Archive for the ‘China’ Category


 

 

Unfortunately for assertive rising powers like China, might is not always right.

If too much pressure is applied on smaller powers, defiance rather than acquiescence may result. And these smaller powers may find succor in international courts and with favorable global opinion.

Recently, China got into a nasty scrap with Vietnam as it move a billion-dollar rig into disputed waters off Vietnam’s coast in late May 2014. Later, a Chinese vessel rammed and sank a Vietnamese fishing boat about 17 nautical miles southwest of the oil rig, the state-run Vietnamese television network, VTV1, reported. All 10 crew members were rescued according to the network.

 

For the complete story, please click on the link below:

 

 

 

 

http://www.interaksyon.com/article/89259/love-hate-triangle–what-is-the-result-of-chinas-heavy-handedness-vis-a-vis-vietnam-ph

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In my previous piece which I wrote in response to my good friend Ramon Casiple’s “China’s Dilemma,” I argued that it is the United States and the Philippines which actually have a dilemma over Ayungin.

I based my argument on the fact that the US Senate has yet to ratify the UN Convention on the Law of the Sea (UNCLOS), upon which the Philippine claim is based. The US does not recognize such concepts and principles as archipelagic state, archipelagic waters, and exclusive economic zone upon which the Philippine claim is based.

Since Ayungin and other disputed islands and features in the Western Philippine Sea (a part of the larger South China Sea) are not part of the metropolitan territory of the Republic, I foresee difficulties in invoking the Mutual Defense Treaty between the US and the Philippines to explain why the US cannot come immediately to our aid.

 

For the complete article, click on the link below:

 

 

http://www.interaksyon.com/article/88634/commentary–being-a-us-protectorate-weakened-ph-position-vis-a-vis-china-in-dispute


Logo of Scuderia Ferrari

You and I know that a Ferrari is not for everybody like say the Volkswagen Beetle.

It is a luxury car line and obviously only those with very fat wallets or bank accounts can purchase a Ferrari.

Ferrari manufactures sports cars and Formula 1 cars in Italy.  It was established as Scuderia Ferrari in 1929 by Enzo Ferrari, himself a motor racing driver, to manufacture racing cars.  It soon started producing road cars or so-called street-legal cars as Ferrari S. p. A. in 1947.

Enzo Ferrari

The Ferrari Enzo with doors open

Enzo died in 1988 and from 2002 to 2004, Ferrari introduced the Enzo.  Produced and named after the company’s founder, the Enzo was Ferrari’s fastest model at the time.

Its most distinctive feature is its gull-wing doors.

So what’s this pedigreed luxury car company got to do with infamy and scandal? According to the news agency Agence France Press (AFP), China said that Ling Jihua, who has close ties to outgoing President Hu Jintao, had been removed as head of the Communist party’s powerful Politburo general office and given a new, less high-profile post.

No explanation was given for the surprise move, but a day later, the Hong Kong-based South China Morning Post, quoting unnamed sources, said Ling’s son had died in a high-speed car crash in Beijing in the early hours of March 18, 2012 that also injured two young women, one of whom was naked.

Naked, injured woman.

The car involved?  A Ferrari. It is not clear though what Ferrari model it was.

AFP continues its report. “Reports of the crash first surfaced in March on China’s popular microblogs, along with speculation that the son of a senior Communist leader had been involved, but were quickly suppressed by the country’s army of online censors.

Photographs of the wreckage were briefly circulated online, sparking questions about how the son of a government official could afford a luxury sports car worth a reported five million yuan (around $800,000).”

For the full story, see http://www.capitalfm.co.ke/news/2012/09/ferrari-crash-reports-bring-fresh-political-scandal-in-china/

In Bangkok, Thailand, the grandson of the wealthy Red Bull creator Chaleo Yoovidhya allegedly slammed his sports car last Monday into a policeman and dragged the officer’s dead body some 200 meters along a Bangkok street before driving away.

The Associated Press (http://www.npr.org/templates/story/story.php?storyId=160531532) reported the police initially attempted to cover up the heir’s involvement by arresting a bogus suspect until Bangkok’s police commissioner Lt. General Comronwit Toopgrajank took charge of the investigation.

I guess Comronwit’s sense of justice and fair play got the better of him.  And there’s this notion developed by Hollywood movies that cop killers should remain unpunished.

The car involved?

Another Ferrari.

