In China, public works and projects usually refer to physical facilities financed directly or indirectly by government investments for the purpose of public benefits. These projects can be divided into basic projects and public welfare projects. With basic projects, there is a small percentage of key industrial projects which need government assistance, such as power stations and coal mines. The reason why the management of public works and projects in China differs from that in other countries lies in the public ownership of the means of production.
This research contribution introduces the framework of public works and projects in China, including types of projects, approval process, accounting system, project implementation, audit scope, audit objectives and methodologies.
The basic goals of public works and projects in China are concerned with:
| (a) Basic Projects | ||
| Energy projects | - | power stations and coal mines |
| Transport projects | - | railways, roads, bridges, ports and airports |
| Telecommunication projects | - | post and telecommunication |
| Rural Water Conservation projects | - | farmland reform, producers of commodity grains, shelter belts, irrigation, drainage and dams |
| Urban public facilities | - | roads and bridges, water supply, gas sewerage and waste disposal in urba areas. |
| (b) Public Welfare Projects | ||
| Educational facilities Cultural facilities Health facilities Sports facilities Environmental facilities Office buildings for government departments and social institutions Public security facilities. |
||
Infrastructure projects are mainly financed by government investment or joint investment of the government and state-owned enterprises. Some projects may be constructed mainly through large state-owned enterprises. For key infrastructure facilities, basic industrial projects and big river -major river projects involving several regions, the central government is the main investor. According to the principle of "the beneficiary is the investor", local projects of energy, transport, post and telecommunications and urban public facilities are mainly funded by local government. For the under-developed areas, the central government may provide fixed amounts of subsidiary investments in projects according to individual needs.
Public welfare projects are mainly financed by government investment. With the exception of special key projects and central projects funded by the central government, most projects are constructed by local governments whose communities will be the beneficiaries of the projects.
Feasibility studies of public works and projects are usually conducted before project establishment by qualified design institutes or consultancy firms engaged by construction units. The designated design institute or consultancy firm studies all alternative programmes of construction and technology by investigation and analysis of technical and economic aspects and then submits a feasibility report including an appraisal of social and economic benefits of the completed project. This report is the basis for a judgement on the necessity and possibility of constructing the project.
After receiving the feasibility report, the decision-making body appoints experts to evaluate the report and review the potentiality of the project. The report of the experts is the basis for project final approval.
The approval of feasibility reports of public works and projects is channelled though a three-tiered process, consisting of the State Council, State Planning Commission and the department or local government concerned. Where major works and projects are involved, the reports are submitted to the National People's Congress for approval by the State Council.
6.1. The budget for a particular public work or project is formulated as an important part of the design document in accordance with relevant budgetary quotas and expense standards. It includes construction and installation expenses, equipment and tool purchases, preliminary expenses, interest on loans and taxes on fixed assets. As soon as the budget is approved by the planning and project management departments, it becomes the basis for setting construction costs, signing contracts and determining accounts. For a tendering project, the budget is the basis for fixing the tender price.
6.2. The funds for public works and projects usually comprise :
| (a) Capital Construction Funds | - | Financial appropriations by the central government |
| (b) Bank Loans | - | Arranged by departments concerned, after consultation with banks according to state investment and credit planning |
| (c) Foreign Loans | - | Including borrowings from foreign countries, foreign direct investments and commodity credits |
| (d) Local Government Financial Funds | ||
| (e) Funds of Enterprises and Undertakings | ||
| (f) Other Funds | Including funds from issuance of securities and discount. | |
6.3. Accounting for public works and projects in China is under reform, gradually seeking agreement with international practices and accounting standards. However, the old accounting approach is still working in the transition period. The accounting management system of public works and projects usually involves the Construction Bank, construction bodies and financial units of government departments.
6.4. According to the planning channel and levels of financial budgetary expenditures, the accounting management is divided into central-level and local-level management. The Construction Bank entrusted by the Ministry of Finance is the core of the management system. The financial divisions of construction bodies are responsible for the financial activities and management of construction funds under the leadership of the responsible department and with co-ordination of the Construction Bank and its branches at all levels.
China is in the process of establishing a socialist market economic system. The state encourages business entities to assume, as corporations, responsibilities for construction projects. In this case, the corporation (the project implementation agency) is formed with representatives from investors and held responsible for the construction, operation and investment repayment. After the project implementation agency is set up, a project manager is appointed to take charge of both construction and operation of the project after completion. The construction management unit selected by the project manager through tenders, is responsible for the execution and management of the project during the construction period.
7.2.1. Preparation of Detailed Designs and Bills of Construction Quantities
The design unit, usually selected by tender, designs the construction according to the requirements of the approved feasibility report. For major projects, such as construction of mines, oil fields, key water and power stations, reclamation areas and group enterprises, comprehensive design and development arrangements are made.
