Annual Report on The Development of PPP in China [1st ed.] 9789811557231, 9789811557248

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Research Series on the Chinese Dream and China’s Development Path

Tianyi Wang · Zhifeng Han · Yongheng Yang · Shouqing Wang · Kaimeng Li Editors

Annual Report on The Development of PPP in China

Research Series on the Chinese Dream and China’s Development Path Series Editors Yang Li, Chinese Academy of Social Sciences, Beijing, China Peilin Li, Chinese Academy of Social Sciences, Beijing, China

Drawing on a large body of empirical studies done over the last two decades, this Series provides its readers with in-depth analyses of the past and present and forecasts for the future course of China’s development. It contains the latest research results made by members of the Chinese Academy of Social Sciences. This series is an invaluable companion to every researcher who is trying to gain a deeper understanding of the development model, path and experience unique to China. Thanks to the adoption of Socialism with Chinese characteristics, and the implementation of comprehensive reform and opening-up, China has made tremendous achievements in areas such as political reform, economic development, and social construction, and is making great strides towards the realization of the Chinese dream of national rejuvenation. In addition to presenting a detailed account of many of these achievements, the authors also discuss what lessons other countries can learn from China’s experience. Project Director Shouguang Xie, President, Social Sciences Academic Press Academic Advisors Fang Cai, Peiyong Gao, Lin Li, Qiang Li, Huaide Ma, Jiahua Pan, Changhong Pei, Ye Qi, Lei Wang, Ming Wang, Yuyan Zhang, Yongnian Zheng, Hong Zhou

More information about this series at http://www.springer.com/series/13571

Tianyi Wang Zhifeng Han Yongheng Yang Shouqing Wang Kaimeng Li •

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Editors

Annual Report on The Development of PPP in China

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Editors Tianyi Wang Center for Public-Private Partnership Tsinghua University Beijing, China Yongheng Yang Center for Public-Private Partnership Tsinghua University Beijing, China

Zhifeng Han Investment Division of National Development and Reform Commission (NDRC) Beijing, China Shouqing Wang Center for Public-Private Partnership Tsinghua University Beijing, China

Kaimeng Li China International Engineering Consulting Corporation Beijing, China

ISSN 2363-6866 ISSN 2363-6874 (electronic) Research Series on the Chinese Dream and China’s Development Path ISBN 978-981-15-5723-1 ISBN 978-981-15-5724-8 (eBook) https://doi.org/10.1007/978-981-15-5724-8 Jointly published with Social Sciences Academic Press The print edition is not for sale in China (Mainland). Customers from China (Mainland) please order the print book from: Social Sciences Academic Press. © Social Sciences Academic Press and Springer Nature Singapore Pte Ltd. 2020 This work is subject to copyright. All rights are reserved by the Publishers, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publishers, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publishers nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publishers remain neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Editorial Board Members

Wang Tianyi Han Zhifeng Yang Yongheng Wang Shouqing Li Kaimeng Liu Shijian Cao Rong Wang Yingying Song Wenjuan Yang Xiaolu Gong Pu Ren Huaiyi Wang Kangkang

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Contents

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Promoting Healthy and Sustainable Development of PPP in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Yongheng Yang, Yingying Wang, Shouqing Wang, and Qiang Wang

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Establishment of PPP Body of Knowledge in China . . . . . . . . . . . . Shouqing Wang, Min Pang, and Yingying Wang

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Key Points and Suggestions for Implementing the PPP Mode in Urbanization Field . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Guilian Luo

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A New Exploration on Infrastructure Investment and Financing Mode . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shijian Liu

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Development and Practice Frontiers of PPP in Typical Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tianyi Wang

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Application and Development of PPP in Public Culture Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 Wenjuan Song, Yingying Wang, and Pu Gong

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Application and Development of PPP Mode in Sports Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 Rong Cao

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The Application and Development of PPP Mode in Hospital, Medical and Elderly Care Service Industries . . . . . . . . . . . . . . . . . 145 Mei Tong

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The Development of PPP in Environmental Protection in the New Stage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 Tao Xue and Hui Guo