Details of the model still to be known although photographs of the car wreck were plastered in today’s issue of Thailand’s newspapers.

The scion’s Ferrari and the police officer’s motorcycle (AP photo)

Voyaruth Yoovidhya

Vorayuth Yoovidhya, the Red Bull scion, was arrested after police traced streaks of engine oil for a number of blocks back to his family’s mansion.

He admitted that he drove the Ferrari but claimed that the police officer’s motorcycle swerved suddenly into his car’s path.  He faces charges of causing death by reckless driving but was released on a 500,000 baht ($15,900) bail.

His grandfather, Red Bull founder Chaleo Yoovidhya, died in March at the age of 88.

The Yoovidhya family was ranked the fourth richest in Thailand this year by Forbes magazine, with a net worth of $5.4 billion. Only a few in Thailand believe that Voyaruth will get anything worse than a slap on the wrist.

This incident follows several highly publicized others where the rich and powerful got away from their responsibilities with impunity.

In jurisdictions with weak institutions and personalistic political cultures, there seems to be two laws–one for the rich and one for the poor.  The rich are above the law while the law is fierce against poor ‘offenders’.

To sum up, Ferraris figures in two car crashes in our part of the world.

In China, the car crash resulted in the death of a son and the demotion of the father from his lofty position in the Chinese Communist Party.  The demotion is part of an effort to expunge forensic evidence of the car crash and to clean up the Party’s image.

The sub-text?  Your children should not engage in the conspicuous consumption of luxury goods; it strongly hints at ill-gotten wealth.  Conspicuous consumption highlights social stratification and the widening gap between rich and poor in contemporary China.  The Party seeks to maintain the fiction that it’s grounded and responsive to the people.  The greater the social distance between Party leaders and the people will mean that the Party is out of touch.

The Bangkok incident is at bottom a contest between unequals in wealth and power.  I guess you will agree with me that the winner is obvious.

We hope though that the Thai justice system will surprise us.

So what’s it with Ferrari?

Nothing,  or at least nothing that could link it organically with scandal.

The problem is with some of the people driving them.

Ferrari 458 Italia (Is this the model of Voyaruth’s Ferrari?)

Even if they are rich and powerful, they just don’t know how to handle a powerful and delicately crafted machine.


In November this year, incumbent US president Barack Obama of the Democratic Party will face off versus the standard-bearer of the Republican Party after the latter goes through its primaries.

Obama (always) on the stump

The front-running Republicans include former Massachusetts Gov. Mitt Romney and former senator from

Mitt Romney

Pennsylvania Rick Santorum.  A distant third is Newt Gingrinch, former Speaker of the House and representative from Georgia.

Obama is running for a second and last term while the Republicans, who have control over Congress, seeks control over the White House.

My students at the University of the Philippines have started asking me how the US elections could possibly affect the Philippines.  I recall being a speaker in a symposium organized to study the impact of the unprecedented election of Obama to the White House in 2008.

My answer then was there will no major changes in US policy vis-a-vis the Philippines  notwithstanding Obama’s election.  For the 2012 elections, my answer is the same.

Democrats and Republicans may have significant differences over domestic policy and this is quite evident as the US tries to recover

Rick Santorum

from the Great Recession.  Republicans insist on cuts in government spending plus cut on taxes on upper income groups.  Democrats may compromise on spending cuts but will not give in on tax cuts for the rich.

However, there is a bipartisan consensus regarding US foreign policy.  And that is to protect American interests and stand by core American allies (such as the North Atlantic Organization) and to prevent the strengthening of rival powers.

John Mearsheimer, an international security expert, argued that no state can attain global hegemon status in the post-Cold War period.  At best, it can be a regional hegemon.  And it could frustrate hegemonic ambitions of another state in another region.  As the US is already hegemonic in the Western hemisphere and its allies are hegemonic in Europe, the most apparent area of contention is Asia and the hegemon to be frustrated is China.  

In this sense, the US has shifted (at the moment) from a war on terror-centered doctrine to an older competition with states doctrine. 

Here, the US has to deal with problems it did not have before.  The Great Recession has reduced the resources available for the US government to achieve its foreign policy and military objectives in the Asia Pacific region.  In addition, it also has to deal with the unique problem of being heavily indebted to its perceived number 1 rival.

