Building Innovative Public-Private Partnerships for Rural Environment Governance in China〔*〕

Fu Jingjing, Cui Hongmei

(School of Law, Southwest Petroleum University, Chengdu, Sichuan, 610500)

China’s rural areas are now facing tremendous pollution risks. However, the existing legal regimes relating to rural pollution control and prevention are ineffective and unenforceable. Traditionally, the rural environmental governance is a classical type of public goods, which relies heavily upon public investments. However, the existing experience has shown that current rural environmental governance regimes which relying solely on public sectors cannot meet the requirements. Recent years have seen a marked increase in cooperation between the public and private sectors for the development and operation of infrastructure. Notwithstanding the Public-Private Partnership (hereinafter PPP) have often been in the transportation and education sectors, there is a growing acknowledgement that PPP mechanisms can be used to meet public service needs in a wide variety of sectors. In this context, the regime is an ideal model for improving the efficiency of rural environmental governance from the institutional level. Therefore, this paper proposes to explore innovative regime so that the environment of countryside could be governed efficiently. At the outset, this paper provides an overview of PPP. This section draws upon the concept of PPPs as a framework to analyze the deliberative nature of public-private partnerships. Additionally, this paper explores the strengths, weakness, opportunities and threats of PPP in rural environmental governance. Moreover, elements which affect successful PPP relationships in rural environmental governance will be identified. Last but not least, it will highlight innovative path to PPP model in rural environmental governance in China.

Ⅰ. Public-Private Partnership and Environmental Governance

1. The definition of PPP

Developing new form of environmental governance must firstly acknowledge the meanings and characteristics of public private partnerships, and increase public deliberation about these norms. A useful starting point would be the understanding of the definition of PPP. Different countries have disparate definition of PPPs. The contents and objectives may vary according to the country specific background and the specific interests of the individual author. The World Bank provided a broad definition of PPP, as a long-term contract between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risk and management responsibility, and remuneration is linked to performance.〔1〕The UNITR defines PPP as “a form of long-term and cooperative relationship between public and private sectors based on a project.”〔2〕In some cases, the term PPP describes a spectrum. “At one end, the public sector retains all responsibility for financing, constructing, operating and maintaining assets, together with the responsibility for assuming all associated risks. At the other end, the private sector assumes all of these responsibilities. The vast majority of PPP approaches fall in the middle of spectrum, with risks and responsibilities shared between the public sector and its private partners according to their strengths and weaknesses.”〔3〕In other situation, the term PPP refers to a long-term, contractually regulated cooperation between the public and private sector for the efficient fulfillment of public tasks in combing the necessary resources of the partners and distributing existing project risks appropriately according to the risk management competence of the project partners.〔4〕In a conclusion, the PPP is a partnership between the public sector and the private sector for the purpose of delivering a project or a service traditionally provided by the public sector.

2. Features of PPP

Besides setting out what is defined as a PPP, it is also helpful to clarify characteristics of PPP. In practice, governments enter into a wide range of contracts with private sectors. Some of these contract types share some PPP characteristics—such as being long-term, output based, or performance related. However, not all contracts signed between public sectors and private sectors are PPP relationships. We should bear in mind that the differences between PPPs and other types of contracts. First, and most fundamental, the major objective of PPP is to structure the relationship between the parties, so that risks are borne by those best able to control them and increased value is achieved through the exploitation of private sector skills and competencies. Under PPP arrangements, the private sector is responsible for design, construction, operation, management, and finance. Public sectors become increasingly involved as regulators and focus resources on service planning, performance monitoring and contract management rather than on the direct management and delivery of services. Hence, the intrinsic quality of PPP is to improve the nation’s public services without placing undue pressure on government funds. In addition, PPPs are used for several types of arrangements between public and private sectors that contribute to provision of public goods or services. A public good is a good that is both non-excludable and non-rivalrous in that individuals cannot be effectively excluded from use and where use by one individual does not reduce availability to others. Public service is any service that the relevant government considers its responsibility to provide or ensure is provided. What is more, PPP involves long-life assets concomitant with the term of the PPP contract. For the most part this means PPPs deal with fixed assets; but may also include related long-life assets that are somewhat purpose or site-specific, such as train rolling stock.

