Institutional innovation and financing infrastructure in Xi'an

Abstract

This paper provides an account of institutional innovations in the city of Xi'an, China to access funds for infrastructure development within the constraints of central government directives. The analysis is guided by a simple framework that explains institutional changes based on the rational choice of agents. A case study is used to explore the institutional mechanisms, and these are supplemented by quantitative data. The main findings are that the Xi'an city government is less reliant on central government funds for financing infrastructure projects, thereby providing it with considerable autonomy and incentive to act by establishing a new investment vehicle, the Xi'an Infrastructure Investment Group. The bulk of funds actually came from internal sources through taxation and self-raised funds. In recent years, attempts were made to access private capital through the bond market and public-private partnerships, forcing Xi'an Infrastructure Investment Group towards greater transparency and better corporate governance. However, several issues remain, such as those pertaining to corporate governance, stop-go limits on user charges, and vulnerability of infrastructure projects to the property cycle because of its system of land assignment.