7.2.2. Preparation of Tender Documents
Tender documents are prepared in accordance with tender management legislation and relevant policies. In the tendering process for the construction of the project, the project executive unit determines the tender price for each project, which is submitted to the department concerned for approval and sealed until the opening of tenders. Tender documents are issued to bidders only after approval by the department concerned.
7.2.3. Invitation for Tenders
Invitation for tenders for the construction of public works in China takes forms of domestic competition, international competition and domestic non-competition, with domestic competition as the main form at present. The tender-inviting agency selects, according to requirements of projects, qualified construction contractors to participate in tendering for projects.
7.2.4. Evaluation and Awarding of Tenders
The tender-inviting agency, under the supervision of the tender-management agency, presides over the processing of opening, evaluating and awarding tenders. Before opening the tenders received, an opening meeting is held with the participation of representatives from the tender-management agency, investors or lenders and bidders. At the meeting, tender evaluation methods and tender prices are announced and invalid tenders discarded. Tender evaluation then begins. Evaluation and awarding of tenders are handled by the Evaluation Committee or Evaluation Working Group which reports the winners of tenders selected by it to the management agency for approval. After approval, the tender-inviting agency issues letters of acceptance to the tender winners and letters of refusal to other bidders.
7.2.5. Supervision
Departments in charge of construction administration under governments at various levels are responsible for the management of tenders for the construction of public projects. Special agencies for this purpose have been set up in most cities above the level of a prefecture with the responsibility of examining the following aspects:
These features involve:
7.3.1. An annual financial plan is prepared and reported to the departments concerned. After approval of the financial plan, the implementation agency makes funds available at the appropriate times for construction as specified in the financial plan.
7.3.2. Management accounting should be implemented to deliver estimates for designs, budgets for construction and final accounts for completed projects. In the meantime, responsibility accounting centres should be identified, the number of contracts ascertained, fixed capital controlled, appropriate reserves established, inventories minimised and the turnover of working capital organised for effective funds utilisation.
7.3.3. Debt repayments should be made on time to banks according to loan agreements and capital construction revenues and taxes paid to the state as required.
7.3.4. Annual financial accounts and final accounts of completed projects should be prepared, together with the analysis of economic activities. These accounting statements should include:
Notes to financial statements should include:
Financial management of the implementation agency is mainly controlled by the following regulations:
7.3.5. As the state requires strict adherence to the above accounting regulations, the implementation agency has the responsibility of maintaining efficient and effective internal control. In order to achieve such internal control, in conjunction with internal auditing, the implementing agency commonly adopts the financial accounting system of "management and accounting at two levels". Here the headquarters are the first-level accounting unit and the sub-headquarters at lower levels are the second-level accounting units. Responsibility is divided between headquarters and sub-headquarters.
Headquarters are responsible for:
Sub-headquarters are responsible for:
7.3.6. In addition to the above division of responsibility between headquarters and sub-headquarters, there are three other important elements in the relationship:
(a) Uniform Methods of Raising Construction Funds. All funds for capital construction in the annual plan are raised uniformly by headquarters which is responsible for signing borrowing contracts and organising debt services.
(b) Ensuring the Supply of Construction Fund. Headquarters are responsible for providing funds to the second-level units with uniform rates of interest according to the approved annual plan and related regulations. The financial and internal audit units of headquarters often examine and report on the use of funds in second-level units to the department concerned.
(c) Controlling the Application of Construction Funds. All expenses, including wages and operational expenses, should be under strict control and payment made only according to approved plans. Internal audit units should make periodic examinations on settlement of accounts of construction projects and promptly handle any irregularities.
(d) Conducting Financial Examination. Apart from checking accounting statements and analysing economic activities, headquarters organise an annual financial examination and orders responsible units to take, within a set time, corrective action on problems discovered and imposes penalties on them where necessary. Internal control should be strengthened and management improved for the purpose of settling issues in project construction.
The quality control of public works and projects includes the planning, design and construction of the undertaking. Quality control of planning and design have been mentioned previously. The quality control of construction by the construction unit is characterised by the following functions:
In addition, the construction unit usually sends supervisors to the construction site to encourage high standards. Rewards and penalties may be used by site supervisors to ensure the construction quality of public projects.
Project monitoring is usually conducted by the construction supervisory unit responsible to the project implementation unit. The detailed work is done by the certified supervisory engineer. At present, project monitoring is conducted in the construction period. The main aspects of monitoring are :
The project implementation unit is usually responsible for equipment purchases through tenders.
