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How to advance China's PPP

Does urbanization bring opportunities to PPP?

In the next twenty or thirty years China’s urbanization will continue its rapid development. There will be 400 million people emigrating from rural areas to urban area. If calculate conservatively that each peasant enjoys the same public services as urban residents with a cost of 100,000 yuan, another 400 trillion yuan of investment will be required for urbanization in future. This enormous investment needs to rely on PPP as for financing, and this is exactly what the Ministry of Finance is actively pushing forward.

On September 5th, Jia Kang, who just left his post as the director of the Institute for Fiscal Science, Ministry of Finance, gave a speech in the Hongru Forum hosted by the SIFL Institute, sharing such ideas as above in terms of Public Private Partnership (PPP).

However, there were also different views put forward on the Forum.

Xia Feng, PPP practitioner and the Deputy General Manager of Shanghai Urban Construction Private Equity Co., Ltd was not as optimistic as Mr. Jia when talking about PPP in future China. He said that private capitals are usually reluctant to involve into those projects without high profitability. Take private capital in Wenzhou for instance, monthly interest of even 1.5 for lending is not taken as risky. Therefore, those low-profit PPP projects seem to be lacking of attraction to those private capitals. And those projects with high profits are usually taken directly by the financing platform of local government.

Some insiders also have views that private enterprises will not pursue high yield in infrastructure construction since it is in nature a kind of nonprofit projects, thus the yield will naturally not be high but just stable.

Deng Haiqing, the director of fixed income department of CITIC Securities even believes that, after China’s market-oriented reforms of interest rates, financing tools will be more advancing. Tools such as assets backed security (ABS) could fully satisfy the financing demand of local government project and thus PPP is actually not necessary.

For Deng’s views, Mr. Jia Kang has different opinions. He pointed out that ABS only settles the issues concerning money, but the planning, designing, construction and operation of an infrastructure project involves much more than just ABS. We cannot simply equal financing tools with PPP mechanism innovation.

However, scholars including Mr. Jia Kang and other insiders of the industry of the Forum all agree that PPP development in China should not be rushing. Relevant laws and regulations should be prepared in advance as soon as possible. And the spirit of contract of the government also becomes the key element which affects the smooth development of a specific public-private cooperation project. Therefore, it is necessary to further perfect the constraint mechanism of the government.

Restraining the government to push ahead PPP

In his speech, Mr. Jia Kang took China’s first PPP project—Citong Bridge of Quanzhou, Fujian province as the case to analyze the reasons why this project is undergoing difficulty and what enlightenments this project can provide us.

Citong Bridge, China’s first PPP project (Source: CFP)

In the early 1990s, Quanzhou Bridge was under overload operation. Therefore, Quanzhou municipal government urgently needed to build up another bridge. However, due to financial distress, the government had to cooperate with a company to start the Citong Bridge project by way of BOT (40% was funded by the government). However, after survey into this project, Mr. Jia Kang found that the government does not protect the right of operation as well as relevant profit of the investors of Citong Bridge. For instance, the contracted term of operation was 30 years. But when the municipal government had enough money, it split the profit of the project in a competitive manner. Now, there are 7 tolls-free bridges around Citong Bridge, thus passengers will void to pass by Citong Bridge which charges fees. And there is still half term of contract to go.

Additionally, there are also other problems existing in this project, such as that the standards of the tolls are not allowed to be adjusted and the policy risks such as free tolls in holidays for highways are all subject for the owners to bear. The owners have expressed their earnest wish: they want to give up the remaining operation term of Citong Bridge but take back road construction fund which are irrelevant to this PPP project.

As for the strong position local government hold in PPP projects as shown in this case, some entrepreneurs of the Forum who have practical experience of PPP project also have the same feelings.

Xia Feng said, his company has actually cooperated with a sub-provincial city of Zhejiang province in a tunnel project. However, due to the good operation situation, local government asked for early buyback. But, under the provisions of the previous contract, the company still possessed 20 years of operation right and thus it did not want to sell the project to the government ahead of schedule. Nevertheless, officials from the local government said that if you don’t want to sell, we will construct another tunnel or build a bridge just near this one. “We have to accept their proposal of early buyback.”

Wang Yin, assistant professor of Shanghai University of Finance and Economics, who has studied PPP project for long time, suggested that, when companies cooperate with governments, they should add exclusive articles in contract, such as that during the term of operation, local government should not build other tunnels, roads, and bridges which may form competence with the former ones. About this, Xia Feng replied that this kind of articles is not practical in current China.

For this first but disagreeable PPP project—Citong Bridge project, Jia Kang has concluded the enlightenments it offers to PPP development in China. It mainly concerns that the establishments of laws and regulations should be ahead of PPP: perfect system constraints on government. Government should respect the spirit of contract, caging the power of government properly; optimize the profit regulation system of the government, exploring and developing some specific methods for the sharing of risks as well as profits.

Jia also stressed that, although there are still problems, the pioneer significance of Citong Bridge construction should be admitted. It, at least, guided large private capital into infrastructure construction which used to be the exclusive area for government by virtue of small public capital.

According to the report, the franchising legislation of infrastructure and public utilities advocated by the National Development and Reform Commission has issued the 6th draft and the draft is under review of relevant departments for suggestions. This law is believed to become the primary legal basis for PPP in future.

And Zhang Liao, the chairman of Shaghai Jibang Investment Advisory Co., Ltd, who participates in the drafting of this law, stated in this forum, the development of this law is speeding up and some breakthroughs have been gained in the most controversial aspect of legal relation between public sectors and non-public sectors.

Zhang also said that what he worries the most is that the government lacks of spirit of contract and there is no legal environment to constraint against this and therefore may lead to the unbalance of the PPP mechanism.


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