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10 Application and Development of PPP in Urban Rail Transit Industry (2017–2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173 Hongneng Chen and Qingliang Xiao 11 Practice and Development Outlook of Financial Institutions Participating in PPP—Comparative Analysis of PPP Financing Modes at Home and Abroad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183 Yun Zhang and Xinbo Zhao 12 The Status-Quo and Problems of PPP Refinancing . . . . . . . . . . . . . 199 Jifeng Zhang 13 Allocation of Major Risk of PPP Project Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 Fei Liu, Yifei Wu, Lv Han, and Xiang Yu 14 Analysis of the Implementation and Application of PPP Project + Resource Compensation Bundling . . . . . . . . . . . . . . . . . . 225 Hao Jin and Lin Tang 15 2013–2018 PPP Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239 Yang Xiaolu

Introduction of Major Authors

Wang Tianyi Chief Executive Officer of China Everbright International Ltd. (a Hong Kong listed corporation), Chairman of China Everbright Water Ltd. (a Singapore and Hong Kong listed company), Chairman of China Everbright Greentech Ltd. (a Hong Kong listed corporation). Mr. Wang is currently the Co-director of the Center for Public–Private Partnership at Tsinghua University (TUPPP) and a Professor of Tsinghua University. He is a member of the China Council for International Cooperation on Environment and Development (CCICED), a member of Advisory Committee of the BRI International Green Development Coalition (BRIGC) and the Vice-Chairman of China Ecological Civilization Research and Promotion Association(CECRPA). Mr. Wang is also a member of the PPP Business Advisory Board of United Nations Economic Commission for Europe (UNECE) and a member of Advisory Committee of China Business Research Center of National University of Singapore. Han Zhifeng Deputy Director of Investment Division of National Development and Reform Commission (NDRC), member of the leading group of TUPPP. Mr. Han graduated from the Department of Economics and Management of Peking University and the Department of Investment of Graduate School of Chinese Academy of Social Sciences successively and got his Ph.D. in economics. He has been engaging in investment management for a long period and has accumulated rich theoretical and practical experience in areas such as strengthening and improving macro-regulation of investment, deepening the reform of investment and financing mechanisms, encouraging and promoting private investment as well as promoting PPP. He participated in the drafting of many important documents including Decision of the State Council on Reforming the Investment System (No.20 [2004], SC,), Several Opinions of the State Council on Encouraging and Guiding the Healthy Development of Private Investment (No.13 [2010], SC) and Guiding Opinions of the State Council on Innovating the Investment and Financing Mechanisms in Key Areas to Encourage Social Investment (No. 60 [2014], SC) as a major drafter. He advocates establishing reasonable return mechanisms of PPP projects, encourages social capital to participate in PPP projects and tries to

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Introduction of Major Authors

promote the asset securitization of PPP projects. He organizes the appraisal and election of typical PPP projects for many times and keeps strengthening international communication of PPP to promote the standardized and steady development of PPP in China. Yang Yongheng Ph.D. of City University of Hong Kong, Professor and Associate Dean of School of Public Policy and Management of Tsinghua University, Executive Associate Dean of China Institute for Development Planning at Tsinghua University and Executive Director of TUPPP. Prof. Yang mainly engages in research on basic theories and application policies in areas like development strategy and planning, public services and management, government performance appraisal as well as public governance and institution design. He has published 12 academic articles in international journals, over 70 Chinese academic articles, 4 academic monographs and translated 7 works. His academic achievements have been cited for over 4,000. Prof. Yang is the leading expert of the major projects of National Social Science Fund and the winner of National Science Fund for Excellent Young Scientists by National Natural Science Foundation of China, and he was awarded New Century Excellent Talents by Ministry of Education. Prof. Yang is also the Deputy Director of the Expert Committee of Building Public Culture Service System of Ministry of Culture and Tourism, member of the Expert Committee on Cultural Reform and Development Planning during the 13th Five-Year Plan Period and member of the Expert Consultative Committee of Service Industry of NDRC. Dr. Wang Shouqing Professor of the Department of Construction Management of Tsinghua University, Chief Specialist of TUPPP, Director of PPP Lab of Hang Lung Center for Real Estate of Tsinghua University, Chairman of Academic Committee of the Chinese Universities PPP Forum. He is one of the two leading experts for legislation of the China Concession Law for Infrastructure and Public Utilities (draft edition), PPP Expert of NDRC, PPP Expert of Ministry of Finance, Chinese representative of the EU-Asia PPP Network, Advisory Board Member of the International Journal of Project Management and Project Management Journal, etc. He has been focusing on the teaching, research and promotion of PPP for 24 years and has published over 400 papers and books. He is Elsevier’s Most Cited Chinese Researchers for six successive years (2014–2019) and is honored as “Godfather of China’s PPP.” Li Kaimeng Director General of the Research Centre of China International Engineering Consulting Corporation(CIECC), and the Expert Obtaining the Special Governmental Allowance from the State Council of China, and the Research Professor Granted by NDRC, Vice President of the China Society of Technology and Economics. Dr. Li is also the member of PPP Expert Committee of the National Development and Reform Commission of China, Secretary-general of the Technology and Economics Committee of China National Association of Engineering Consultants, Secretary-general of China PPP Consultant Forum, Vice-Chairperson of the Bureau of Working Party on Public–Private Partnerships of