Gloria Macapagal-Arroyo

How does the Philippines figure in all these?  President Gloria Macapagal-Arroyo must have been perceived as a not-too-reliable an ally by the US.  First, she withdrew a token Philippine force in Iraq in 2004 for politically expedient reasons at the home front.  Second, she played heavy footsie with the Chinese–entering into many economic and investment agreements and entertaining visits from Chinese military officials.  Her government even entered into joint seismic survey arrangements with China and Vietnam within the disputed Spratly Islands group.

That now seems to be water under the bridge.  If Arroyo tilted towards the Chinese, President Noynoy Aquino is clearly sympathetic to the American cause.  

President Noynoy Aquino

The current cause of worry for the Philippines is the adverse impact of the economic slowdown in the US and Europe on the country’s electronic exports.  Economic experts are of the opinion that our exports will recover to previous levels only if the Western economies.  Others believe that our electronic exports may not the ones needed abroad–like tablet screens?

Officials of the country’s business process outsourcing (BPO) industry pooh-poohed fears raised over proposed  US legislation that will discourage outsourcing and create jobs within the US.  They believed that US multinationals will oppose the proposal since outsourcing is a cost-cutting measure. 

Wells Fargo

Their optimism is justified by the decision of Wells Fargo, the 2nd largest bank in the US, to set up a BPO center in Taguig City.

To sum up, I don’t think the coming US elections will have any significant impact on the Philippines.


Prof. Aileen S.P. Baviera
Asian Center
University of the Philippines

Prof. Aileen Baviera

Philippines-China relations must be at one of its lowest points ever. Even during the height of the Mischief Reef crisis (1995-1997), economic ties were growing and there was minimal effect on warm people-to-people linkages.

Now the value of economic cooperation with China has been questioned due to perceptions that it has been pursued through corrupt practices (e.g. NBN-ZTE, Northrail, Southrail, Transco, etc). People-to-people ties have also been damaged by the Hong Kong hostage crisis and to a lesser extent by Chinese execution of Filipino drug mules. Moreover, the South China Sea territorial dispute remains a flashpoint, with the Chinese side issuing warnings over recent Philippine-sanctioned oil exploration activities by UK-based Forum Energy on the Reed Bank.


At the same time, Chinese ambassador Liu Jianchao persists in describing relations between the two countries as “in very good shape”, and his government has extended an invitation to President Noynoy Aquino to visit China. Indeed, relations continue to be viable because of a number of reasons, not least among them a long tradition of friendship and expanding exchanges. Even the growing number of Philippine missions in China (now including Beijing, Guangzhou, Xiamen, Shanghai, Chongqing, Hong Kong and Macau) is an indication of the importance we attach to China and our commitment to developing mutually beneficial relations.


Both sides realize the importance of cooperation, not only for bilateral advantages but also in contributing to regional prosperity as well as peace and stability. This is especially true today, as there is much uncertainty about how the unfolding rise of China and US’ renewed interest in the Asia Pacific will affect the balance of economic and military power – and ultimately the interests of China’s near neighbours – in East Asia.


Adherents of realist thinking in international relations have a popular saying, quoting Thucydides (5th century BC): “the strong do what they can, the weak suffer what they must”.


It is clear where the Philippines stand in this equation. But there are certain leverages even for the weak, which for us include the country’s strategic location (a happy accident of geography which we have yet to make full use of), good human and natural resources, and perhaps even a reservoir of good will towards our people owing to the fact that we try very hard not to make enemies.


But being weak (economically, technologically, militarily) opens up a lot of vulnerabilities which can only be offset by being discerning, wise, imaginative, but above all else – being ever, ever cautious.


This is where good diplomacy can make a world of difference – diplomacy towards friends and allies, and even more so towards neighbours with whom we have sharp disagreements such as territorial disputes. In this context, a visit by President Noynoy Aquino to China requires solid preparation and a crystal clear understanding of how to approach the issues at hand.


Choosing a proper ambassador to China is a very important element of what will be known for years to come as the (younger) Aquino diplomacy. Among the names that have been mentioned in media reports are Edward Go, Alfonso Uy, and Domingo Lee. While these individuals may have many excellent qualities, and while there may be advantages to appointing persons of ethnic Chinese background for certain specific objectives, the Filipino nation at this time needs a very strong representative in Beijing – one who is knowledgeable on outstanding issues and seasoned enough to face the very tough challenges of helping craft a China policy that will actively promote and defend the economic and security interests of the country and contribute to regional stability.


