We are now entering the empirical chapters on the second political role of firms, societal control. I use the solid waste treatment sector as the context for this part of the book. A young sector that took off in the mid 1990s, solid waste treatment has been a sector that invites public opposition and protest. If not operated up to standard, landfills can cause soil and water pollution, and waste incinerators can produce various air pollutants. In this chapter and Chapter 7, I will focus on the waste incineration sector to examine the relationship between protests, the political service of societal control provided by firms, and the changing landscape of firms of different ownership types. The waste incineration sector started off with a mix of private firms and state-owned enterprises (SOEs), but protests had gradually changed the relationship between local governments and businesses that build and operate waste treatment plants. In the thirty years of rapid expansion of waste incinerators, cities in areas that experience high-profile protests began to see more large, powerful SOEs and less private firms in this sector. In this chapter, I use an original dataset on Chinese cities’ incineration plants to show how high-profile protests are strongly associated with the gradual retreat of private firms in the incineration sector. I will then use comparative case studies and process tracing to show the mechanism of this shift in Chapter 7.
Solid Waste Treatment, a New Sector in China
Modern sanitary solid waste treatment has a short history in China. Before the 1990s, Chinese cities simply disposed of their municipal solid waste in unregulated dump sites in city suburbs or burnt the waste in the open. Problems from these primitive garbage disposal methods gradually emerged in the late 1990s, as untreated solid waste and leachate (hazardous liquid that drains from solid waste) posed major threats to soil and groundwater, allowing toxins and pollutants into farm products and the environment in general. They also created public health issues as they harbored mosquitos and flies that transmitted epidemic diseases. The Chinese national government started to pay attention to solid waste treatment and designated certain cities as experimental sites for sanitary solid waste treatment.
In 1988, the first modern waste incinerator in the country was built in Shenzhen. In 1991, the first sanitary landfill in the country was built in Hangzhou. In 1995, the Chinese national government included urban solid waste treatment into the ninth five-year-plan, encouraging city governments to treat municipal waste in a sanitary way. Nonetheless, the speed of building solid waste treatment facilities remained slow until the 2000s.
In the 2000s, the Chinese national government issued a series of national environmental initiatives promoting solid waste treatment. In 2002, the Chinese national government issued a notification to accelerate the development of wastewater and solid waste treatment, setting specific goals for the amount of solid waste to be treated.Footnote 1 The same document also encouraged more private firms and nonstate capital to invest in this sector to relieve some of the fiscal stress on local governments, something the state often does when pushing for sectoral development. In 2008, the Chinese national government officially established a Ministry of Ecology and Environment. Soil and water pollution joined air pollution to become the focus of a series of environment preservation initiatives put out by this new ministry in 2008, 2011, 2012, 2015, and 2017. In general, these initiatives called for waste-to-energy (WtE) projects, including waste sorting and recycling systems, incineration projects, anaerobic digestion projects,Footnote 2 and gasification in landfills.Footnote 3 The purpose of these WtE projects is to turn sorted and recycled solid waste into energy, such as electricity or heat. WtE projects are essentially intended to be clean and sustainable ways to treat solid waste; turning useless garbage into a valuable resource. In 2012, the national government also started to offer a preferential price of 0.65 yuan per kwh for electricity generated from WtE projects, much higher than the approximately 0.4 yuan per kwh for electricity generated by coal.Footnote 4
The heavy focus on solid waste treatment in these national initiatives drew local governments’ attention to the solid waste sector, which had been largely ignored until then. Among all the WtE projects proposed by the national government, incineration plants received the most attention from local governments. In densely populated areas where land is scarce, incineration plants are a more economic policy solution to the waste problem as they take up less land. In areas that are less densely populated, incineration plants could become visibility projects, which still make them more popular than other WtE projects. Compared with landfills, which are gaping holes in the ground, or recycling systems that are scattered around the city without much visual effect, incineration plants can occupy acres of land and include large buildings that display an impressive scale. Combined with striking architectural designs and landscaping, incineration plants are easy to show off to the upper-level government.Footnote 5 Most of the fifteen cities where I did fieldwork have modern, park-like incineration plants. Other scholars also find that aesthetically pleasing incineration plants are particularly common in less populated areas (Lu et al. Reference Lu, Yingshi Xie, Huang, Hai and Zhang2019).