3. The arguments for PPP in environmental governance

Recent years, PPP has also been urged as a means of overcoming some of the political standoffs in implementing global environmental agreements, such the UN Framework Convention on Climate Change (1992) and its Kyoto Protocol (1997). Under the Kyoto Protocol, the Clean Development Mechanism (CDM) was established to allow countries with specific greenhouse gas reduction targets (the so-called Annex I countries) to achieve some of these targets by investing in climate-friendly activities in countries that do not have these targets (non-Annex I countries, which are usually developing countries).〔5〕“Governance without government”, as early recognized by Rosenau and others, has also become institutionalized as an additional driving force in local environmental governance.〔6〕PPPs fill in what local governments are not willing or able to regulate, such as forest governance, biodiversity conversation, and pollution control. From the governance perspective, the role of PPP is a regime to supplant or complement the role of environmental governments.〔7〕Supporters purported benefits of PPPs are their potential to overcome governance deficits and to build bridges between different actors. PPPs in environmental governance have been met with skepticism from a variety of critics as well. Critics have argued that using business to enact environmental protection only strengthens the causes of environmental degradation and anthropogenic climate change.〔8〕Others have pointed out that the use of public-private partnerships as a functional means of implementing policy may reduce the public space for governing the provision of social services, and hence eroding democratic accountability of local governments.〔9〕

In response to these criticisms, the following sections propose a number of ways to increase the local deliberative capacity of partnerships in order to enhance local accountability, yet still achieve the functional objectives of business operations and technology transfer.

Ⅱ.The SWOT Analysis of PPP in Rural Environmental Governance

The objective of this section is to evaluate whether a PPP approach is suitable for the rural environmental governance project. We will use the SWOT analysis method to explore the new role that PPPs play in policy frameworks and show that the main contributions of PPPs are in improving rural environmental governance. It also identifies a number of obstacles faced by PPPs in the field of rural environmental governance. The potential for applying PPPs in the rural environmental governance should harmonize expectations of local authority policy and the private sector together. This in turn will determine the criteria to be applied and to their respective weightings. From this perspective we will address the following questions:

1. What are the potential advantages for each partner of PPPs

2. What are the potential obstacles and constraints to PPP opportunities

3. Would the private sector be interested in the opportunities

4. Is PPP the best solution to achieve the rural environmental governance

1. Strengths analysis

For a long time, it is government that takes responsible for the prevention and control of pollution in rural areas, which leads to huge financial burden on government. However, rural environmental governance is typically under-funded—that is, most countries are not investing enough to meet its needs. This problem is particularly prevalent in developing countries. One of the main advantages of the PPP model is the ability to introduce social funds into rural areas to reduce government’s financial burden. In addition, PPP model could achieve the optimal risk allocation between government and private sectors. A core principle of any PPP is the allocation of risk to the party best able to manage it at least cost. The aim is to optimize rather than maximize risk transfer, to ensure that best value is achieved. What is more, PPP is an efficient approach to achieve sustainable development of rural areas. Currently there are two common approaches to improve environment in rural areas, i.e., public supply model and business development (such as housing development). For the former one, the major drawback is that there is no sufficient finance to improve rural environments through the whole country. As to the latter one, the main risks are how to ensure the quality of project and improve the sustainable development of rural areas. From a rational economic perspective, projectors are amoral calculators and are prone to pursue economic profits ignoring the quality of projects. Additionally, selling villages’ collective land is not conducive to local farmers’ employment and rural areas’ sustainable development. International experience suggests that the quality of service achieved under a PPP is often better than that achieved by traditional procurement. The essence of PPP lies in the principle of contract. Within the supervising of PPP contracts, responsibilities of designing, building, an operation, specific requirements of the project, supervising regimes and penalties could be identified clearly. Specifically, compared to real estate development projects, PPP model can guarantee the cultivated land area does not fall below the red line. Last but not least, the allocation of project risk should incentivize a private sector contractor to improve its management and performance on any given project. Under most PPP projects, full payment to the private sector contractor will only occur if the required service standards are being met on an ongoing basis. In summary, designed appropriately, the PPP can generate substantial benefits for government, local citizens and private sectors.