Of special concern is the report that Domingo Lee is being considered, as he was a former Philippine Representative to Taiwan under President Corazon Aquino. (Because of the Philippines’ one-China policy, we call the heads of our missions in Taipei “representatives” rather than “ambassadors”).


Lee, then one of the leaders of the Chinese community, was also reported in a 2002 book by author Jie Chen (Edward Elgar Publishing) to be a member of Standing Committee of the de facto Philippine branch of the Kuomintang Party, the Chinese Communist Party’s arch-rival!


As much of diplomacy is about communication and signalling messages through statements and actions, we can only wonder what signals our government will be sending to China if indeed Domingo Lee were to be appointed.
Appointing a well-qualified ambassador to Beijing, as has already been called for by former Secretary Roberto Romulo, is only one small step in repairing relations with Beijing.

However small, it can be a critical one.


As the head of our mission in Beijing will be working very closely with the DFA home office, a professional career officer of the country’s foreign service, should be a more logical, wiser choice.

————————————————————————————————————————————————–

Note from Bong Mendoza
Aileen Baviera is professor and former dean of the Asian Center, University of the Philippines. She was immediate past president of the Philippine Association for Chinese Studies (PACS), and former head of the Center for International Relations and Strategic Studies, Foreign Service Institute. She was recently Visiting Fellow, Australian Research Council’s Center of Excellence in Policing and Security (based at the Australian National University and Griffith University), and is currently visiting fellow at the S. Rajaratnam School of International Studies in Singapore.


1. 

Why do countries with less checks and balances also experience greater number of project failures?

In the general political science literature, the notion of checks and balances was considered as a powerful antidote to the abuse of power (i.e., monarchical power).  Concentration of governmental power in one person or a single group more often leads to excess and abuse.  John Locke and the American founding fathers counselled the separation of powers to decrease the likelihood of tyranny.

However if power was too dispersed among so many decision makers, it could result in indecisiveness and the lack of public order (Haggard and McCubbins 2001).

Lesser checks and balances leads to arbitrariness given that only one (or a few) make political (or policy) decisions.  Lesser checks and balances mean a lesser number of veto players.  Fewer veto players may produce decisiveness and policy flexibility (at its best) but also policy volatility at its worst (Tsebelis 1995, 1999, 2000).  An empirical study by Henisz (2004) concludes that the notion that political checks and balances that constrain decision makers’ discretion serve to limit policy volatility and thus encourage investment and economic growth.

A fewer number of veto players may lead to a larger number of project approvals.  However, it could also mean relaxation of due diligence.  When these projects are faced with macroeconomic shocks and other sources of project risk, it is again less difficult for a fewer number of decision makers to declare project failure (tariff freezing, contract renegotiation, etc.).

Another point:  Checks and balances enhances the commitment (makes it more credible) of governments (borrowers) to pay their loans and honour contracts.    

2.
Why is China more prone to freeze tariffs than ASEAN countries?

 

It must be pointed out that China is an economy transitioning from central planning to market capitalism under the auspices of an authoritarian political regime.  For this reason, ubiquitous institutions that we may take for granted in jurisdictions with a dissimilar history such as contracts, private property rights, courts, etc. are not as fully developed in China compared to it Southeast Asian neighbours.

 Specialist literature (e.g. Landry 2008) notes that China is an anomaly—it being designated as a ‘decentralized authoritarian’ polity.  Local governments in China enjoy an unprecedented degree of fiscal autonomy and devolved powers (including the power to sign contracts with private firms).  Other scholars (verify citations) suggest this was the result of a log-rolling bargain between central and local elites in the light of the painful experiences of Mao period (especially the Cultural Revolution).   Empirical literature indicates that failure of most infrastructure PPPs can be traced to the imprudent exuberance of local governments (who are apparently in a race with each other in building infrastructure).  Compounding the situation is the apparent lack of a national PPP template that could guide sub-national actors and private partners. (See Adams et al. 2006; Bellier and Zhou 2003;  Zhong et al. 2008).   

 3.

 Why does ASEAN have better project experiences than China?

 The original ASEAN-5 (Malaysia, Indonesia, Thailand, Philippines and Singapore) has a more extensive experience with private sector-led, mixed-economy capitalism and does not have the historical burden of China’s command economy. Consequently, these countries have comparatively better institutions supportive of infrastructure PPPs. 

