PLANNING MODEL OF INFRASTRUCTURE
PROJECT IN CHINA
Xiangrong DU1 and Tsunemi WATANABE2
1

PhD, Dept. of Infrastructure Systems Engineering, Kochi University of Technology(Miyanokuti 185, Tosayamada-tyou, Kami-city, Kochi 782-8502, Japan)
E-mail: stonedu2812@yahoo.com
2
Member of JSCE, Frontier Course Engineering, Kochi University of Technology(Miyanokuti 185, Tosayamada-tyou, Kami-city, Kochi 782-8502, Japan
E-mail: watanabe.tsunemi@kochi-tech.ac.jp

In China, public services have been delivered to citizens at low prices and subsidized by government toa great extent since 1949. Government directly invested, constructed and operated public infrastructure.
However, the single source of government investment could not satisfy the increasing demand on
infrastructure projects. Moreover, the direct government investment and management of public utilities
resulted in poor construction performance. In addition, the monopolistic operation of state-owned
companies caused low operation efficiency, striking resources waste, and heavy fiscal burden due to thelack of specific obligation division between government and state company.
From 1994, the Chinese government began to attract foreign companies to participate in the investment,
construction and operation of infrastructure projects mainly through BOT method. Since the China’s entry
into the WTO, the domestic private companies have been encouraged to invest and operate infrastructure
projects, too. However, many privately financed infrastructure projects still encountered difficulty
originated from excessive or inadequate government obligation.
The proper obligation division between government and private company becomes the key issue ininfrastructure project planning. The authors aim to propose a proper project planning model which shall fit
all kinds of infrastructure projects with various fund origins. The proposed planning model shall include acomprehensive planning framework and a six-step planning process. In particular, the financial indicator,
i.e. self-reimbursement ratio is introduced for correct appraisal of project feasibility and proper obligation
division between government and project company.
Key Words: China, Infrastructure, Implementation Scheme, Self-reimbursement rate, project planningmass transit, tap water supply, wastewater disposal,
pipeline gas supply, heat supply, garbage disposal
and other items), electric power facilities, highways,
railways, telecommunication system, and flood
control works (SDPC 2000), which are respectively
administered by construction authority, electric
power supervision authority, transportation
authority, railway authority, telecommunication
authority and water resource conservancy authority.
Since 1949, infrastructure was regarded as publicwelfare undertaking in China. Public services
produced by infrastructure projects were delivered to

1. History of Development and Operation of
Infrastructure Projects in China(1) Disadvantages of government provision of
public services
Infrastructure is defined as the basic facilities,
services, and installations needed for the functioningof a community or society, such as transportationand communications systems, water and powerlines, and public institutions including schools, post
offices, and prisons (Akatsuka and Yoshida 1999).
In China, infrastructure are mainly classified into
several types: urban public utilities (such as urban
1infrastructure projects in foreign countries,
particularly in the UK and the USA, attracted theattention of the Chinese government and changed its
attitude toward private delivery of public services
from prohibition to encouragement.
With the purpose of meeting the demand of
economic development and people’s living
improvement on public service and infrastructure
projects, from 1994, the Chinese government opened
up the investment market of certain scope of
infrastructure projects (SPC, MEP, and MOT 1995)
and began to attract foreign companies toparticipation in the investment, construction andoperation of infrastructure projects. A certain
number of laws, rules and administrative measures
were correspondingly issued and enforced forgovernment at all levels to administer the foreign
investment in infrastructure projects.
After China’s entry into the WTO in 2001, theChinese government began to open the investment
market of infrastructure projects for both foreign anddomestic private companies to invest, construction,and operate infrastructure projects. The Chinese
legal framework including laws, rules andadministrative measures has been modified pursuant
totheprincipleoftransparency
andnon-discrimination (including national treatment)prescribed in the Protocol on the Accession of thePeople’s Republic of China (WTO 2001).
Under such favorable situation infrastructure
projects financed by private companies are
increasing quickly. From 1990 to 2000, private
investments in infrastructure projects in China
totaled $44 billion, accounting for less than 10% of
the total annual infrastructure investment (ADB
2003), which implies that there is still a wide spacefor private sector to invest in infrastructure.