2. Weakness analysis

Potential PPPs can be hindered by several constraints and obstacles which must be considered. Firstly, rural environment is a public good, which results in problems such as free-riders or externalities. Therefore, compared to other sectors such as infrastructures and transportation, rural environmental governance is hardly to attract private sectors involving in it. Furthermore, rural environmental governance relates to atmosphere, water, soil and ecology factors, which requires the introduction of innovative and comprehensive technologies. As a result, introducing the PPP model into the rural environmental governance field may lead to several practical problems, such as high costs on investment, complexity of technology, uncertain profits, and slow return of funds, which makes the normal PPP model (such as sewage treatment plant and waste disposal plant) difficult to adapt to rural areas. In addition, the private sector will be interested in some projects more than others based not only on purely financial considerations. A crucial issue, which must be addressed, is the creditability of local governments.

3. Opportunity analysis

In recent years, rural environmental governance has become an important issue in China. Since the Third Plenary Session of the 18th CPC Central Committee, deepening the reform of the economic system and innovating the investment and financing mechanism has become the new demands of social development in China. In this context, introducing private sectors to the rural environment governance reflects the institutional innovation. Furthermore, applying the PPP model to the rural environment governance is a realistic need for modern state governance. It is worthy of noting that the PPP model turns the traditional poly-centric governance into the multi-subject co-governance. Thirdly, it is worthy of noting that the PPP policy has been clarified by Chinese governments. At the state level, encouraging private funds into rural environmental governance and fostering village tourists with private sectors are identified by the Centre government in the No.1 documents of 2016 and 2017. At the provincial level, it is stressed by the Sichuan government that it is urgent to fostering village tourists rooted in local unique characteristics in order to establish beautiful Sichuan. In a conclusion, there is a great opportunity for PPPs in the field of rural environmental governance.

4. Threats analysis

Applying the PPP model in rural environmental governance may also lead to some potential risks. Firstly, PPPs can give rise to implicit liabilities on governments, that is, non-contractual liabilities that arise from moral obligation or public expectations for government intervention that create further fiscal risk. Secondly, PPPs can achieve efficiency improvements in the rural environmental governance, as described above. However, creating the incentives to achieve efficiency gains, and ensuring the public and users reap the benefit, depends on the government effectively structuring, procuring, and managing the PPP project over its lifetime—to achieve competitive tension, real risk transfer, and ensure anticipated performance improvements materialize in practice. This can be difficult where low public sector capacity means that governments lack the resources and skill to structure and manage PPPs well. Thirdly, PPPs in China may face huge political risks. PPPs are long-term partnerships between public sectors and private sectors which are always longer than ten-years. However, China’s local governments are lack of contractual spirit and are prone to break PPP contracts due to change of officers and short of investment. Additionally, the planning and screening of PPPs are facing risks such as over-optimistic risk forecast and policy change. To be specific, the rural environmental governance is diversity and complexity. As a result, local governments are difficult to effectively select the most competitive private sector through the existing public service procurement procedure.

In a conclusion, while certain strengths and opportunities do exist and can be harnessed, PPP should not be regarded as representing neither a miracle cure nor indeed a quick fix to rural environmental governance. PPP should be regarded as an option amongst a range of possible tools to be applied only where the situation and project characteristics permit it and where clear advantages and benefits can be demonstrated.

Ⅲ.Elements Determining the PPP Model in Rural Environmental Governance

PPP regimes are often project specific and determined by the existing legal, political, economic, and institutional frameworks. Although the successful PPPs are viable, the bulk of the efforts should be achieved in practice. The objective of this section is to identify relevant factors that affecting successful PPP relationships, in particularly, in the field of rural environmental governance.