 What could be investigated further is whether PPPs in the ASEAN-5 needed the imprimatur of central (or federal) authorities.  I suspect that local governments in ASEAN had lesser leeway compared to their Chinese counterparts in contracting big ticket infrastructure PPPs.  Thus, you had a greater number of veto players in ASEAN which could have resulted in greater pre-operational prudence and a more judicious sharing of project risks among central and local governments with their private partners.

 Size is another point of consideration when we try to explaining differing levels of decentralization and devolution in China and ASEAN.  Chinese local governments (esp. provinces) are equivalent to or larger than most ASEAN nations.   There is thus a greater imperative to decentralize in China than in ASEAN given these size disparities. 

4.

Why are countries with lower (higher) levels of corruption less (more) likely to freeze tariffs?

 Jurisdictions with lower levels of corruption are less likely to freeze tariffs while countries with higher levels of corruption will be more likely to freeze tariffs.  The freezing of tariffs is, among others, an opportunity for state agents to extract side payments from private contractors.  More corrupt agents are then most likely to freeze tariffs in expectation of illicit gain that could arise from tariff unfreezing or contract renegotiation.  

 5.

Why are countries with enhanced rule of law more likely to freeze tariffs?

Kaufmann et al (2009) defines ‘Rule of Law (RL)’ as “capturing perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence.”  Intuitively, one should expect that countries with enhanced RL will be less likely to freeze tariffs since the quality of contract enforcement would be high.

This empirical result is indeed a puzzler.

Could this be associated with ‘Voice’?  What were the regression results between Voice and tariff freezing?    I expect that countries with greater voice will be more likely to freeze tariffs as governments will be more responsive to noisy electorates demanding tariff freezes.

_______________________________________

Explanatory note: Together with the earlier blog entry on China, this particular entry is a by-product of my collaboration with Dr. Renato Reside of the UP School of Economics on the structural determinants of risks faced by infrastructure PPPs in Asia.


It must be pointed out that China is an economy transitioning from central planning to market capitalism under the auspices of an authoritarian political regime.  For this reason, ubiquitous institutions that we may take for granted in jurisdictions with a dissimilar history such as contracts, private property rights, courts, etc. are not as fully developed in China compared to its Southeast Asian neighbours.

 

Specialist literature (e.g. Landry 2008) notes that China is an anomaly—it being designated as a ‘decentralized authoritarian’ polity.  Local governments in China enjoy an unprecedented degree of fiscal autonomy and devolved powers (including the power to sign contracts with private firms).  Brandt and Rawski (2008) notes that prior to the inception of reform, China developed a tradition of policy entrepreneurship in which local figures compete for high-level attention by demonstrating the beneficial implementation of the principles enshrined in broad central directives. This competition intensified under the reform, with GDP growth, exports, inflow of foreign investment, and other economic criteria replacing ideological benchmarks as the arbiters of success. Thus Li and Zhou (2005) find that promotion prospects for provincial leaders rise, and the likelihood of termination declines as provincial economic performance improves. Whiting (2001) makes similar observations about local officials.

 

Officials at all levels possess the authority as well as the resources needed to promote local growth. They also have strong incentives to do so, because their career prospects, as well as personal financial opportunities for themselves and their families, friends, and supporters, are closely tied to the economic trajectory of the jurisdictions under their leadership. Rapid local growth pushes local leaders to the head of the queues awaiting recognition, promotion, and bonuses. Growth also expands the pools of public revenue and enterprise profits over which officials exercise varying degrees of control, enlarges business opportunities available to the families and associates of local leaders, and swells the flow of (legal and illicit) rents directed toward official agencies and their managers.

 

These circumstances have transformed China’s local and provincial governments into eager champions of development, each striving to outdo its neighbours and rivals in expanding airports, highways, science parks, and telecommunications and in establishing firm foundations for local “pillar industries.” This competition contributes mightily to the persistent “investment hunger” visible in China’s economy, as local administrations resist central calls for restraint in enlarging existing facilities and building new ones.

 This drive to excel in growth-manship, which has become embedded in government behavior at every level, distinguishes Chinese public administration from the conduct of (especially) local governments in many low-income nations, where local administrations often pay greater attention to supporting local elites or to extracting income from existing economic structures than to promoting growth.  

 

My good friend and colleague from the University of California (San Diego), Barry Naughton (2008) observes a recentralizing reform since 1993 (where the number of vetoplayers was reduced and the center became more decisive). 

