Infrastructure Financing a Major Challenge for Urban Town Development

As a result of rapid urbanization in the past three decades, over half of China's population live in cities and towns today. However, public services and utilities in towns lag behind those in cities due to disproportionate allocation of investment. To realize their potential to absorb new migrants and improve the living standards for residents, massive investments will be required for basic urban infrastructure, said a new World Bank study which examines the development and features of town in China.

The study entitled China Small and Medium Towns Overview notes that the number of towns increased dramatically in China, rising from 2,173 in 1978 to 19,322 in 2009. The total population living in the town districts – the urban core of towns – reached 211.87 million in 2009, which is 34 percent of China’s urban population or nearly 15 percent of national total population.

As urban and economic centers in rural China, towns in general and town districts in particular play an important role as the connecting point of China's urban-rural dual economy. They absorb local rural surplus labor and mitigate the migration pressure on large cities.

However, the economy in towns is still small compared to the large cities. Although most of China's industrial enterprises are in towns, the average number of industrial enterprises in towns is only about one-quarter of the number in prefecture-level municipalities, and they employ less than one-tenth of the enterprise labor force in cities.

In recent years, a new trend is emerging. Some migrant workers are choosing to return and find employment in their hometowns. The small size of their enterprises makes it difficult for towns to absorb large numbers of migrant labor without fiscal support.

So far, investments and public resources have been mostly directed to the highly urbanized big cities, leaving the less urbanized towns with much less funds for developments. Towns receive a mere nine per cent of total fixed asset investment.

Unbalanced allocation of fixed asset investments that favors cities over towns has led to disparities in the level of public infrastructure and quality of municipal services such as roads, piped gas, water supply and wastewater treatment. The development of infrastructure for basic urban services in towns has been listed as a critical target in the country's 12th Five Year Plan (2011-2015). Town districts have been identified as the next frontier for extending urban infrastructure services.

All financing for urban infrastructure projects is managed through the Urban Maintenance and Construction Fund (UMCF) which derives its revenues from budgetary allocations of central and local governments and from financial market sources. The share of the fiscal fund in UMCF has declined sharply since 1986. In 2009, over 80 percent of annual investment financed from the fiscal fund was from local sources, with allocations from central and provincial government budgets providing a minor share.

Local governments are thus under pressure to mobilize extra-budget resources for the delivery of infrastructure investments and public services. Revenue from land transfer transactions with developers is an important component of the UMCF fiscal fund. Urban development investment companies (UDIC) have been established to facilitate land transfer revenues for local government as well as to mobilize domestic loans and self-raised funds for infrastructure investment and maintenance. UDIC also issue bonds and stocks backed by their land use rights and future revenue from land development projects.

"Shortage of capital has become the biggest challenge in infrastructure development in towns. Towns are not fiscally independent, because local taxes are collected by county government and only a certain proportion is surrendered to town government. Due to the allocation formula used, town governments seldom have sufficient funds to invest in infrastructure,"said Paul Kriss, World Bank Sector Coordinator for Rural-Urban Integration in China. "Furthermore, town governments are not legally qualified to act as borrowers and take loans from financial institutions. Banks are reluctant to finance infrastructure projects in towns due to debt service concerns. This explains the increasing role of market financing mobilized by UDIC," he added.