1. General elements determining the PPP model

First and foremost, successful PPPs depend on the effectiveness of the national and municipal legislative and regulatory structures. Because of these critical interactions it is preferable to ensure the development of effective legislative and regulatory provisions before developing PPP relationships. The PPP legal framework is a broader term which comprises all the laws and regulations that control whether, and how, PPPs can be implemented. It is now acknowledged that a specific law that applies to aspects of PPP process is a suitable option for China. A PPP-specific law can help raise the profile and demonstrate political commitment to the PPP program—although care is needed to avoid conflict with any other existing relevant laws. PPP laws may set out scope, principles, processes and institutional responsibilities and policies such as public financial management rules PPPs.

Secondly, governments need skill, capacity, and coordination to implement PPPs successfully. Under the PPP model, the private party will design, finance, build and maintain the project, and provide services. However, the government remains responsible for ensuring the public service is provided to the expected quality, in a way that achieves good value for money. The government must choose the right project, select a competent partner, and set and enforce the parameters within which that partner operates. Therefore, governments should set out a process that must be followed to develop and implement every PPP project and clarify responsibilities for implementing a PPP in advance. Governments have a large effect on the success of private initiatives. PPP model is the outcome of multi-centric governance.〔10〕In their meta-governance roles, governments play a monitoring and warranty role in the governance system. Of particular importance is the role of the public sector which may transform itself from a service provider to an overseer of service contracts.

Thirdly, in order to protect each partner’s interests, it is important to make a wholesome contractual framework. Functional interdependencies are hampered because the interests of different partners differ greatly in their goals and composition, hardly communicate with each other and compete against each other. Thus, a coordinating and integrating mechanism is necessary and importance. A PPP will involve numerous parties and therefore a corresponding number of contractual arrangements. Among these contracts, a project contract is the foundation of the programme. Lying at the core of the contractual framework, it governs the relationship between the awarding authority and the project company. No matter what type of PPP model the programme has been adopted, scrutiny of contractual documents should aim to safeguard the public interest, ensure contract fairness, promote effective regulation and monitoring, and ensure contractual flexibility to meet changed circumstances.

Moreover, guaranteeing benefit from PPP requires recognition of the relative strengths and weaknesses of each type of structure and the aims and objectives of each party. Crucial to the successful of a PPP is whether it will provide value for money and above all additional value than traditional public procurement methods. Thus, the government should establish the true cost of providing a service with the purpose of benchmarking or shadow biding potential private costs. The benefits and costs should be systematically analyzed considering both quantifiable and non quantifiable items.

2. Special elements determining PPP model in rural environmental governance

When designing and evaluating PPP projects in the rural environmental governance, particular attention needs to be given to the economic factors. Economics theory divides products into public goods and private goods. Whether a product or service is a public good or not depends on two related characteristics: non-excludability and non-rivalry.〔11〕Non-excludability means that the costs of excluding nonpaying beneficiaries who consume the good are so high that no private profit-maximizing firm is willing to supply the good. Non-rivalry refers to consumption of a public good by one person does not leave less for any other consumer. A private good is defined in economics as an item that yields positive benefits to people that is excludable and rivalrous. A good that is rivalrous but non-excludable is sometimes called a common-pool resource. A good that is excludable but non-rivalrous is sometimes called a club good. Having explained the private-public distinction in economics and law, we can now relate them to each other. The relationship is very simple: efficiency requires that private goods should be privately owned and public goods should be publicly owned. In other words, efficiency requires that rivalrous and excludable goods should be controlled by individuals or small groups of people, whereas non-rivalrous and non-excludable goods should be controlled by a large group of people such as the state. Thus, the distinction between private and public goods should guide the development of legal rules to answer the question, “What can be privately owned?”

