Sale of Public Housings to Sitting-Tenants: What Determines the Success

or Failure of Such Privatization Programs around the World since

1980's ?

Kwok Chun, Wong and Linzi, ZhengUniversity of Hong Kong

Focus of this presentation

• Drawing a general pattern of public housing production proceeds for different countries can by examining Chinese indemnificatory housing construction, try to explain why the outcomes of this program have not been close to satisfactory every since 1994.

Introduction

• Comparisons and analysis of indemnificatory housing agents and responsibilities in different countries

• Hypothesis of China’s failure and other countries’ successes

• Model construction within principal—agent theory

• Empirical Evidences

Comparisons and analysis

Agent Responsibilities

Singapore HUB in 1966HUB is responsible for providing houses for middle and low income

families according the central government’s policy.

JapanProvince House Bureau in

1949

Draw housing policy and develop implementation system; making

budgets and allocate nation housing resources; drawing national five-

years' program; monitoring housing relate activities of local

government, public group, relate financial department and etc.。

Table 1 indemnificatory housing provider and their responsibilities

Comparisons and analysis

• In Japan and Singapore, central governments, local housing management departments and construction agencies are participants of policy making

• central governments are premier whose responsibility is coordination of related resources

• local housing management and construction departments are policy implementers whose responsibilities are clearly regulated by policy

• The local governments do not have rights to implementation like China does

Comparisons and analysis

• In China, a series of indemnificatory policies have been enacted out ever since 1994

• local governments are they actors of indemnificatory housing program

• However, there are no specific codes to regulate local government’s relative behaviors

• Local governments have incentives to act tangentially to central government’s objectives.

Hypothesis

• relative successes of countries like Japan and Singapore is because of their adoption of principals and agents and the information transportation chain between them

• central governments and local governments actually act as principal and agents constraint by contract and local governments can achieve their maximum utility by providing minimum units of indemnificatory housing.

Model construction—Assumptions• local governments have enough information advantage to

make the central government lack of real information because the transportation chain is too long

• the central government wants to maximize social welfare as a whole while local governments aim to achieve GDP growth rate as high as possible

• central government is risk neutrality for the enactments are implemented within the whole country while local governments are risk aversion when certainty equivalents and risk premium should be considered.

Model construction

• a• y means production, and y = a+ is the production

function of local governments• W （ y ） = s + by , • y = y – W denotes income of central government• The problem the central government is facing is to

maximize W and rewards and punishments according to observable y

aA,

b[0 ， 1 ]

Model construction

• Risk aversion of local governments,• local governments are C( a), • let C （ a ） = / 2 , k > 0 means cost coefficient• Therefore, the real income of local governments are:

U(A)= -erA

C(0)=0, C'(a)>0, C

' '(a)>0

ka2

= W - C( a) = s +b( a + ) - ka2

/ 2 （1）

Model construction

• let X equals to the stable income of local governments and Y is random income, if u (X ) = Eu ( Y), we call X is Y’s certainty equivalence, so we know the certainty equivalence of local governments is ：

CE( ) = E( ) - R, R>0 （2）

Model construction

• It is easy to prove that and because that there is , we get:

R = rb2 2 /2

= s +b( a + ) - ka2

/ 2

CE( ) = s + ba - ka2

/2 - rb2 2 /2 （3）

• Let means the reserve income level of local governments. Thus the constraint of local governments’ participation of this program is: ( PC) s + ba - ka

2/2 - rb

2 2 /2 （4）

Model construction

• The agent decision is:

• The incentive consistent condition is• According to the given contract function, W (y)= s + by,

the principal decision is ：

max CE( ) = s + ba - ka2

/2 - rb2 2 /2 （5）

a*= b/k

maxE(y' = y – W) （6）

=( - s + (1 - b) a)

s.t. s + ba - ka2

/2 - rb2 2 /2 ( PC)

a* = b/k ( IC)

Model construction• by solving these equations we can get the optimal

incentive coefficient of central government is:

• Substitute into we can get the

optimal effort degree is:

b * = 21

1

rk

b * = 21

1

rk a

*= b/k

a*=

)1(

12rkk

Process of calculation

• The Explicit Cost, includes land grant fee, housing preferential favorable fee and construction cost of infrastructure.