In China, government at different levels carry out overall project management and control. The management and control are implemented in the following ways:
- The Construction Bank, as an investor, is involved in the management of public works and project implementation.
- The Statistics Department requires project implementation units to submit periodic reports on the application of investments and summarise these reports to governments at various levels to facilitate macro-control of investments and construction progress of public works and projects.
- The government departments involved are responsible for organising the inspection and acceptance of public works and projects. According to the regulations governing public works and projects, inspection and acceptance of large and medium-sized projects are organised by the National Planning Commission or project executive units of local government appointed for this purpose by the Commission. Small projects are inspected and accepted by the departments in charge of public works and projects or local governments. An inspection and acceptance committee or group is generally composed of representatives from banks and those in charge of materials, environmental protection, construction, labour, statistics, auditing and public finance. The inspection and acceptance of public works and projects are conducted in compliance with uniform state standards.
On completion of a public project, the whole property is transferred to the project operational unit which is responsible for the use, maintenance and repayment of investment. There are three types of project management units:
9.1. Instead of allocating funds without any returns in the past, the government has now granted low-interest or interest-free loans for profit-earning public works and projects, such as power stations, ports and railways. The government requires project executive agencies to repay all loans granted to them within a certain period and at the same time delegates to them powers to earn economic benefits and expand their productive forces by using state-owned assets.
9.2. Executive agencies of some public welfare projects, such as gas works in cities, are allowed to charge appropriate fees which are used to repay investments and to cover their daily costs.
9.3. The government still allocates funds gratis to non-profit-earning public works and proj ects such as libraries and schools. But executive agencies of these projects are allowed to carry out profitable operations in various ways within a permitted scope so as to decrease the daily expenses borne by the state.
9.4. Executive agencies have no legal right to deal with the properties of public works and projects and are prohibited to make use of the assets of public projects and works at the expenses of public and state interests. The government entrusts the department in charge of projects at the higher level to exercise supervision of the operations and activities of public projects.
In China, most construction companies are state-owned co-operatives through which the construction of public works and projects are a monopoly. With the deepening of the economic structural reform, more and more stock companies, in which the state has minority shares and private companies will participate in the competition for contracts of public works and projects.
In order to maintain the public interest, the Chinese government takes a very cautious attitude towards the privatisation of public works and projects. At present, privatisation of public works is carried out on a trial basis within a small scope, such as construction of a few private schools and needs to be improved through practice.
Foreign-funded projects refer to works which are financed by loans or aid of international financial and banking institutions, United Nations agencies, foreign governments and social organisations. These projects are constructed by the Chinese government in the interests of the people and the state and become tangible assets on completion.
12.1. Supervision of Financing Bodies
12.1.1. To ensure that foreign loans and aid are used for agreed purposes, accountability is monitored by the agencies concerned which usually set up effective systems for supervision of projects and include details of such supervision in relevant agreements. In addition, the relationship between the supervised and the supervisor and their rights and responsibilities are clearly stipulated by legal documents. Strict supervision of the operations and activities of projects are carried out accordingly at the implementation and after the completion stages of projects.
12.1.2. The supervision of foreign-funded projects by financing bodies encompasses:
12.2.1. Foreign-funded projects in China are managed by following the principle of "management at different levels under the unified leadership". In accordance with policies on the utilisation of foreign funds adopted by the National People's Congress, the State Planning Commission arranges the use of funds for public projects, exercises control over the general scale of funds and is responsible for the approval of new projects. As government debtors or recipient representatives, government departments such as the Ministry of Finance, Ministry of Foreign Trade and Economic Co-operation and People's Bank negotiate and sign agreements with the relevant foreign financing institutions.
12.2.2. In addition, they are responsible for the work of regranting or reallocating project funds to relevant departments or local authorities, in line with project agreements and management of the whole process of construction of projects according to their different characteristics. After receiving the funds, the relevant departments or local authorities, in accordance with project agreements and those concerning the reallocation of funds, distribute them to the executive agencies of projects from higher levels to lower levels and undertake the physical management and implementation of projects. As grass-roots units of project construction, executive agencies of projects at all levels are responsible for the utilisation and management of project funds and the repayment of loans for projects in the light of the construction objectives and duties set by project agreements and agreements on the reallocation of funds.
12.2.3. The public sector auditing function of the Audit Administration does not extend to the management and implementation of foreign-funded projects. However, in order to make government departments and the executive agencies of projects at all levels accountable for foreign-funded projects, auditors from the Audit Administration audit the compliance, regularity and effectiveness of financial activities of foreign-funded projects. Audit reports on the annual financial statements of these projects are forwarded to the foreign financing institutions involved.