For these reasons, waste incineration plants quickly became a trend in China’s solid waste treatment sector. As Figure 6.1 shows, in the twenty-five years from 1993 to 2017, the number of incineration plants in China grew from 8 to 351 (author’s data), with an accelerated increase of more than 6 percent in annual growth rate since 2002. China has seen the fastest growth in building incineration plants and in 2016 it was the country with the most incinerators in the world.Footnote 6 The number of incineration plants has grown much faster than that of any other WtE projects. WtE landfills, primarily gasification projects in landfills only increased from two to twelve in the same time period,Footnote 7 and only five anaerobic digestion plants were built by 2016.Footnote 8
Figure 6.1 Number of incineration plants in Chinese cities by year
The solid waste sector welcomed private firms from the beginning of this sectoral development. As in the urban bus sector, marketization in the solid waste sector mostly took the form of government franchising. In this sector, most government franchising occurs through open bidding for a Build–Operate–Transfer contract with the local government. The winning company designs, constructs, and operates the incineration plant for twenty to thirty years, after which the contract can be renewed. The local government collects waste treatment fees from residents and businesses to pay the company for its services at a pre-agreed price by weight. This fee is subject to change over time. The incineration plant also receives government payment for the electricity generated by burning solid waste.
The sector is not highly profitable and only generates a relatively small amount of employment, so the Chinese central government continues to encourage private firms to enter it. For more than twenty years since 1993, the sector was evenly split between private firms and SOEs across Chinese cities. But since 2012, more SOEs, particularly large ones, have begun to enter this sector. There are now more state-owned than private incineration plants. Figure 6.2 shows this trend. But unlike in the urban bus sector, where many city governments forced out the private firms, very few private firms exited this sector involuntarily. Some private firms even actively seek joint ventures with SOEs. In this sector, there are twice as many central and provincial SOEs than small, local SOEs.
Figure 6.2 Number of incineration plants by firm type in Chinese cities
On average, each Chinese city has 1.9 incineration plants and two landfills (author’s data). On average, each incineration plant has an initial investment of 250 million yuan, and furnaces and other key incineration facilities have a lifespan of no more than twenty-five years. Entry into this sector is relatively easy. There is little proprietary technology in building and operating an incineration plant. The most technology intensive part, the furnace, is usually imported.Footnote 9 Similarly, solid waste sorting facilities are also imported, if a solid waste firm decides to use one. Therefore, firms in this sector come from various backgrounds. For example, an incineration plant built in 2009 in Suzhou, Jiangsu, was built and maintained by a local silk firm that specialized in garments.Footnote 10
Protest-Prone Projects and Firm Choices
An important feature of the waste incineration sector is its tendency to attract NIMBY (not in my back yard) protests. Unlike air-conditioned buses and clean-energy buses, building a waste incineration plant can stir up the public’s fear of worsened air quality and health risks. If not operated up to standard, waste incinerators produce various air pollutants, among which are notorious dioxins, chemical compounds that induce cancer and birth defects. Dioxins can only be reduced by burning at a high combustion temperature of 800°C for a certain amount of time, but the Chinese public lacks trust in either the government or firms, and does not believe the operators will bear the costs of maintaining such high incineration temperatures.Footnote 11
Therefore, protests are common in this sector. Out of the 351 incineration plants built in China, forty-five, or about 13 percent of them, reportedly experienced mass protests against the construction or operation of the plants between 1999 and 2016 (author’s data), see Figure 6.3.Footnote 12 This number is unsurprisingly underreported. In my fifteen interview cities, ten experienced protests against their incineration plants, but only the largest four were reported and therefore included in my quantitative dataset. The majority of protests against incineration plants were not high profile and contained locally owing to successful government control of civil society and the news media.
Figure 6.3 Number of high-profile protests against incineration plants
The protest-prone feature of incineration plants is what incentivizes local officials to politicize firms in this sector. When launching an incineration plant invites high-profile protests 13 percent of the time, local leaders need to carefully calculate how to balance between claiming credit for following central policy guidance in building these projects and avoiding blame for the potential high-profile protests. The decision about which firms to work with therefore becomes important. Unlike most public projects in a city, the decision on firm choice for incineration plants is made by the top city leaders rather than the head of the Urban Administrative and Law Enforcement Bureau that manages a city’s incineration plants. And for the top leaders, their decision is often based on the calculation of whether the government can preempt protests, and whether it might need to resort to suppression should high-profile protests break out.
Over time, in the waste incineration sector, we see since 2012 a gradual dominance of SOEs, particularly strong ones. This timeline coincides with the peak year of high-profile protests in 2009, when eleven out of the country’s thirty new incineration plants, or 40 percent of them, experienced protests that went out of control and escalated into high-profile events. After this, fewer private firms entered the sector, and some established private firms decided to form joint ventures with SOEs, even when the Chinese national government continued to call for private investment in this sector.
This turn is largely driven by the changing method of societal control, a political service demanded of firms, in the waste incineration sector. With growing awareness of incineration and its environmental and public health impacts, citizens in China are increasingly opposed to incineration plants and less likely to be swayed by appeasement strategies such as persuasion and financial compensation. The increasing public opposition to incineration plants clearly did not deter Chinese local governments from launching incineration plants. However, it does indicate that local governments are finding it increasingly challenging to prevent opposition from escalating into high-profile protests and are more likely to resort to suppression. Against this background, private firms, who have a relatively low level of political capital and who are better as scapegoats and at appeasement strategies, become less useful in societal control. But SOEs, particularly the powerful ones, become more important as allies that can help with suppression.