UCSD Prof. Naughton

In return for the revenues and authority the center reclaimed,  local officials were given much greater freedom to manage their local economies as they saw fit.  Central leaders set up a new relationship with local officials, essentially decentralizing to the local government ability to manage the process of selective opening.  Local governments were allowed vastly greater sway over their own economic development,  their own publicly owned enterprises,  and their relations with private and foreign businesses.  In this way, the central government relinquished its ownership claim of the tens of thousands of “state-owned” but local government-controlled firms in ordinary competitive sectors.

No longer did central and local governments jointly manage most assets. The separation of ownership became a de facto reality during the 1990s and, as mentioned earlier, was formalized in 2002, when central SASAC drew a line between the firms that it directly owned and those owned by local governments. One important result of clarifying local ownership was a wave of privatizations, a trajectory very different from that of the large, centrally controlled firms that stayed predominantly government owned.

 

Particularly in fast-growing coastal provinces, restructured and new industrial and commercial firms exploded, creating significant resources and wealth. Conversion of state firms into new corporate forms, and frequently into private firms, generated lucrative opportunities for local officials. Local government officials were quick to set up alliances and various forms of partnership with local entrepreneurs.  Sometimes favored entrepreneurs were beneficiaries of privatization, and sometimes more complex (and hidden) forms of cooperation were instituted. The process of selective opening became a locally managed one, in which local officials struck bargains with local entrepreneurs. Entrepreneurs were usually more than willing to reach accommodation with local officials (Dickson, 2003). Control of land emerged as a crucial resource under the control of local officials and real estate development became an especially lucrative business for local officials. In essence, local officials were given the freedom to make their own arrangements with emerging businesses, and they formed tight alliances with local business groups. Foreign firms were brought into increasingly wide-ranging and lucrative partnerships with local government. Local patronage complemented the central patronage described earlier.

 

Central and local were held together, as before, by the nomenklatura system. At its bare-bones essentials, the nomenklatura system ensured that the heads of provincial and municipal government and party organs were appointed by national leaders.  Thus, the center always reserved the right to replace the top officials of any locality and, in practice, frequently rotated the top provincial leaders. The hierarchical system remained firmly in place with respect to the top jobs at the local level.

 

Moreover, the regularization of rules for promotion in that hierarchy now began in earnest, as changes introduced tentatively in the 1980s began to be enforced as norms in the nomenklatura system. Rules of promotion in the hierarchy became far more institutionalized than ever before.  Mandatory retirement ages, minimum educational standards, and effective term limits had been gradually built into the personnel system during the 1980s, and now, with the end of “elder power,”  they began to apply in earnest (Bo, 2004).

 

Application of these procedures throughout the nomenklatura system resulted in more  predictable career paths that served to bind ambitious professionals to the hierarchical system. They also ensured steady turnover and made career mobility and advancement a realistic prospect. Capable individuals, as they moved up, were increasingly rotated among various regional posts, and sometimes through different functional specialties (Li, 2004). The career path of the mayor of Beijing, Wang Qishan, while not typical, gives a flavour of  the way the system works. Over the past fifteen years, Wang was moved  successively into positions as the vice head of the state-run Bank of Construction, the vice governor of Guangdong province (to clean up financial problems), back to Beijing to serve as the head of the Office of System Reform, then First Communist Party Secretary of Hainan Province, and finally mayor of  Beijing.

The breadth of Wang’s experience is unusual, as is his privileged Party background, but the pattern of rotation through different regional and national jobs is increasingly common. The heads of some of the largest centrally run SOEs now serve in the Communist Party Central Committee. This kind of career path binds the managers of huge and powerful enterprises to the hierarchical system. It also means that the patronage resources of those enterprises are potentially at the service of the hierarchical system.

Wang Qishan

 

The increasing predictability and institutionalization does not spell the end of politics or patronage or make it any less necessary for leaders to promote their own factions and followers. It simply means the game is played by different rules, played out over a new terrain with more clearly delineated pathways.

Even Jiang Zemin, the top leader, was subject to the new constraints. Deng Xiaoping had insisted that Jiang should step down from his top posts after two full terms and proposed that Hu Jintao should succeed Jiang in 2002.  Deng thus used his own prestige to create a new elite consensus about the rules of political succession that constrained. the subsequent generation of leaders. Assuming that Hu

Jiang Zemin

Hu Jintao

Jintao steps down at the end of his second term in 2012 and confirms the precedent, regular turnover and predictable career paths will have been established.