There is without doubt that rural environment is a public goods. On the one hand, one resident with good environment does not diminish the amount of supplies to other residents. On the other hand, the resident cannot exclude others to enjoy the good environment. However, the supply of public goods is restricted by the “tragedy of commons”. In much of the world, common land is over-used, common pasture land is over-grazed, and public forests are over-harvested. Hence a rural with good environment results in over-used. Then how to prevent the “tragedy of commons” and control free-riders are the key issues. Theoretically property rights could be possible solutions for preventing over-use of common resources. Foremost, rural environment is a public good within a limited geographic area so that it is possible to exclude free riders within the area by setting out property rights. According to Tiebout-Oates Model, for local public goods, the mechanism to determine the efficient level might not have to be voting in the ballot box (for elected officials), but “voting with one’s feet” among communities.〔12〕As a result, local governments would offer a set menu of environmental services, and potential residents would choose their residence among competing communities. By doing so, residents would reveal their demand for local public goods (good environment). Bruce Hamilton then proposed that local land use regulations could be used to exclude free riders in the Tiebout-Oates system.〔13〕Under Hamilton’s system, property taxes or property fees could be used to specify the minimum amount of property that people had to buy to enjoy the public services. Therefore, according to the Tiebout-Oates-Hamilton model, the problem of public goods is thereby resolved, at least for those that can be geographically confined had assumed was necessary.

Ⅳ.Innovated Research on the PPPs to Develop the Rural Environment

PPP arrangements come in variety forms and are still an evolving mechanism which must be adapted to the individual needs and characteristics of each project and project partners. Each type of PPP has inherent strengths and weaknesses which need to be recognized. In the context of rural environmental governance, as we discussed above, the key question for the applicability of the PPP model is how to define property rights to exclude free-riders and makes profits. Two innovative model are proposed in this section in order to accommodate different situations.

1. TBOT Model

TBOT (transfer-build-operation-transfer) is an innovative model based on TOT and BOT. The model is suitable to carry out its comprehensive management of the surrounding environment of the PPP project based on an existing mature profit projects. TBOT arrangements involve the transfer of ownership of a mature property, transfer of responsibility for constructing, financing and operating a new facility to a private sector partner for a fixed period of time. In a TBOT framework, local government transfers the ownership of a mature facility that has been operating for a period to the public sector in free during the concession period. During the concession period the private company owns and operates the mature facility with the prime goal to recover the costs of investment and maintenance while constructing the new project. The private sector should responsible for the designing, building and operating the new project that adjoins the mature project. After the project is completed and begins to operate, government obtains the proceeds equivalent to the existing mature project’s operation right from the project company, at the same time, according to the TBOT agreement, the investor will return the project operation right of the mature project and new project in succession to the government after a few years. Essentially, TBOT model is that government packages a building project and a project to be built to obtain yearly increasing contracted revenue (from the project to be built). This model’s characterize is that the private sector obtain a franchise of a project of restoration of contaminated site from government through calling for bid, then the project company is responsible for financing, construction, operation and management. It recovers the funds to repay through the development and operation of the project in the franchise period and obtains a reasonable profit, after the franchise period has been finished, the project is transferred to the government in free.

2. Peer-Production Model

Peer production model occurs in a socio-technical system which allows thousands of individuals to effectively cooperate to create a non-exclusive given outcome.〔14〕This is a process taking advantage of new collaborative possibilities afforded by the internet and has become a widespread mode of labor.〔15〕Free and open source software and open source hardware are two typical examples of peer production. Examples include Wikipedia, an online encyclopedia, and Linux, a computer operating system. At its core, peer production is a model of social production, emerging alongside contract and market-based, managerial-firm based and state-based production. These forms of production are typified by two core characteristics: decentralization and social cues. To begin with, authority to act resides with individual agents faced with opportunities for action, rather than in the hands of a central organizer, like the manager of a firm or a bureaucrat. Additionally, they use social cues and motivations, rather than prices or commands, to motivate and coordinate the action of participating agents. Peer production is viable when capital costs fall far enough and coordination costs fall far enough. This peer production model shows us a new possible reality, a model where the democratic civic sphere, productive commons, and a vibrant market can co-exist for mutual benefit in rural environmental governance.

