By Binyam Reja, PhD, Transport Cluster Leader for China and Mongolia, World Bank Presented at Transforming Transportation 2016

1. 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

2. 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

3. 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?

4. 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

5. 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
BillionRMB
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

6. 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
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
BillionRMB
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)

7. 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
BillionRMB
Domestic Loan
Local governments took 30 years to
borrow RMB1.36 trillion
Borrowed
RMB1.26 trillion
from 2009 to
2011

8. 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

9. New Infrastructure Financing Method
Targeted 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

10. 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

11. 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

12. Case Study:
Urumqi Urban Transport Project

13. 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 Arrangement
Under the New Budget Law

14. Urumqi Urban Transport Case

15. 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
millionRMB)
Without project NPV With project NPV
Subsidy includes debt service
obligation

16. 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