Regulating Government Investment

After years of deliberation, the Legal Affairs Office of the State Council now invites public comments on the draft of government investment regulation until January 30. The rule has the potential to finally pare down government investment currently free of any legal oversight, but has been cited for several limitations.

Sidelining Congress

The draft regulation bypasses the People's Congress and makes no mention of congress' role in planning and making government investment.

"As an important part of the government budget, these investments should be included in each agency's budget and are up for approval at the legislature," said Liu Shangxi, researcher at the Institute of Fiscal Science of the Ministry of Finance. "Large government investment projects should also invite public comment."

Many legal experts criticize the regulation for ignoring the responsibility and power of China's legislature. Representatives from the budget office of the National People's Congress told Caixin that law makers have read the regulation and are aware of the problem, but now is not the time "to make discuss opinions on this issue in the open."

Vague Terms

Currently, government investments are largely under the supervision of the NDRC and many large spending projects are not included in the budget books of government agencies. For instance, in 2009, the central government's public investment amounted to 924 billion yuan and a third was handed out by the NDRC.

"The Ministry of Finance and other agencies should join the NDRC to incorporate these spending and investment plans into government budgets," said Wang Yongjun, Dean of Finance Research Institute at Central University of Finance and Economy. "But these points are missing from the draft."

Nebulous definitions in the draft also raised questions among finance experts. It used terms such as "fiscal budgetary funds" and "all kinds of specific construction funds." A fiscal expert who wishes to remain anonymous said the definition of the latter lacks clarity and there is a risk that the vague term would allow funds to be hidden from the budget.   

Switch of Direction

The draft stipulates that "investment and subsidies to operational construction projects should be managed as a capital fund." The phrasing as it stands carries the implicit risk that state shares in private businesses could expand upon receiving subsidies and investment from the government.

Lai Yongtian from the Ministry of Finance said that the ownership of such a "capital fund" would be vague. In practice, government capital injections and subsidies are usually turned into state-owned stakes and the number of state-owned shareholders in private companies is increased.

More direct investment from the government is characteristic of a planned economy, which runs afoul with current reforms to build a service-based government, said Shi Zhengwen from China University of Political Science and Law.    

Seeds that Squander

Another loophole of the draft is the loosened restraint on investment planning. The regulations are written to oversee administrative misconduct during the investment process. However, there are no checks on those who draw the initial blueprints.

"The biggest waste comes from those involved in planning sessions," said Liu. "Poor investment preparation guarantees poor performance right from the start."

"Every investment should come with an evaluation plan, which should be open to the public along with a detailed budget," said Wang from the Central University of Finance and Economy.