Societal Control, a Political Service that Changes the Sector
Owing to concerns over protests and the need to determine whether to appease or suppress them, local governments carefully choose among firms with different levels of political capital to launch incineration plants. Within the solid waste treatment sector, the political capital of a firm comes from both its ownership type and political connections, as explained in Chapter 3. Based on my interviews, there are roughly three groups of firms with different levels of political capital in the waste incineration sector: private firms, weak SOEs, and strong SOEs.
Private firms are firms of wholly private ownership, which could be domestic or foreign. They usually have strong political connections, but that is their only source of political capital in most sectors. Weak SOEs are SOEs established by provincial governments beyond the incineration plant’s immediate location or by city governments. They have more political capital than private firms because as economic arms of a local government, their political capital comes from both their ownership type and individual political connections. Strong SOEs are SOEs established by the national government or the provincial government of the province where the incineration plant is located. Strong SOEs have the highest level of political capital of all firms. They not only have individual political connections but also the support of the highest level of government or the most important provincial government to city officials. I elaborate next on their political capital and the different political roles they play when protests break out against an incineration plant.
Strong SOEs: Powerful Political Allies at Critical Times
In the presence of high-profile protests against incineration plants, city governments often use suppression to end protests and continue the projects. At such critical moments, firms with high levels of political capital, in this case strong SOEs, can bring a local government the much-needed political support, and can help the local government justify suppression. As a central SOE manager said, “This sector has many protests. Local governments choose us [the central SOE] to do it [launch an incineration plant] in order to shed any responsibility [for protests]. This is the best choice.”Footnote 13
Specifically, strong SOEs become allies of local governments in suppressing high-profile protests by doing two things. First and most important, when a protest against an incineration plant escalates, the city government can no longer hide it from the provincial government and will need to suppress it quickly and justify suppression with force. In such instances, having a strong SOE to build and operate the incineration plant helps to justify the government’s use of force. The local government is no longer suppressing the public because of the interests of a private firm or the city government’s own interests, but is protecting the interests of a strong SOE, the economic arm of upper-level governments. Suppression in this case is more likely to get support from the upper-level government instead of instigating investigations into corruption and nepotism.
When I was doing fieldwork in a city that had accumulated an astonishing level of government debt, equaling fourteen years of total fiscal income that year, I asked about the government’s rationale of using a strong SOE for their newly launched and third incineration plant in the city. By then, the city had experienced two protests against the two existing incineration plants, one owned by a private firm and the other by a local SOE. The official in charge of waste management explained the rationale for using a provincial SOE for the third incineration plant: “Using an SOE with a strong background will give us peace of mind. These SOEs have the [provincial] government to back them up. If anything [protests] happens, having the [provincial] government along is better.”Footnote 14 Another city leader explained the difference between provincial SOEs and private firms: “The most important reason that we favor it [SOE] is the low political risks. We never know what will come out of a project like this. If we give it to a [provincial] SOE, no one will blame us later.”Footnote 15 Having a strong SOE means the city government has a powerful political ally when facing potential investigations by the upper-level government, particularly when violent suppression becomes necessary.
Second and related, powerful SOEs have the political power to support the local government in justifying the need for an incineration plant in the first place. Most of the time, local governments do not need to explain their launch of a municipal waste treatment project. However, when high-profile protests break out against an incineration plant, they might face questioning from the upper-level government. This is particularly challenging considering many incineration plants were not launched properly in China.
Like many other projects in China, incineration plants must pass an environmental impact assessment (EIA) by the Ministry of Ecology and Environment before construction. These EIAs are often manipulated by the evaluating agencies. In 2012, for example, the Chinese central government found that 17.56 percent of EIA contractors who conducted these assessments fabricated facts and data.Footnote 16 In 2015, the Ministry of Ecology and Environment criticized the widespread corruption in EIA evaluating agencies and the collusion between these agencies and the businesses being evaluated.Footnote 17 When it comes to incineration plants, various types of data showing their safety and public consent can be forged. Examples include the distance between the incineration plant and the nearest residential area, population density in the area, percentage of arable land in the area, and signatures from residents in the area agreeing to an incineration plant in their neighborhood.Footnote 18
Data fabrication is hard to detect and is usually not a problem until a high-profile protest breaks out. High-profile protests can invite upper-level government investigation into the incineration plant, and occasionally evidence of data fabrication is seized upon by the public and exposed to news media. Once this fabrication is exposed, both the city government and the waste treatment firm could be punished by the Ministry of Ecology and Environment for fraud. Receiving a punishment from a national ministry would defeat any credit such projects might bring a local leader.
Therefore, when data fabrication and other illegal acts in launching an incineration plant have a higher risk of exposure owing to potential high-profile protests, strong SOEs are the best partner in crime to help local officials avoid punishment. Strong SOEs can utilize their political support from the upper-level government to influence investigation results and exempt local officials from responsibility. While there is no systematic information on this sensitive subject, I collected eleven cases where the public exposed how incineration firms and local governments illegally forged data, including signatures of nearby residents in support of the environmental impact evaluation.Footnote 19 In these cases, six firms were central and provincial level (strong) SOEs, four were private firms, and the last was a local SOE. Among the six strong SOEs, none received any punishment (four investigations were dropped), and only one received minor criticism for unintended mistakes in applying for environmental impact approvals. In the case of the local SOE, the government officials received criticism and the firm was punished with a minor fine. Among the four cases involving a private firm, all firms were punished with fines or suspension of operation. Moreover, in two of these cases the government officials involved received a warning.
In sum, strong SOEs are favored as an ally during a crisis. When local officials anticipate protests will escalate into high-profile ones, and therefore expect the need to use suppression that could negatively affect the government’s image and legitimacy, as well as individual officials’ careers, they prefer to partner with strong SOEs to avoid blame from the upper-level government later. The high level of political capital of strong SOEs makes them valuable allies in a state–society crisis, directly bringing local governments extra political support to engage in drastic measures such as suppression. Weak SOEs and private firms cannot lend this support as easily.
Private Firms: Compliant Scapegoats
Despite high-profile protests making it more attractive to work with a strong SOE, local officials do not wait for a protest to escalate and then hope for no punishment from the upper-level government. They first try to preempt protests with appeasement strategies, including persuasion and offering concessions, to prevent them from escalating in the first place. While having a powerful firm ally with high levels of political capital helps at difficult times, it also comes at a high cost – it is much harder for the city government to control a strong SOE that is supported by a higher level of government. Interviews with city officials show a dominantly negative experience with strong SOEs. One city official said:
Honestly, dealing with these [central] SOEs is so much trouble. They are as difficult to work with as us [the local government], if not more! If we ask them to do something, any small thing like purchasing another facility, they will have endless meetings that come to nothing. And they are so slow, and they don’t listen. If we ask a private firm to do something, they do it the next day!Footnote 20
This compliance by private firms comes from their lower level of political capital and therefore higher dependence on local governments for business success. Private firms’ political capital mostly comes from their political connections developed through exchange of interests with individual government officials. Sustaining political connections requires private firms to be acquiescent to officials’ personal preferences. When the situation calls for it, private firms have little choice but to act as the local government’s “running dog” or scapegoat. This feature provides them with several advantages over strong SOEs from the local government’s perspective.
First, private firms are easier to use as political scapegoats. As scholars have noted, intermediaries used to avoid blame are often the powerless ones (Oexl and Grossman Reference Oexl and Grossman2013). When the public starts to organize protests over an incineration plant, local governments usually appease the public with persuasion. The key message of persuasion is that the incineration plant in question will not produce pollution. To make this message convincing, local governments need to signal to the public that they are on the side of the people and are impartial regulators committed to keeping the firms under close watch and under control. The local government might increase the number of inspections of the plant, punish and fine the firm for substandard operations, and order the upgrade of facilities necessary for clean incineration. It is easier for local governments to adopt these measures for privately run incineration plants, because they do not have enough political capital to resist the government’s tougher measures. From data collected on inspection of incineration plants by governments and NGOs, shown in Table 6.1, we can see an obvious bias in the reporting of violations based on firm ownership.
| Firm type | Percentage of firms with violations in the provinces of Anhui, Shandong, Yunnan, Jilin, Heilongjiang, and Guangdong, reported by governments | Percentage of firms with violations, reported by NGOs |
| Private | 64 | 26 |
| Weak SOEs | 31 | 20 |
| Strong SOEs | 17 | 31 |
Notes: Only six provincial governments conducted inspections by January 2018.
These data show a significant difference in how the government and nongovernmental organizations (NGOs) report violations. Starting in 2015, city governments were required to have inspection teams that regularly inspect the operations of incinerators.Footnote 21 Inspection results are announced to the public as evidence of strict government regulation. If they find violations, then local governments order firms to improve their operations, impose fines, and sometimes threaten firms with temporary shutdowns. By comparing government inspection reports and NGO inspection reports in the same time period, local governments seem to overreport violations by private firms and underreport violations by strong SOEs.
It is possible that SOEs are more law abiding and operate to a stricter standard than private firms, and that NGOs are biasing their results against SOEs. But this possibility was denied by government officials. When asking an official in a city’s Bureau of Environmental Protection about whether some firm ownership types proved better at quality control and were more law-abiding than other firm types, the official said:
There is really no difference in violations. SOEs and private firms all violate environmental laws and engage in illegal emissions [of exhaust gas and wastewater] and other things. Central SOEs are the worst! They know they have backing and have nothing to fear. And it’s bad for us [the city’s Bureau of Environmental Protection] to offend them. If we try to inspect and regulate their operations, the next day we ourselves [the bureau] will be inspected by the Party Discipline Commission, asking us why we are suddenly interested in this firm but did not care, say, three years ago, and what we are getting [monetarily and politically] out of inspecting it [the SOE]? Therefore, we are not motivated to do it [inspection and regulation], and they [SOEs] know that.Footnote 22
In another interview with a manager of a city’s incineration plant, the manager mentioned that he received requests from a strong SOE in the neighboring city to help treat extra solid waste because the requesting SOE’s burners broke down. The manager’s firm refused the request, and “they [the other SOE] then [illegally] dumped solid waste in places they shouldn’t be dumping it.”Footnote 23
Therefore, a more plausible explanation for the difference between reported violations by local governments and NGOs is that local governments are biased either in regulation or reporting against private firms. Violations by private firms are less protected by the local government and are used so the local government can claim credit for regulation enforcement. After all, it is politically less risky to punish private firms than SOEs, especially strong SOEs. In return for the private firms’ “service” of letting themselves be exposed and punished, local governments often do not actually enforce the punishment.Footnote 24
Similarly, it is easier to use private firms for the concession strategy. When a protest against an incineration plant is at risk of escalation, one measure to appease the public is to temporarily shut down the incineration plant. It is much easier to suspend a private firm’s business. Suspension in either construction or operation means monetary loss to firms, and consequently all firms strongly resist project suspension. Resistance from private firms is the weakest, as seen in the urban bus sector, because private firms lack strong political backing from higher-level governments, and offending private firms does not easily lead to political retribution from higher-level governments. Strong SOEs, on the other hand, are essentially economic arms of higher-level governments, which makes their resistance to business suspension more effective as their resistance is often backed by higher-level governments. From 2000 to 2018, fourteen incineration plants were halted by city governments as a response to escalating mass protests at some point in their construction or operation. Among these halted projects, ten were operated by private firms, two by weak SOEs, and two by strong SOEs.Footnote 25 Halting a project run by powerful SOEs is extremely difficult, as they can leverage their political influence with the upper-level government and force a local government to abandon the concession strategy, which is costly to businesses.
The second advantage of private firms in the eyes of local governments is that they are more likely to agree to contributing to visibility projects, which, in the waste incineration sector, are closer to a bribe than regulation in nature, as only one plant is needed to showcase waste treatment capacity of the city.
A popular visibility project for city government officials since 2015 is to build “environmental education bases” for the public, a creative response to the CCP’s general policy directive of environmental protection. The solid waste sector is a popular sector to launch these education bases to showcase a city’s “advanced measures” in treating solid waste and the city leaders’ resolution in environmental protection and preservation. An education base usually includes an impressive building with exhibition halls and sometimes a stadium. It is used to host free school visits and government visits, and to boost a city’s chances of winning various national city titles. As education bases are not included in the contracts and do not generate any income, the party with the least bargaining power usually ends up paying for it, and this is usually a private firm. Between 2015 and 2018, nineteen such education bases have been built at existing incineration plants, out of which eleven were built by private firms, four by central SOEs, and four by local SOEs (author’s data). Compared with persuading a central SOE, it is easier to have the private firms take on the local government’s extra-contractual demands.
And lastly, private firms are better at serving the personal monetary incentives of local officials. This is not to say that incineration plants are launched primarily based on their potential for corruption. From interviews, the consensus is that solid waste plants do not bring nearly as many corruption opportunities as other large infrastructure projects. Since incineration plants are prone to protests, they have a higher risk of being audited and investigated, and therefore are not preferred by local officials for corruption purposes. As a local official in the bureau of urban management said, “Incineration plants are not roads or bridges, they are risky [in provoking protests] and therefore not worth the trouble [to build one for rents].”Footnote 26
But local officials do not mind extra monetary gains from any infrastructure projects. One subtle strategy of corruption is to force construction teams onto the solid waste firm. My interviews in this sector in fifteen cities covered four strong SOEs (two central SOEs and two provincial SOEs), one local SOE, and six private firms. A common complaint from the private firms is that once they win the bid to build and operate an incineration plant, they will have to accept construction teams “introduced” by the local government leaders.Footnote 27 But among the SOEs I talked to, only the one local SOE used local construction teams. All four strong SOEs admitted that they received the same request from the city government, but they did not feel obliged to accept it. A provincial-level SOE even said, “We are doing them [the city government] a favor [by building the incineration plant]. We ask the local government to use our own construction teams on their other projects as payback to us.”Footnote 28
Therefore, compared with strong SOEs, private firms have much less bargaining power when dealing with city governments, making them attractive partners for the local government. The bargaining power of strong SOEs often make them less likely to cooperate with a city government’s extra-contract demands. As one provincial SOE manager explained, “If they [the local government] want to renege on things we agreed upon, or change their mind, we will play the provincial governor card. That’s how we do business in our province.”Footnote 29 From the perspectives of local officials, this shifts their preference to private firms, the easiest type of firm to control. Only when local governments anticipate high-profile, potentially uncontrollable protests against an incineration plant, do they relinquish control over the firm in exchange for a powerful political ally – the strong SOEs.
Weak SOEs: An In-Between Choice
Weak SOEs share the advantages and disadvantages of both strong SOEs and private firms, but only to a limited extent. These are either local city SOEs or SOEs owned by a government situated in a different province from the incineration plant. With the backing of government, weak SOEs have more political capital than private firms. However, their political capital is lower than that of strong SOEs, owned by either the national government or directly from the same provincial government under which the city’s incineration plant is built. This puts weak SOEs in an awkward position between strong SOEs and private firms in the eyes of the local government. They are easier to control than the strong SOEs, but not as easy to control as private firms. It takes much longer for weak SOEs to make decisions on extra spending, and such decisions are not always approved. They could lend more political support to the local government for suppression than the private firms. But when compared with what strong SOEs could bring, this support is limited because weak SOEs belong to weaker local governments. When a high-profile protest happens, the city government would prefer support from the national government or from its very own provincial government.
This dilemma thus makes it harder for weak SOEs to compete with the other firms. When asked about their experience doing “outbound” business in other provinces, a vice executive of a provincial SOE said, “It is the most difficult for us to get a project. We do not have as much political background [zhengzhi beijing] as the central SOEs, but then we are not as flexible as the private firms. We are more like the central SOEs but our [political] background is weaker.”Footnote 30 The dilemma thus puts weak SOEs at a most disadvantaged position in the waste incineration sector.
To sum up, the decision on which firm to partner with on a protest-prone project is a trade-off between getting extra political support and having more control over the firm. This decision depends on the local government’s calculation of the risk of high-profile protests and the likelihood to resort to suppression. I test this mechanism with an original dataset on protests and firm choice for waste incineration plants in the next section.
A Quantitative Analysis of Firm Choice and Protests
When a city government decides on the type of firms to use for waste incineration plants, the decision is largely based on local officials’ expectation of high-profile protests. If they think high-profile protests are likely, they are more likely to use firms with a high level of political capital, which would be strong SOEs in this sector. If city officials believe they can prevent protests from escalating into high-profile protests, they are more likely to select a firm with lower political capital to have the firm serve as scapegoats in appeasement strategies. To test this mechanism, I use a multinomial logit model to estimate the relation between a city government’s choice of firms for incineration plants and their estimated risk of high-profile protests.
The hypothesis is that the more likely it is that high-profile protests will break out against an incineration plant, the more likely it is that the city government will choose a firm with high political capital. The dependent variable is firm choice, coded into three categories of firms that have increasing levels of political capital: 1 for private firms, 2 for weak SOEs, and 3 for strong SOEs.Footnote 31 Private firms include foreign owned firms. Weak SOEs are SOEs owned by city governments or provincial governments outside the incineration plant’s province. Strong SOEs are SOEs owned by the national government or the provincial government of the incineration plant’s province. Data for this information come from the company’s website and government announcements of a project.
The key variable of interest is protest history. This is a continuous variable measured as the total number of high-profile protests that ever happened against incineration plants in the city and its immediate neighboring cities between 1993 and the year of construction of a new incineration plant. This variable only captures high-profile protests as only these are reported in the media. Since local governments are mostly concerned about high-profile protests, selection bias in media reports is less of a concern. Protest history indicates the potential for another high-profile protest against a new incineration plant. The more high-profile protests there were in the past and in neighboring cities, the more likely local officials will include the risk of high-profile protests in their decision-making process of firm choice. A history of high-profile protests could either signal that the region has a more vibrant civil society or that the local governments in the region are less capable in containing mass protests and preventing them from escalating. Including past protests in the immediate neighboring cities allows this variable to account for information diffusion between local governments.
I also include a group of control variables. One is the size of the incineration plant, measured as plant capacity. An alternative explanation for firm preference is local protectionism (Wedeman Reference Wedeman2003; Zhou Reference Zhou2004). Larger plants mean more investment, larger business operations, and greater employment opportunities, and it is possible that the city government will attempt to benefit an SOE by providing it with a larger project. But if local officials are driven by corruption and they are more likely to get bribes from private firms (Shleifer Reference Shleifer1998), then large plants, meaning a higher number of bribes, should make local officials favor private firms.
I also include a variable of regulation enforcement of a city, measured by whether the city government has reported and punished violations by the previous incineration plants. Businesspeople have mentioned in multiple interviews that they care about the regulatory environment, even though what they really mean is whether the government is paying too much attention to the sector or is willing to turn a blind eye when business needs to cut corners. As it is difficult to measure the level of enforcement, I measure this variable with government announcements of violations of other solid waste treatment facilities in the city.
I also test the possibility of path dependence by including a variable indicating the type of firms that built the previous incineration plants (if any). This variable is coded the same way as the dependent variable, with 1 indicating a private firm, 2 a weak SOE, and 3 a strong SOE. These indicators control for the likelihood of path dependence on firm choices. While most cities do not use the same firms for different incineration plants, it is worthwhile to test this alternative hypothesis.
I also include several variables measuring the city’s economic development level and population size, particularly gross domestic product (GDP) per capita, population density, and the city government’s fiscal health. For a government’s fiscal health, an ideal measure would be the debts a city government has accumulated. Owing to data unavailability for this measure, I measure city fiscal health instead with the ratio of fiscal expenditure to fiscal income. As city governments often finance public spending with loans from state-owned banks, which is not included in fiscal expenditure, this proxy measure of a city’s debt level will overestimate the city’s fiscal health. But such overestimation creates bias against finding the results I expect, hence enhancing the analysis. The variable fiscal health is lagged for one year, as decision-making on infrastructure investment is usually made a year ahead.
Data come from my original data collection of 351 incineration plants in 177 Chinese cities that were already built or were under construction between 1993 and 2018. Data are collected from news articles, government documents, and company reports. Table 6.2 provides a summary description of the data.
Table 6.2 Descriptive statistics
| Target items | Observations | Mean | S.D. | Min. | Max | |
|---|---|---|---|---|---|---|
| Firm choice: total | 351 | |||||
| Private firms | 212 | 1 | ||||
| Weak SOEs | 79 | 2 | ||||
| Strong SOEs | 60 | 3 | ||||
| Fiscal health | 331 | 1.924 | 1.195 | 0.857 | 8.751 | |
| Protest history | 334 | 1.207 | 1.973 | 0 | 12 | |
| Regulation enforcement | 224 | 0.249 | 0.433 | 0 | 1 | |
| GDP per capita (in 10,000 RMB) | 330 | 20.775 | 22.132 | 0.426 | 160.018 | |
| Previous firm: none | 196 | |||||
| Private firm | 92 | |||||
| Weak SOE | 27 | |||||
| Strong SOE | 96 | |||||
A series of multinomial models show a strong relation between firm choices and protest history in a city and its immediate neighboring area: see Table 6.3.
Notes:
* p≤ 0.10, **p≤ 0.05, ***p≤ 0.01. Standard errors in parentheses. The coefficient for population density is approximately 0.00001, and is therefore reported as 0 in the table.
Table 6.3
Table 6.3 Data shows strong correlation between firm choice and protests using multinomial logistic regression models.
Protest history, Model 1, Private firms, −0.279, p value less than or equal to 0.05, standard error = 0.119. Weak SOEs, −0.479, p value less than or equal to 0.01, standard error = 0.164.
Protest history, Model 2, Private firms, −0.281, p value less than or equal to 0.05, standard error = 0.122. Weak SOEs, −0.456, p value less than or equal to 0.01, standard error = 0.161.
Protest history, Main Model, Private firms, −0.358, p value less than or equal to 0.01, standard error = 0.134. Weak SOEs, −0.537, p value less than or equal to 0.01, standard error = 0.018.
Fiscal health, Model 1, Private firms, −0.348, standard error = 0.492. Weak SOEs, 0.128, standard error = 0.181.
Fiscal health, Model 2, Private firms, −0.306, standard error = 0.187. Weak SOEs, −0.301, standard error = 0.254.
Fiscal health, Main Model, Private firms, −0.178, standard error = 0.191. Weak SOEs, −0.239, standard error = 0.268.
Population density, Model 1, all values at 0.000.
Population density, Model 2, all values at 0.000.
Population density, Main Model, all values at 0.000.
Plant capacity, Model 1, Private firms, −0.828, p value less than or equal to 0.05, standard error = 0.375. Weak SOEs, 0.067, standard error = 0.455.
Plant capacity, Model 2, Private firms, −0.989, p value less than or equal to 0.05, standard error = 0.400. Weak SOEs, −0.039, standard error = 0.464.
Plant capacity, Main Model, Private firms, −0.893, p value less than or equal to 0.05, standard error = 0.419. Weak SOEs, 0.068, standard error = 0.498.
GDP per capita, Model 1, Private firms, −0.065, p value less than or equal to 0.10, standard error = 0.038. Weak SOEs, −0.016, standard error = 0.037.
GDP per capita, Model 2, Private firms, −0.014, standard error = 0.050. Weak SOEs, 0.065, standard error = 0.046.
GDP per capita, Main Model, Private firms, −0.014, standard error = 0.054. Weak SOEs, 0.062, standard error = 0.048.
Regulation, Model 1, not included.