citizens at low prices and subsidized by government
to a great extent. Governments not only undertook
the supervision function of infrastructure projects
but directly invested in, constructed and operated
public infrastructure. Although the construction
market of infrastructure projects opened up to
private companies from 1984 (SC 1984),
government still directly invests in and operates
infrastructure projects.
So far, the government fund and loan accounts
for over 80% of the total investment of urban
construction (RG 2006). However, the single sourceof government funds in the construction of new
facilities and the operation and maintenance ofexisting facilities can not satisfy the increasing
demand on the public service delivery caused by theaccelerated progress of industrialization andurbanization.
From 1990, government begun to reduce or evencancel fiscal subsidy for public utilities, andconfirmed the price of public services based on its
cost. For example, the average price of tap water in
36 cities increased from 0.14 CNY/ton(approximately 2.1 JPY/ton) in 1998 to
1.32CNY/ton (approximately 19.8 JPY/ton) at theend of 2002 (RG 2006). The price of pubic service
increased quickly; however, the service quality was
still poor. Consumers of public services feel
unsatisfied with this practice.
Due to the constraints of limited fiscal budget for
public service and affordable public service price,
the effective and efficient resources utilization in theconstruction and operation process of physicalfacilities shall become the only resort of government
to improve public service delivery.
However, the direct government investment andmanagement of public utilities resulted in poor
construction performance (NAOC 2004). Anotherinvestigation manifests that the monopolistic
operation of state-owned companies within theirrespective service areas caused low operation
efficiency, striking resources waste, and heavy fiscal
burden (RG 2006 and Xiang 2005).

(3) Transitional government administration on
public service delivery
During the privatization of infrastructure projects
the government regulation shifts gradually fromdirectinvestment
andadministrationofinfrastructure projects to indirect supervision of theinvestment,
construction,
operation
project
companies through fiscal, financial, legal andadministrative means.
In order for governmental organizations to(2) Introduction of private fund and management
capability
The effective and efficient implementation ofprivateinvestment
andmanagementof2

central government) and local governments.
However, because there is certain difference of
project planning and approval procedure, method,and content requirement in these legal documents, it
is inconvenient and troublesome for relevant
government departments to adopt various projectplanning and approval methods and procedure forforeigner-invested infrastructure projects (including
electric power projects), privately invested public
utility projects and privately invested fixed asset
projects (which include infrastructure projects),
respectively.

accommodate themselves to the new regulation
requirement, a series of legal instruments (shown in
Table 1) have been issued and enforced by different
government departments including the Ministry ofForeign Trade and Economic Cooperation (thepredecessor of the Ministry of Commerce), the State
Planning Commission (the predecessor of the
National Development and Reform Commission),
the Ministry of Electric Power (the predecessor of
the State Electricity Regulatory Commission), theMinistry of Transportation, the Ministry ofConstruction, the State Council (i.e. the Chinese

Table 1 List of Legal Documents Governing Private Provision of Infrastructure Projects
PFI related law, rule, or policy
Notice on questions of attracting foreign investment via
BOT method
Provisional regulations on foreign investedbuild-operate-transfer projects
Notice on questions concerning the administration of
examination and approvals for foreign invested concession
projects established on trial basis
Interim provision and approval procedure on electric power
project invested directly by foreigners
Interim administrative measures for project financed byforeign investors
Construction law of the People’s Republic of China
Biding law of the People's Republic of China
Interim provisions on utilizing foreign capital in urban
public utilities
Protocol on the accession of the People's Republic of China
Opinion on expediting the marketization process of public
undertaking
Provisions on guiding the orientation of foreign investment
The guide to feasibility study of investment projects
Notice on proper disposal of problems concerning guaranteeof fixed rate of return for foreign investment
Administrative measures on concessionary operation of
Beijing urban infrastructure
Opinion on the implementation of further reform ofinvestment and financing regime in urban infrastructure
sector
Provincial regulation on administration of government
investment. Beijing, China
Administrative measures on concessionary operation of
public utilities
Interim measure on verification and approval ofenterprise-invested projects
Interim administrative measure on verification and approvalof foreigner-invested projects
The decision of the State Council on reforming theinvestment system
3