• Opportunity Cost. The potential decrement of GDP caused by reducing investments in fixed assets.

Measurement of explicit costMeasurement of explicit cost

Process of calculation• land grant fee is the payment to land which should be repaid by the seller

when owner wants to resell one’s economic apartment five years after buying which is about 10% of the final price of this

Average price of

commercial housing

（ Yuan/square meter

s）

Sales of economic

housing

（ million square

meters）

Trade volume

（ million）

1999 4787 45.8 219244.6

2000 4557 168.2 766487.4

2001 4716 185.3 873874.8

2002 4467 220.7 985866.9

2003 4456 320 1425920

2004 4747 306.3 1454006

2005 5853 222.87 1304458

Total repayment to land

(million) 702985.8

Average repayment to

land （ million） 100426.5

Table 2 land grant fee of Beijing

Process of calculation item Original standard Implementation standard

1 Comprehensive development of urban construction management

fees

One million Yuan each item, five million Yuan for un-comprehensive items and two million Yuan for

others

Cancelled

2 Ownership registering fee 80Yuan per unit Cancelled

3 Land acquisition and management fees 1.5 ％ of total land acquisition costs Cancelled

4 Temporary land use and management fees Cancelled Cancelled

5 Fees of urban house pulling down and accommodation 0.3 ％ of pulling down and accommodation Cancelled

6 Transaction fees 1 ％ of housing price Cancelled

7 Housing safety evaluation fees 0.8 － 1.2Yuan /sq.m Cancelled

8 Fire safety licensing 10 元 Cancelled

9 Infrastructure construction cost Residential 160Yuan/sqm

Non-residential 200 Yuan/sqm

80Yuan/sqm for residential housing and

100Yuan/sqm for non-residential housing.

10 City Fund for energy saving and the development of new wall

materials

8Yuan/sqm 4 Yuan/sqm

11 Flood control costs 20 acreage 10 acreage

12 Construction license licence fees 0.1 ％－ 0.3 ％ of investment 0.05％－ 0.15 ％ of investment

13 Road charges 0.4 － 3 Yuan/day 0.2 － 1.5Yuan/day

14 Greening payments 240 （ suburban ）145 （ outer suburbs ）

3000 － 5000Yuan when greening percentage is

less than 30%

15 loan note 120 Yuan/note 60 Yuan/note

16 Market transaction service fee 0.1 ％ of the price of tender bid 0.05 ％ of the price of tender bid

Table 3 housing preferential favorable fee

Process of calculation

Table4 Total explicit cost of economic housing each year in Beijing

Land grant fee

housing

preferential

favorable fee

construction

cost of

infrastructureTotal

Total explicit cost

of economic

housing each year

(million)

70298.58 20985.71 53513.57 142787.9

Process of calculation

• Let GDP = a + b* fixed assets investment

Measurement of opportunity costMeasurement of opportunity cost

Year GDP （ Billion ）fixed assets

investment （ Billion ）

1990 500.8 135.6

1991 598.9 144.4

1992 709.1 201

1993 886.2 318.2

1994 1145.3 507.9

1995 1507.7 841.5

1996 1789.2 876.9

1997 2075.6 961.2

1998 2376.0 1155.6

1999 2677.6 1170.6

2000 3161.0 1297.4

2001 3710.5 1530.5

2002 4330.4 1814.3

2003 5023.8 2517.1

2004 6060.3 2528.3

2005 6886.3 2827.2

Process of calculation

• Let GDP = a + b* fixed assets investment

GDP = 55.34 + 2.26 fixed assets investment

（t＝12.3497）

R2 ＝0.975 F＝587.446 n＝15

Process of calculation

Table 6 opportunity cost measured by GDP

GDP （ billion ） GDP loss （％）

1999 2677.6 1.22%

2000 3161 1.04%

2001 3710.5 0.88%

2002 4330.4 0.76%

2003 5023.8 0.65%

2004 6060.3 0.54%

2005 6886.3 0.48%

Incentive level analysisTable 7 the proportion of cost distribution

Cost of local

government

（ million ）

Cost of central

government

（ million ）

The responsible

percentage of local

government(%)

1999 31606.12 6577.388 82.77%

2000 113365.1 22994.67 83.14%

2001 126952.7 26216.29 82.88%

2002 147359.2 29576.06 83.28%

2003 213414.4 42777.65 83.30%

2004 210516.9 43620.23 82.84%

2005 170430.9 39133.79 81.33%

Risk aversion degree analysis of local governments

According to results of the former two parts we can get

conclusions twofold:

One is the cost of efforts of local governments in China is

very high and the incentive level offered by central

government is low, therefore the risk aversion degree of

local governments is very high.