The question then arises that how to establish a peer production model in rural environmental governance. Three essential building blocks of generalized peer production could be exhibited. First of all, the potential objects of peer production must be modular. That is, they must be divisible into components, or modules, each of which can be produced independently of the production of the others. For instance, villagers who involve in a PPP project could take responsibilities such as growing trees and flowers, maintaining wetland, or garbage collection. These efforts are all contribute to rural environmental governance and could be distributed to different villagers. This enables production to be incremental and asynchronous, pooling the individual discrete efforts of different people, with different capabilities, who are available at different times. Second, an efficient peer-production project must have low-cost integration. In a PPP project, private sectors take the responsibility of providing new environmental technology, while local citizens performing certain tasks such as labor services or providing maintenance. Collaboration with villagers in the rural environmental protection and control may reduce the costs of technology transfer by them to participate in the shaping of technologies implemented, or in identifying local needs. Meanwhile, peer production model in the field of rural environmental governance could access to local genetic materials and trial new technology so that investors could benefit from unique expertise and prior experience. In addition, a successful peer production model requires the peer production license regime. This sharing license proposes that all who contribute to the commons can also use the commons. In a conclusion, such local collaboration with private partners may lead to the situations of “non-zero-sum games” where investors can success fully transfer a new technology to a new location, and local people can influence the nature and purposes of the investment and technology.

Innovations in public services are not just new ideas, techniques or methods, but also new practices, and they not only involve physical artifacts, but also changes in the relationships between the service providers. There are a large number of partnerships active in the field of rural environmental governance; the ontology of environmental governance has indeed changed from a single-centric structure, with states regulating rural environment, to a more complex structure in which governance is both a public and private affair. In conclusion, public and private sectors can enhance each other in the field of rural environmental governance.

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〔2〕United Nations Institute for Training and Research, Public Private Partnership for Sustainable Development, 2000.

〔3〕The European Commission, Guidelines for Successful Public-Private Partnerships, 2003, p.13.

〔4〕Alfen H. W., Kalidindi S. N., Ogunlana S., Wang S. Q. et al., Public-Private Partnership in Infrastructure Development: Case Studies from Asia and Europe, 2009: Bauhaus-Universitat Weimar Publishing, Germany, p.3.

〔5〕Tim Forsyth, “Building Deliberative Public-Private Partnerships for Waste Management in Asia” (2005), Geoforum 36, pp.429-439.

〔6〕Rosenau, J.N., Czempiel, E., et al., Governance Without Government: Order and Change in World Politics, 1992: Cambridge University Press, Cambridge, USA.

〔7〕B?ckstrand, K., “Accountability of networked climate governance: The rise of transnational climate partnerships” (2008), Global Environmental Politics 8(3), pp.74-102.

〔8〕Blowers, A., Power participation and partnership: the limits of co-operative environmental management. In: Glasbergen, P. (Ed.), Co-operative Environmental Management: Public-Private Agreements as a Policy Strategy. 1998: Kluwer, Dordrecht, London, pp.229-250.

〔9〕Rhodes, R., “The new governance: governing without government” (1996), Political Studies 44 (4), pp.652-666.

〔10〕Cashore, B., Auld, G., Newsom, D., Governing Through Markets: Forest Certification and the Emergence of Non-State Authority, 2004: Yale University Press, New Haven, London.

〔11〕Robert Coopers & Thomas Ulen, Law and Economics, 2008: Pearson Publishing, p.108.

〔12〕Tiebout, Charles M., “A Pure Theory of Local Expenditures” (1956), Journal of Political Economy 64, pp.416-424.

〔13〕Hamilton, Bruce W., “Zoning and Property Taxation in a System of Local Governments” (1975), Urban Studies 12, pp.205-211.

〔14〕Yochai Benkler & Helen Nissenbaum, “Commons based Peer Production and Virtue” (2006), The Journal of Political Philosophy 14(4), pp.394-419.

〔15〕Yochai Benkler,“Freedom in the Commons: Towards a Political Economy of Information” (2003), Duke Law Journal 52(6), pp.1245-1276.