Investment accountability spells reform in China

Zheng Bianyi, The China Daily, Asia News Network, Beijing

After a six-month delay, the investment mechanism reform plan was finally unveiled in July. Much-anticipated, it seeks to improve the current government investment mechanism.

At the moment, government-initiated investment, including budget and state bonds, stands at a staggering 200 billion yuan (US$24.1 billion). The National Development and Reform Commission, China's top economic policymaker, has attributed the red-hot investment spree to local governments' drive and their "show-off" construction projects.

Reining in government investment has been taken by some economists as a fundamental step towards putting the brakes on swelling investment. But the new plan is not just aimed at improving the government investment mechanism.

A series of spectacular treasury-financed project fiascos was discovered in a recent survey conducted by the National Audit Office.

Among 320 completed projects out of a total of 526 urban infrastructure schemes surveyed, 32 had not been put into operation, 18 were still conducting trial runs or running intermittently, 69 were failing to run at their designed capability and 34 were either mismanaged or equipped with shoddy machinery, incurring huge waste.

The main culprit behind these investment blunders was the incomplete investment decision-making mechanism. Questions have been raised as to who should take responsibility for these bungled investment projects. The new investment mechanism reform plan tries to answer these questions.

It introduces a government investment accountability system, stipulating that anyone who incurs huge losses to the state by failing to obey laws or regulations will be held accountable for administrative and legal redress.

The last round of investment mechanism reforms, initiated in the early 1990s, focused on granting enterprises the right to make their own investment decisions rather than be dictated to by government investment accountability.

The notion of setting up a government investment accountability mechanism was raised during the draft process of the new plan, which began after the 2001 central economic work conference.

Although the new plan has broached the issue of government investment accountability, how they are to be carried out remains unresolved. Two questions are critical concerning the government investment mechanism: One is the decision-making process, the other is supervision and accountability.

According to the new plan, the decision-making process will be conducted in a scientific and democratic manner, while lawmakers should oversee budget matters. As such, investment decisions will be neither the sole responsibility of the administrative agencies nor its leadership, but will involve the legislative body -- the people's congress.

There is not much expertise in this regard so far, especially at local level. The mammoth Three Gorges Dam project, undertaken only after it was approved at the National People's Congress, is a case in point.

If a project holds great significance in a locality, it should be carried out in the same way as the dam project. But whether this model is applicable depends on a mature people's congress and government system, which will take some time to achieve.

"The major investment project should get the go-ahead from the local people's congress or their authorization," said Liu Shangxi, a professor at a finance ministry think tank.

For projects that will have a potential impact on local residents, such as city renovation, public hearings are an indispensable procedure to be taken, Liu suggested.

The new plan stipulates that government investment must be undertaken according to set procedures, otherwise the official who is in charge of that investment decision will be held accountable for dereliction of duty.

However, there is an irony in that. It would be hard to pinpoint who is to be held responsible for a failed project that had gone through the proper procedure, critics say.

For example, if a bridge built in line with the correct procedures collapses and if the builder is found to be at fault, it will be easy to hold him accountable. It would be difficult to hold the mayor accountable for the bridge's collapse, but some responsibility may have to be taken for endorsing the building work to be carried out by a shoddy builder in the first place.

Many cities have issued local regulations concerning government investment, setting out specific responsibilities for any entity involved in government-invested projects such as government agencies, construction companies and intermediaries. But none of these local legislations has tinkered with this conundrum.

Another drawback of the plan is that it fails to clarify who exactly should oversee government investment accountability. Similar local legislation has made the local law-making body -- the people's congress -- responsible for supervision.

Whether the State Council's government investment management regulation -- which is still to be worked out -- will follow the local legislation's wording remains to be seen.