 

Empirical literature indicates that failure of most infrastructure PPPs can also be traced to the imprudent exuberance of local governments (who are apparently in a race with each other in building infrastructure).  Compounding the situation is the apparent lack of a national PPP template that could guide sub-national actors and private partners. (See Adams et al. 2006; Bellier and Zhou 2003;  Li 2007; Zhong et al. 2008). 

 

In a study of 16 failed infrastructure PPPs, Ke et al (2009) identified legal, regulatory and political risks as key reasons for adverse project outcomes.  Legal/regulation risks especially change in law risk is one of the most frequent risks encountered in China’s PPP projects. This risk includes the adoption, promulgation, modification, or reinterpretation after the signature date of the concession agreement by any governmental authority of any laws of the host country; and the imposition by a governmental authority of any material condition in connection with the issuance, renewal, or modification of any approval after the date of signature of the Concession Agreement that in either case establishes requirements for the construction, operation, or maintenance of the BOT project that render the performance by the project developer according to its terms illegal. For example, the State Council issued a notice on abolishing the existing projects guaranteeing the fixed rate of return from foreign investments in 2002.

Thereafter, those existing projects with a promised fixed rate of return from local government were forced to be handled in the way of “modification”, “purchase”, “transfer” or “cancellation” on the basis of the particulars of the concerned project.

 

Besides the laws/regulations risk, political risks are regarded as other most frequent risks, which describe the risks of the actions from the central, provincial, or local levels of government. The specific risk factors critical to the success of PPP projects in China may include poor political decision-making process, public/political opposition, government reliability and corruption. Other risk factors include change of local government and its key official, government’s fiscal situation and capability to purchase guaranteed output (especially of power/water/gas), government’s poor knowledge and high expectation, etc.

It is important to be noticed that the authors suggest the private investors not to take advantage of government’s poor knowledge/ experience and sign unfair contracts, especially when local governments promise some incentives to improve the attractiveness of the target project to private investors due to the urgent pressure of infrastructure development.

 

Ho (2006) believes there has been too much emphasis on attracting investment from the private sector and too little attention to market competition. The main objective of PPPs is to make use of market competition in order to ensure the effective use of resources in the provision of public facilities and services. However, some local governments have placed too much emphasis on attracting private investments by offering even more favourable terms than the normal national status. In order to attract foreign investment, some local governments have promised more than they are capable of doing.

When the relevant government officials change, the new officials may look for ways to terminate those agreements which are found to be unfair or unreasonable. PPPs have been treated as the privatization of public facilities/services, focusing on short-term return without a spirit of long-term partnership. In order to achieve a high return on investment, both the government and private investors have tried to charge a high fee for the provided facilities and services as well as assigning land use without paying any charges. The financial risk and burden are shifted to the public who face a high price for the public facilities and services without getting the corresponding increase in service quality.

 

Choi et al cite the case of the Da Chang WFOE BOT water project, the earliest PPP water project in Shanghai, begun by directly negotiating with the Thames Water and Bovis consortium in 1995. The scope of the project is to build a water treatment plant with a capacity of filtering 400,000 cubic meters per day for two million customers and to operate the plant for 20 years.

 

The project was initially regarded as a successful case in that the municipal government independently proceeded with the project without any symbolic support from the central government, such as comfort letters or guarantees, so as to limit the financial risks involved.   

However, later, during the operation phase in 2002, the profitable project faced a sudden change of government policy targeting large international companies with bargaining power to an extent enough to insert the fixed return clause into contracts that the guaranteed rates of return for infrastructure projects are illegal, and risks and returns in BOT projects should be shared by Chinese as well as foreign partners according to the State Council’s decision in 2002. The project guaranteed with a fixed return rate of 16% was not treated as exceptional and thus became illegal.

 

Despite all the efforts of Thames Water to negotiate the new terms with the Shanghai Waterworks Company (owned by Shanghai government), the company could not reach any agreement and finally exited the project by selling its assets to the Shanghai Shibei (Northern City) Water Treatment Corporation in June 2004.  In similar cases, the bulk water supply contract of  Shenyang Public Utility, in which Suez held a stake, and the Xian water treatment project held by Berlinwasser were terminated because the demand was lower than the forecast, and the municipality stopped subsidizing the companies as promised in the contracts.

 

REFERENCES

 

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Deng Xiaoping: architect of Chinese reform