Empirical EvidenceAssumptionsAssumptions

1 ） because of the impossible and very expensive

monitoring cost of local governments, the central

government choose to be accept the core role of local

governments within the utility function.

2 ） GDP and indemnificatory housing have negative

relationship.

Empirical EvidenceUtility function of central governmentUtility function of central government

U 2x = F (TGDP，H)

where H is the amount of indemnificatory housing.

Suppose central government has the minimum requirement of local

indemnificatory housing production according to

we get where satisfies

s + ba - ka 2 /2 - rb 2 2 /2

HminH, minH s + ba - ka 2 /2 - rb 2 2 /2 = .

Empirical Evidenceutility function of local governmentutility function of local government

Obviously so the first item of eq(*) is positive and the

second one is negative. When it is decreasing function, within the

principal agent relationship, local governments are inclined to keep H

above the stable value.

UX 1 = F (UX 2 ， LGDP )

= F (f ( TGDP， H ) ， LGDP)

H

U x

2 > 0,

H

u x

1 =

2XU

F

H

U x

2 +

LGDP

F

H

LGDP

(*)

2XU

F

> 0， H

U x2> 0

Empirical Evidenceutility function of local governmentutility function of local government

maxUX 1 = F ( f ( TGDP，H ) ，LGDP)

s. t. HminH

H， LGD P 0

Build a lagrange function ：

Z = F ( f ( TGDP，H ) ，LGDP) + (H- min H)

Has to satisfy

Z

= H - MinH 0 and

Z

= 0

H

Z

=H

F

+ 0 H 0 and HH

Z

= 0 (**)

Empirical Evidenceutility function of local governmentutility function of local government

In eq(**), because , From eq(*) we know

therefore we get H =min H, which means only the minimum

amount of indemnificatory housing provided by local governments

can satisfy the requirements of utility maximization.

H>min H> 0, H

Z

= 0 and H

F

+ ＝0

H

F

< 0，so ＝－H

F

0 and

Z= 0，

Empirical Evidence Table 8 middle and low income groups in Beijing

Year Total residents （ millio

n ）Middle and low income

individuals （ million ）Middle and low income

families （ million ）

1999 1099.8 329.9 103.1

2000 1107.5 332.3 103.8

2001 1122.3 336.7 105.2

2002 1136.3 340.9 106.5

2003 1148.8 344.6 107.7

2004 1162.9 348.9 109.0

2005 1180.7 354.2 110.7

Empirical Evidence Indemnificatory housing demand and level in Beijing

Year

Middle and low

income

families （ million ）

Amount of indemnificatory

housing in need （ ten

thousand units ）

Indemnificatory housing

completed

（ ten thousand units ）

Indemnificatory

level

1999 103.11 30.93 1.29 4.17%

2000 103.81 29.86 1.65 5.55%

2001 105.22 29.84 2.16 7.26%

2002 106.53 29.67 2.05 6.94%

2003 107.70 30.09 2.70 9.24%

2004 109.02 29.72 2.73 9.22%

2005 110.69 30.19 2.94 9.74%

Empirical Evidence

• All the indemnificatory levels are lower than ten percent which is obviously not sufficient. However, during this period the GDP growth rate in Beijing has been kept on 10% --it is good performance of economy. The GDP growth rate is stable which means construction the indemnificatory housing construction did not encroach on economy so we can conclude that the minH of Beijing is some figure between 20 thousand to 30 thousand which is consist to the reality—according the publicized political goal.

Conclusion

In China, the process of indemnificatory housing production is actually a

contract between central government and local governments, the two of

which comprise an relationship of principal and agent. Because of the

extremely high or even impossible monitoring cost and asymmetry

information, the utility functions of local governments get the maximum

point when they provide minimum amount of indemnificatory housing.