastructure industry. This paper identified comprehensive variables of these four elements through a synthesis of literature review, interviews and brainstorming discussion. A questionnaire survey was conducted to examine the relative significance of each item and the difference among the perceptions of experts from different factors. The critical SWOT was extracted by factor analysis on the aforesaid variables. Their typical strengths include ability to explore a new market, independence of business operation, organization structure and management ability and market competition ability. Major weaknesses are internal structure and management, poor negotiation ability, financing and investment problems, lack of management capability in infrastructure projects and unsustainable development. On the other hand, the primary opportunities comprise macro industry environment, macro economic development, favorable environment for private enterprises, government s support and incentives, government s shortages and increasing understanding of PPP. Major threats are as follows: government management issues, provisional deficiencies of PPP application, economic fluctuation, macro social environment, restrictions on infrastructure projects, immature legal system and long contract transaction time. The research findings in this study provide useful references to help DPEs in assessing their SWOT. It is important to understand that the elements and their relative significance are persistently changing, as the diversity exists in the DPEs as well as the infrastructure projects. The methodology in this research nevertheless provides a useful tool for assessing these changes. References Ahadzi, M. and Bowles, G. (2004), Public-private partnerships and contract negotiations: an empirical study, Construction Management and Economics, Vol. 22 No. 9, pp Asian Development Bank (2008), Component-B report: concession structures, alternative revenue sources, and legal and regulatory framework. TA-PRC: application of public-private partnerships in urban rail-based transportation project, Project Number: 39527, Asian Development Bank, Hong Kong, March Beijing Evening News (2003), Beijing issues PPP regulations for infrastructure development, Beijing Evening News, Front page, November 25. Beijing Municipal Commission of Development and Reform (2005), International forum on infrastructure marketization, available at: (accessed January 2, 2008).

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