The audit mandate for public works and projects is divided into two main categories: audit examination and discretion, which are clearly stipulated in relevant laws and regulations promulgated by the government. Audit examination refers to supervision of the whole process of construction of public works, carried out by audit institutions at all levels. The following aspects are involved in the first category of audit of supervision:
In the course of audits, auditors are entitled to free access to relevant documents and materials. Also, they may request departments to cease illegal activities, inform banks to suspend payments, close accounts and finalise financial records and property dealings. The following aspects are involved in the second category of audit discretion:
The objectives of auditing public works and projects include:
15.1. Statutory procedures for auditing work in China can be applied to auditing all types of public works and projects. These procedures generally encompass the following steps :
15.2. Along with the development of public works and projects, new auditing methods have been adopted. At present, the methods include :
16.1. The aim of the audit of investment decisions is to evaluate the necessity, feasibility and economics of public works and projects. This audit includes:
The audit of designs covers the following five aspects:
The key points of the audit of the estimates of public works and projects are :
Contracts for the construction of projects are subject to audit so as to evaluate the accountability of both parties to the contract. (the executive agency and contractors) and safeguard the integrity of contracts. The aim of the audit is to ascertain whether the parties are statutory bodies, whether the terms of the contract are in compliance with relevant regulations of the state, whether the parties have abided by the contract and whether there are any breaches of the terms and conditions of the contract. Furthermore, auditors examine whether progress payments are made at the set times in accordance with the provisions of the annual investment plan or loan contract.
Generally speaking, it is difficult to establish firm standards for a propriety audit. However, the conduct of performance and compliance audits usually has implications for the evaluation of propriety. Relevant issues are the rational use of project funds, propriety of the construction programme and relevance of designs and construction organisation. At present, propriety audits of public works and projects are carried out on a sample basis.
Since the effective application of funds reflects the effectiveness of projects in value-for-money auditing, auditors should pay close attention to examining whether investment decisions are correct, technology is advanced, funds are used effectively and all the economic and technical targets are achieved.
Major items of construction machinery, equipment and material are procured through domestic competition of tenders. However, with some foreign-funded projects, these items are procured through international competition of tenders. Audit of procurements mainly encompasses the supervision and examination of tendering procedures.
16.8.1. The technical examination system is an important part of the management of public works and projects. Although the executive agencies involved are in the process of changing, their technical role has become increasingly important.
16.8.2. Technical examination refers to the review and supervision of the handling of major technical issues and their results in the construction of public works and projects. In China, the work of technical examination is parallel with the work of audit. Both are independent from each other.
16.8.3. In past years, government departments in charge of construction at all levels acted as technical examiners, appointed to perform supervisory functions and duties on behalf of the government. In China, technical examination has become an integral part of managing public works and projects by governments.
16.8.4. Technical examiners are supervisors of the executive agencies of public works and projects. Requirements and decisions made by the examiners must be carried out without any preconditions. Major issues are reported directly to Commission of Construction. This kind of technical examination may have serious defects:
16.8.5. In the context of the problems mentioned above, in recent years the government has tried to popularise the generally accepted social control system with favourable results. The work of technical examination may be summarised as follows:
The main matters covered by this type of audit are:
The following issues are involved in the audit of these aspects:
Since construction of a large number of public works and projects have been contracted out to public companies, it becomes increasingly important to strengthen the audit of contracts of such entities. The audit covers the following five aspects :
Formal audits of privatised public works and projects are yet to be conducted by government audit institutions in China.
The development and utilisation of auditing resources include human, financial and material considerations. Accordingly, auditors engaged in the audit of public works and projects should be familiar with the principles and policies of the government, management of assets, financial, accounting and auditing matters. In order to achieve their objectives, audit institutions at all levels have trained their auditors by assigning them responsible auditing tasks and offering them opportunities for advanced studies and participating in seminars and training courses. Some auditors have been sent to work or study in foreign countries with advanced experience in auditing work. In addition, within the authorised establishment for personnel, audit institutions should include engineers and other non-accounting specialists for the audit of the technical aspects of public works and projects.
As regards the development and use of human resources, more competent auditing personnel j, should be recruited and paid appropriately. Although audit institutions in China still lack experience in the development and use of financial and material resources in auditing public works and projects, the application of CAATs would improve this aspect of resource utilisation.
Existing auditing legislation provides that auditors submit reports to their audit institutions after carrying out audits. Before submitting final audit reports, opinions should be solicited from auditees. After examining the audit reports, audit institutions should formulate conclusions and request the auditees and relevant departments to implement any recommendations. Common or serious auditing problems are reported to the appropriate level of government at least annually. Major issues are reported directly to the Premier or Vice-Premiers of the State Council.
The major problems and limitations encountered in auditing public works and projects in China are: