Since the 1950s, the capital construction (see Glossary) industry has been plagued by excessive growth and compartmentalization. There were frequent cost overruns and construction delays, and resources were overtaxed. Project directors often failed to predict accurately the need for such elements as transportation, raw materials, and energy. A large number of small factories were built, providing surplus capacity at the national level but with deficient economies of scale at the plant level. Poor cooperation among ministries and provinces resulted in unnecessary duplication. Because each area strove for self-sufficiency in all phases of construction, specialization suffered. Since the early years of the People's Republic, overinvestment in construction has been a persistent problem. Fiscal reforms in 1979 and 1980 exacerbated overinvestment by allowing local governments to keep a much greater percentage of the revenue from enterprises in their respective areas. Local governments could then use the retained earnings to invest in factories in their areas. These investments, falling outside the national economic plan, interfered with the central government's control of capital investment.

In 1981 the economy underwent a period of "readjustment," during which the investment budget for capital construction was sharply reduced (see _________, ch. 5). This administrative solution to overinvestment proved ineffective, and later reforms concentrated on economic measures such as tax levies to discourage investment. The issuance of interest-bearing loans instead of grants was also intended to control construction growth. Despite reforms, capital construction continued at a heated pace in 1986. The majority of the new investment was unplanned, coming from loans or enterprises' internal capital.

During the Seventh Five-Year Plan, 925 medium-and large-scale projects were scheduled. The government planned to allocate -Y1.3 trillion for fixed assets, an increase of 70 percent over the Sixth Five-Year Plan. Forty percent of the funds were allocated for new projects, and the remaining 60 percent for renovation or expansion of existing facilities. Some of the projects involved were powergenerating stations, coal mines, railroads, ports, airports, and raw-material production centers.

Data as of July 1987