Regulation, Model 2, Private firms, −0.492, standard error = 0.345. Weak SOEs, 0.149, standard error = 0.313.
Regulation, Main Model, Private firms, 0.015, standard error = 0.417. Weak SOEs, 0.650, standard error = 0.533.
Previous firm type, Model 1, not included.
Previous firm type, Model 2, not included.
Previous firm type, Main Model Private firms, 1.470, p value less than or equal to 0.01, standard error = 0.556. Weak SOEs, 2.316, p value less than or equal to 0.05, standard error = 1.026.
Previous firm type, Main Model, Private firms, 0.431, standard error = 1.102. Weak SOEs, −0.224, standard error = 0.745.
Previous firm type, Main Model, Private firms, 0.332, standard error = 0.629, Weak SOEs, −0.513, standard error = 0.823.
Log likelihood, Model 1, −200.47.
Log likelihood, Model 2, −197.59.
Log likelihood, Main Model, −196.19.
N, all models, 221.
A Strong Correlation between Protests and Firm Choice
As predicted, a history of high-profile protests in a city and its immediate neighboring cities has a statistically significant and strong impact on a local government’s choice of firms. With each additional protest in the city and its neighboring area, the odds of choosing a strong SOE to build a new plant is 1.43 times higher than choosing a private firm (log odds of −0.358) and 1.71 times higher than choosing a weak SOE (log odds of −0.537), given that all other variables are held at their mean. Weak SOEs and private firms do not exhibit too much difference from each other in local leaders’ eyes, but strong SOEs have a clear advantage in areas with a history of high-profile protests. A predictive margins plot illustrates this relationship (Figure 6.4).
Figure 6.4 Protest history and firm choice
Holding other variables at their means, in cities without any high-profile protests in the past and in their immediate neighboring area, the local government favors using private firms to build and operate incineration plants. The predicted chance of using a private firm to build a new incineration plant is 62 percent, much higher than the second-best choice, a weak SOE (23 percent), or a strong SOE (14 percent).
But once the city has experienced or observed high-profile protests against incinerators in its immediate vicinity, the preference starts to change. The likelihood to use a private firm to build and operate incineration plants steadily drops, while the likelihood to use a strong SOE steadily increases. In areas that experienced six high-profile protests against incinerators, holding other variables at their means, the predicted chance for a city in that area to use a private firm drops to 39 percent, and the chance of using a strong SOE increases to 45 percent. Eventually, in areas that experience as high as twelve high-profile protests against incineration plants, the predicted probability of using a private firm is merely 13 percent; while the chance that a city in that area will hire a strong SOE for a new incineration plant increases to 80 percent.
The choice of using a weak SOE seems to be much less affected by protest history, but it is also negatively related to the presence of high-profile protests. This could be because weak SOEs, be they city government SOEs or SOEs owned by other provinces, still lack the political capital of strong SOEs, and therefore are not competitive when a city is expecting high-profile protests.
Other Factors that Play a Role
Of all the control variables, plant capacity is statistically significant. When an incineration plant is small, it is much more likely for the local government to use a private firm to build and operate the plant. This is consistent with my interviews, in which a central SOE executive expressed a lack of interest in smaller plants because “they do not add anything to us. They do not showcase our capacity, and we don’t need small projects to survive.”Footnote 32 But as we can see from Figure 6.5, the larger a plant is to be built, the more likely SOEs, particularly strong SOEs, will be given the job. In other words, competition with SOEs becomes fiercer for large plants, especially the largest ones, where firms of all ownership types have an equal opportunity to win a bid for building and operating incineration plants.
Figure 6.5 Plant capacity and firm choice
Path dependence also plays a role, particularly if a local government has used a private firm before. If a city has previously used a private firm, then holding other variables at their means, the next project will be ten times (log odds 2.31) more likely to be built by a weak SOE and four times (log odds 1.47) more likely by a private firm, compared with by a strong SOE. But if the local government had used a weak SOE or a strong SOE before, that would decrease the probability of using another SOE for the next project, even though this result is not statistically significant. These results paint a murky picture, but nonetheless indicate that local leaders learn from previous experiences working with different firms. They seek to strike a balance between their need for control of and political support from firms operating sensitive local projects.
Other control variables are not statistically significant, meaning the fiscal health of a local government, population density, and GDP per capita do not play a role in local leaders’ choice of firms for an incineration plant. Regulation enforcement also turns out to be insignificant, but that could have been the result of a lack of data, as the majority of cities do not report on regulation enforcement.
With an original dataset, this quantitative analysis finds a strong relationship between high-profile protests and firm choices for incineration plants. However, it does not reveal exactly how protests influence local governments’ firm choice for incineration projects. In Chapter 7, I take a deeper look into two cities with comparative case studies and process tracing to reveal the relationship between high-profile protests, different political services provided by SOEs and private firms for societal control, and how that changes the landscape of firms in the solid waste treatment sector.