Enacting
time

Enacting organ

1994

Ministry of Foreign Trade andEconomic Cooperation

1995

State Planning Commission

1995

State Planning Commission,
Ministry of Electric Power andMinistry of Transportation

1996

Ministry of Power Industry

1997
1999

State Planning Commission andState Administration of
Foreign Exchange
National People’s CongressNational People’s Congress

2000

Ministry of Construction

2001

WTO

2002

Ministry of Construction

2002

State Council
National Development andReform Commission

1997

2002
2002

State Council

2003

Beijing Municipal Government

2003

Beijing Municipal Government

2004

Beijing Development andReform Commission

2004

Ministry of Construction

2004
2004
2004

National Development andReform Commission
National Development andReform Commission
State Council

and the private sector.
Most of the infrastructure projects, which arefinanced and operated by foreign companies
encountered difficulty, a certain number of which
originated from excessive government commitment
such as overmuch risk obligation (Du and Watanabe
2005b, Wang 2005). In addition, private companies
participating in infrastructure projects did not gain
the same treatment as those provided forstate-owned companies, i.e. inadequate government
obligation (Zhao 2003).
Therefore, the proper project planning,particularly the due division of financial obligation
between government and project company, becomes
the key issues of relevant project authorities ininfrastructure project planning whether the projectcompany is a private company, a state company, aconsortium of mere private companies, a consortiumof mere state companies, or a consortium of bothprivate and state companies.

For the promotion of smooth implementation of all
kinds of privately financed infrastructure projects,
Du and Watanabe (2005a) proposed a uniform
planning and approval procedure together with therequired contents of relevant project documents,
which shall be submitted to relevant authorities forreview and approval.

2. Research Background, Methodology andObjective(1) Problems of Infrastructure Project Planning
The National Development and Reform
Commission (NDRC) (2002) promulgated the Guide
to Feasibility Study of Investment Projects (tentative
edition) to govern the preparation of feasibility study
report of any government-invested fixed asset
projects (including infrastructure projects), whichshall be sponsored by a state company. However, theguide does not consider the appropriate financial
obligation division between government and statecompany.
In practice, the Beijing Municipal Government,
which undertook the excessive obligation, i.e. theguarantee of debt repayment, take over the 5th
Beijing Ring Highway Project only after threemonths of its operation (Significant 2004). In
another case, due to the lack of specific obligation
division, the Guangxi Province Government had toraise approximate CNY 200 million every year to
disburse annual loan interest which should be paidby the state highway companies affiliated to the
Guangxi Province Government (Five 2005).
Pursuant to the Decision of the State Council on
Reforming the Investment System issued by the StateCouncil (2004), social fund, i.e. non-government
fund shall be used as much as possible for profitableinfrastructure projects, thus any infrastructure
projects shall be well planned. The specificevaluation criteria are necessary for government tojudge whether the proposed project scheme is
profitable, partly profitable, or unprofitable, in otherwords, whether it deserves complete private
investment or needs government subsidy based on
the current practice. However, all legal documents
issued by various government departments do not
stipulate or propose the judgment criteria offinancial obligation division between government(2) Research Methodology and Objective
Based on thorough analysis and careful
comparison of relevant legal rules and government
policies on infrastructure project planning, theauthors shall propose a project planning model
which may be applied by project authorities to allkinds of infrastructure projects involving new
construction of physical facilities in China.
The planning model shall not only include thecontents of former project proposal and project
feasibility study report, which are prepared by stateor private companies, but also contain obligation
division between government and project company,
particularly the risk and financial obligation division
based on the total lifecycle of the proposed
infrastructure project. The analysis of cost andbenefit in the total lifecycle of proposed project shallbe conducted.
The proposed planning model shall include acomprehensive planning framework and a six-stepplanning process. In particular, the financial
indicator, i.e. self-reimbursement ratio is introduced
for correct appraisal of project feasibility and proper
obligation division between government and projectcompany.

4scheme (shown in Table 6) and financial scheme(shown in Table 7).
Service scheme is the base of the project planning
framework. Technical scheme contains three parts ofcontents: engineering design, construction scheme,
operation and maintenance scheme. Business
scheme is the key part of the project planning
framework.

3. Planning Framework for Infrastructure
Projects
In order to integrate the formerly used project
documents into the proposed project planning
framework, the authors list the contents ofpreliminary feasibility study (i.e. project proposal)
stated in the Notice (SPC, MEP, and MOT 1995) andfeasibility study report stated in the Provisional
regulations (SPC 1995) in Table 2, the contents ofproject proposal (i.e. preliminary feasibility study)
and feasibility study report for foreigner-invested
electric power project stipulated by the former
Ministry of Power Industry in Table 3 (MOPI 1996;
SPC and SAFE 1997), the contents of project
proposal and feasibility study report for urban
infrastructure projects invested by government inTable 4 (BMG 1999 and BDRC 2004).
The authors classify the contents of this project
document into four types: demand analysis,
technical scheme, financial scheme and business
scheme including contract scheme.
Based on the previous analysis the authors clarify
the intrinsic logic between various parts of contents
in the project planning document and propose thecomprehensiveplanning
frameworkofinfrastructure projects, which includes four parts ofcontents: service scheme (shown in Table 5),technical scheme (shown in Table 5) and business

4. Establishment of Proper Project Planning
Process
Based on the analysis of previous section, theauthor suggests that infrastructure project planningshall include six steps: service planning, selection oftechnical scheme (including engineering design,
construction scheme, operation and maintenancescheme), establishment of business scheme,
financial analysis, proposal of obligation division
scheme and project implementation scheme. The
proposed public service and infrastructure project
shall be procured according the principles ofobjectivity, transparency, impartiality, competitionand efficiency. Not only state companies may bid forthe proposed project, so do private companies.
Private companies shall be treated the same asstate-owned companies, so the tax cost imposed on
private companies shall be included in the proposed
financial scheme.

Table 2 Requirement of Preliminary Feasibility Study and Feasibility Study for Foreigner-Invested
Infrastructure Projects
Type ofcontent
Demandanalysis
Technical
schemeFinancial
schemeBusiness
schemePreliminary feasibility study

Feasibility study report

The analysis of market demand Survey of the project and target
on public service
Market demand for the project
Engineering and technique
Description of project engineering and technical index,
Environment protection
including the technology to be adopted
Assessment of the effects of the project on the environment
Engineering and construction plan
Total investment amount
Project costs
Economic and financial
Financial analysis, including total investment, cost of labor
analysisand materials, financing scheme and cost, cash flow,internal rate of return, inflation rate, supposed foreignexchange rate and interest rate, analysis of risks andsensitivity and other items
Service pricing standard andProject charge
price adjustment principle
Description of the project company
Concession duration
Operation plans
Principle of Risk allocation
Government obligation

5

Table 3 Requirement of Project Proposal and Feasibility Study Report for Foreigner-Invested ElectricPower Projects
Type ofcontent
Demandanalysis
Technical
schemeFinancial
schemeBusiness
schemeContract
aspectProject proposal
Demand on electric power
Technical, environmental
standard and equipment type
Construction method

Feasibility study report
The demand on electric power or the necessity of the
project
Conceptual design documents (project capacity, projectsiting, technical standard, environmental standard andtype of equipment)

The necessity of utilizing foreign The necessity of utilizing foreign investment
investment
Total investment
Total investment
Financial analysis
Economic evaluation andfinancial analysis
Investment source
Financing method and requirement (draft of loan
Capital structure (investment
agreement) agreed by the Ministry of Power Industry
amount, financing amount,and verified by the State Administration of Foreign
equity/debt ratio),
Exchange Investigation in qualification and achievement
Certificate of foreign parties’of engineering and equipment corporations.
creditProvince price authority’s commitment and approval ofFormation of company
electric priceOperation management
Bid documents for procurement of equipment and for civil
works (equipment parameters, capability and price)
Arrangement of connection with Contract of purchase and sale of electric power endorsedwater source, fuel source,by Ministry of Power Industry
transportation, and electric grid Agreement on link with electric grid ratified by Ministryof Power Industry
Agreement on land usage, fuel supply, water supply
ratified by Ministry of Power Industry
Agreement on the operation management of power plant
ratified by Ministry of Power Industry.

Table 4 Requirement of project proposal and feasibility study report for government-invested urban
infrastructure projects
Type ofcontent
Demandanalysis
Technical
schemeFinancial
schemeBusiness
schemeProject proposal

Feasibility study report

Project outline and necessity

Project outline and necessity

Project capacity
Project siting and site area
Construction scheme and component works
Preliminary construction schedule
Preliminary analysis of environment impact,transportation, culture relic protection,
labor protection, safety, sanitary,consumption of water and energy source

Project capacity
Function requirement
Quality standard
Project siting and plot plan
Consumption of fuel and resource
Environment protection
Labor protection and health care
Construction scheme and component works
Construction duration and schedule
Access to water source, electric power, road andcommunication for purpose of construction
Total investment estimate
Analysis of economic and social benefit

Approximate total investment estimate
Prediction of economic and social benefit
including financial appraisal and economic
appraisal
Preliminary scheme of fund raising and loan Investment source and capital structure
repayment
The constitution of the company including thememorandum of association and articles ofassociation

6

Table 5 Service and technical scheme of infrastructures
projects(1) Service planning
In order to overcome premature project
development mentioned and inaccurate prediction ofdemand on public service (Du and Watanabe 2005b),
demand analysis (shown in the top part of Table 5)
shall be based on the accurate demand analysis of
public service, the five-year (or ten-year) national
economic social development program, national
industry policies and urban infrastructuredevelopment programs. The Project administration
department shall provide reliable historical data of
public service to consultants to increase the accurate
level of demand forecast of public service including
service quantity, quality standard. Regarding public
service price, the public opinion shall be consideredthrough questionnaire investigation or public
hearing. It is advisable for project administration
department to reduce fiscal subsidy for service andincrease service price in a gradual and smooth way
based on the past service price and analysis of public
opinion. The demand analysis is the focus of project
proposal and shall be conducted and appraised byexperts.

Category

DetailPresent condition and forecastof service demand quantity,
Service Scheme
service price, and service
standard.
Facility performance andcapacity
Facility quality
Facility life
Design schedule
Facility component:
Engineering Architecture/aesthetics
Ground and foundation
DesignCivil, electrical and mechanicalsystems
Pollution prevention technology
and facilities
Byproduct disposal technology
and facilities
Construction technologies andinstallation method
Technical
Construction and installation
Schemeschedule
Material and equipment supply
schedule
Construction/demolition waste
Construction disposal
Safety planning for handlingschemehazardous materials
Noise mitigation and handlingof dangerous/emergency
Situations
Protection of flora and fauna
Protection ofcultural/archeological relics
Operation & Service quality standard
Maintenance Service supply planningschemeFacility maintenance planning(2) Identification of technical scheme
Technical scheme shall be carefully planned andthe following contents are included:
 Confirmation of project capacity
 Confirmation of quality standard of public
service Selection of technical standard and life ofequipment Selection of quality standard and life of civilworks
 Project siting and layout
 Preparation of construction and maintenancescheme, Assessment and precaution of ecological andenvironment impact, Analysis of resource consumption, equipment
utilization and labor demand
 Labor protection and safety

Table 6 Business scheme of infrastructures projects
Category
Investment

DetailCapital structure (equity/debt)
Government investment
Financing
Loan sources and structure
Revenue
Tariff/toll level and adjustment
mechanism
Government subdidy
Annual operation income
ExpenditureTax, duty and royalty
Annual design, construction,
maintenance, operation andasset replacing outlay
Allocation of risk obligation
Project duration Design, construction andoperation duration(3) Establishment of business scheme
Following the demand analysis and identificationof technical scheme, pursuant to the present
regulations on privately financed infrastructure
projects in China, the business scheme ofinfrastructure project (shown in Table 6) shall beplanned carefully, which mainly concerns theidentification of project environment, the design ofcapital structure of a project company and theobligation division between government and the
project company. The risk allocation and fiscal
obligation shall be proposed in these stage.
7

Table 7 Financial scheme of infrastructures projects
Financial Variables
Annual construction cost
Annual operating/maintenance cost
Annual assets purchasing cost
Annual assets replacing cost
Annual operating income

Capital Structure
EquityLoan and bondDebt/equity ratio
Financial Indicators
Net present cost (NPC)
Net present revenue (NPR)
Self-reimbursing ratio (SRR)

Time
Parameter

EconomicParameter

Financial Parameters
Concession period
Design and construction period
Operation period
Grace period
Payback period
Debt payment period
Interest rate
Exchange rate of currency
Inflation rate
Insurance fee rate
Rate of return on equity

Accounting Depreciation rate of fixed asset
parameter
Business income tax rate
Tax
Value-added tax
Parameter Royalty
Earning reserve
Currency
Currencies of loans and equity
Parameter Currencies of revenues and payments
Price of material, power and equipment
MarketPrice of project product or service
Parameter
Tariffrisk to the project company (ACT 2003)
 Selection of concession duration based on thedesigned life of key equipment and civil works
and subject to government limit (30 years ofoperation period is permissible in China). It issuggested that the initial value of concession
duration shall be decided based on part
experience or directly awarded the permissible
duration if there is no experience.

The business scheme shall include the following
contents:
 Calculation of annual project cost without tax
burden and exposure to risk, including
construction, maintenance, operation andreplacing cost based on the technical scheme
proposed. This sum of annual project cost
shall constitute raw project cost. The present
value of raw project cost shall be expressed as
Raw NPC in later calculation formula.
 Establishment of service price scheme
acceptable to the public.
 Identification of current taxes and accounting
criteria of the depreciation of fixed assets andthe amortization of intangible assets
 Establishment of interest rate, inflation rate,
foreign exchange rate (if foreign investment isinvolved) and insurance rate Planning of capital structure (e.g., ratio of
equity to debt shall be more than 1/3) andfinancing scheme based on private investment
and operation.
 All risk shall be identified and evaluated basedon the likelihood and financial influence ofrisk. Risk shall be categorized into two types:
retained risk to government and transferred

Tax cost
State companies are exempted from certain typesof taxes, which shall be paid by private companies.
In order to set up a uniform standard and objectively
calculate the total project cost within the designatedproject lifecycle the total project cost analysis inbusiness case shall include relevant tax cost based on
the private investment and operation of
infrastructure projects. The type and rate of taxes
shall be identified.
In the bidding process, if state companies also bid
for the proposed projects, its total project cost shallbe adjusted to include the tax cost with the purposeof treating all bidder with the same evaluation
criteria.
8

cancel fiscal subsidy for public utilities, andconfirmed the price of public services based on its
cost, which inevitably cause the increase of public
service price. However, the quick increase in public
service price has caused public dissatisfaction (RG
2006).
Price authority shall control the price of public
service within an affordable level. One feasible way
is to reduce fiscal subsidy for service and increase
service price in a gradual and smooth way based on
the past service price and analysis of public opinion.
Therefore, a certain level of financial obligation of
government shall be undertaken by government for
partly self-reimbursed infrastructure projects such as
subway, daily garbage treatment facility, andwastewater disposal facility since the service priceof these projects is still controlled by government. In
deciding the initial business scheme the type andamount of government investment or subsidy shallbe confirmed based on current practice.
In addition, the price control and subsidy forservices shall be conducted according to the
Schedule of Specific Commitments on Services ofProtocol on the Accession of the people's republic ofchina (WTO 2001)

Risk cost
Except that the State Planning Commission(1995) required that preliminary feasibility study
should include the principle of risk allocation, allother preliminary feasibility study and feasibility
study prescribed by other government organs did notconsider risk as an inevitable factor for the objective
evaluation of project feasibility and optimal
selection of concessionaire. Because of the multiple
stage and long duration of infrastructure projects the
project risk must be specifically considered andobjectively evaluated in project planning. Moreover,
the risk obligation shall be reasonally allocatedbetween government and the project company.
In normal case, project authority shall undertakethe risk of change in law, foreign currency
fluctuation, and partial demand change. At the sametime project companies shall assume the risk of force
majeure, design and construction, maintenance andoperation, and partial demand change.
Up to now, there is no specific government ruleon the allocation of demand risk, which is still at thediscretion of contracting authority.
The feasible method for private concessionaires
in electric power or water sector to reduce demandrisk is to obtain the guarantee of government that acertain quantity of public service shall be procured
through signing concession contract. For example,
the government guarantee of electric power purchasein Laibin B power project is approximate 55% of
installed capacity (Ye and Tiong 2003). The
guarantee of 50% of annual procurement quantity of
public service by government may be appropriate forelectric power, clean water, incineration or
accommodation or supplier of wastewater
Regarding transportation projects, because toll isdirected paid to private concessionaires, in generalcases, the government does not guarantee the traffic
volume for private concessionaires. However, thespecific protection clauses that government
guarantees access right of private companies tosimilar free transportation network shall be provided
in concession contracts as a incentive measure forprivate participation in transportation projects.

(4) Financial analysis
During the planning of business scheme, allfinancial parameters, financial variables have been
decided. The capital structure, debt percentage,
equity percentage has been decided, too. The
financial indicator including NPC, NPR, and SRR,
shall be calculated according to the following
procedure:① Calculation of discount rate
Discount Rate = Interest Rate of Loan x Debt Percentage+ Rate of Return on Equity x equity percentage② Calculation of risk-adjusted Net Present Cost
(NPC) discounted to the beginning of project
construction based on the designed technicalscheme, current taxes and predicted risk
probability and impact
NPC = Raw NPC + Risk NPC + Tax NPC

Price control and government subsidy
From 1990, government begun to reduce or even

Raw NPC = Operating Costs + Capital Costs
9

provide more profit for the project company. In
order to restrict the project profit to the reasonable
scope, government may take several measures toreduce the SSR until is equal to 1. The measures
including the reduction of public service price,
concession duration, government investment or
government subsidy, or the increase of concession
tax. The reduction of government investment andsubsidy shall be preferable.

Risk NPC=Consequence x Probability of risk Occurrence③ Calculation of risk-adjusted Net Present
Revenue (NPR) discounted to the beginning of
project construction based on the service priceand expected service demand.
④ Calculation of Self-Reimbursement Ratio(SRR), i.e. NPR/NPC
SRR = NPR/NPC③ SRR ≤1
IF SRR is less than 1, it means the total operation
revenue cannot reimburse the total project cost at the
expected rate of return on investment. The proposedbusiness scheme of project is infeasible and shall be
adjusted. Government may take the following
measures to adjust the formerly proposed business
scheme.

The term of self-financing ability, which issimilar to SRR, has been used by Chang and Chen
(2001) and Zhang (2005), respectively, however,they did not use the SRR to establish the financial
obligation division and project implementation
scheme specifically.
The financial analysis in this section aims for thereasonable obligation division between government
and project company. Therefore, in the calculationof project cost, the actual market price of various
inputs shall be adopted; however, in the computationof project revenue, the government controlled priceof public service shall be applied, which is lower
than the real cost price of public service in mostcases.

 Government may extend concession duration;
however, the concession duration is limited to 30
years pursuant to government regulation.
Government may reduce taxes subject to thecurrent regulation. The concession tax may be
reduced to zero. Government may increase
public service price subject to the ceiling pricemade by the price authority. the three methods
may be used independently or jointly.

(5) Feasibility study of proposed business schemeand obligation division between government
and project company
After SRR has been decided, the feasibility of
proposed business scheme shall be analyzed. The
various value of SRR represent three types of project
conditions: If all the above three measures i.e. the extensionof concession duration, reduction of taxes andincrease of service price have been taken subject
to government regulation, SRR is still less than 1,
the government may also subsidize the project in
the form of government investment or service
subsidy. However, the government subsidy shallbe within the reasonable extent. The due
government subsidy may be obtained by the costand benefit analysis of past similar projects on
the whole project cycle. The current government
subsidy for unit price of public service may also
be used as the indicator of due government after
the proper adjustment based on the price forecastof public service. The author suggests thatgovernment subsidy shall be selected first to
reduce the front-end concentrated government
payment.

① SRR = 1
IF the SRR is just equal to 1, it means that the
total operation revenue can reimburse the total
project cost and the model company may obtain
expected rate of return on investment thus the projectis feasible thereby government may continue toprepare implementation scheme.
② SRR ≥ 1
IF SRR is more 1, it means the total operation
revenue not only can reimburse the total project costat the expected rate of return on investment but also
10

payments received from the users of the facilities. Most
PFI projects adopted BOT scheme.
Build-Operate-Own (BOO) is similar to BOT
except that the physical facilities of infrastructure
project are owned by the project company and thetransfer of the physical facilities is unnecessary. This
implementation scheme is seldom adopted undercurrent political situation.
Installation-Operation-Transfer (IOT) denotes
government invests mainly in civil works of the
franchised project and becomes the owner of suchproperty, while the project company is encouraged toinvest in mechanical and electrical equipment and tooperate the project facilities during concession term. At
the expiration of the concession term, the project
facilities owned by private entity should be transferred
to government. The 9th Beijing Subway Project
adopted this implementation scheme.

 If all the above four measures i.e. the extensionof concession duration, reduction of taxes,
increase of service price and due government
subsidy have been taken subject to thegovernment regulation, SRR is still less than 1,
which manifests that the proposed project isinfeasible. Therefore, government shall stop the
implementation of the proposed project.
By the above analysis process, not only project
feasibility may be calculated the due obligation
allocation between government and project
concessionaire may also be decided.
(6) Project implementation scheme
According to the result of financial analysis, if
the proposed project is feasible, one business scheme
is selected.

5. Conclusion

 If the project does not need the government
investment
or
subsidy,
theproject
implementation method may choose pure private
investment plus BOT or BOO method

The paper proposes a comprehensive projectplanning framework and proper project planning
process, which includes six steps: analysis of project
demand,selectionoftechnical
scheme,establishment of business scheme, financial
analysis, financial obligation division between
government and project company, and project
implementation scheme. The financial analysis
indicator, i.e. SRR is introduced to analyze project
feasibility and divide risk and financial obligation
between government and project company.

 If project is subsidized by the form ofgovernment
investment
theproject
implementation method may choose cooperative
investment plus BOT or IOT.
 If project is subsidized by annual government
subsidy, the project implementations scheme
may choose pure privately investment, annual
government subsidy and BOT.

Reference

The various project implementation schemes,
including BOT, BOO, and IOT, are clarified in thefollowing paragraphs:
Build-Operate-Transfer (BOT) denotes ainfrastructure project that is built, operated, maintained
and transferred to the relevant authority at the
expiration of the concession period by a projectcompany, which is authorized the concession right by aproject authority to operate lawfully andindependently, and obtain revenue to recover its
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