Introduction of Major Authors

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UNECE Intergovernmental Bodies, the Team Leader of UNECE Urban Rail Transit PPP Standard Preparation, the Vice-Chairman of the Concession Specialists Committee of China Tendering & Bidding Association, Peer-reviewed Expert for the Prizes of Outstanding Research Achievements within the National and Provincial Development and Reform Commission (DRC) System of China, Vice-Chairman of the Expert Committee on the National Quality Project Authorization of the Investment Association of China, and the Research Professor of the Think Tank Alliance for the central government-owned enterprises under the SASAC of the State Council of China, Consulting Expert for World Bank, Asia Development Bank and other international organizations. Dr. Li is also the member of the Expert Committee of Tsinghua University PPP Research Center, Visiting Scholar of Stanford University in USA, Ph.D. of Economics from China Renmin University Major in Population, Resource and Environmental Economics, Master of Economics from Nankai University of China, Bachelor of Science from Zhengzhou University of China.

Chapter 1

Promoting Healthy and Sustainable Development of PPP in China Yongheng Yang, Yingying Wang, Shouqing Wang, and Qiang Wang

Abstract This article first elaborates on the four development stages of PPP development in China: the exploratory and experimental stage before 2002, steady promotion in 2003–2008, fluctuation in 2009–2013, and universal promotion since 2014. Then this article analyses China’s accomplishments in PPP undertaking from four aspects comprised of institution improvement, regulation measures, model innovation, and implementation status. However, the PPP undertaking in China still faces a series of critical issues and challenges, including the imperfect legal system, cognitive discrepancy, inefficiency in management system, overemphasis on fundraising and less emphasis on operation, indifferent reaction of private sector, lagging in government’s capability building, etc.. In the end, this article proposes six suggestions for the improvement of sustainable development of PPP undertaking in China based on the current situation. Keywords PPP · Project · Sustainable development · China introduction

Y. Yang (B) School of Public Policy and Management, Tsinghua University, Beijing, China e-mail: [email protected] Y. Yang · Y. Wang · S. Wang PPP Research Center, Tsinghua University, Beijing, China e-mail: [email protected] S. Wang e-mail: [email protected] Y. Wang Public Management, Tsinghua University, Beijing, China S. Wang Department of Construction Management, Tsinghua University, Beijing, China Q. Wang Strategic Planning Department, Shanghai Chengtou Group Corporation, Shanghai, China e-mail: [email protected]

© Social Sciences Academic Press and Springer Nature Singapore Pte Ltd. 2020 T. Wang et al. (eds.): Annual Report on The Development of PPP in China, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-15-5724-8_1

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Benchmarking PPP Procurement Assessing Government Capability to Prepare · Procure and Manage PPPs 2017 · PPIAF

1.1 Introduction The Public-Private Partnership (PPP), also known as “partnership between government and social capital parties” in China, is a type of market-oriented mechanism for infrastructure construction and public services provision (Savas 2000). It is an innovative mode for enterprises and social forces’ participation in infrastructure construction and public services provision, as well as an embodiment of the supply-side structural reform in the field of public goods supply (Yang et al. 2013). Under the PPP mode, the government and the social capital parties enter into a long-term partnership featuring complementary advantages, shared benefits and shared risks (Wang et al. 2000). The government contractually engages social capital parties to perform its responsibility on infrastructure and public services, which should have been provided by the government. Introduction of the PPP mode, on the one hand, will help encourage various market players and private entities’ participation to supply the public goods, solve the shortage of public funding and ease the demand-supply imbalance of public goods. On the other hand, PPP also helps introduce competition mechanism and corporate management practices to the field of public goods and services provision, thereby improving the efficiency and level of public goods supply. The investment, construction and operation of infrastructure and public services under the PPP mode have increasingly become an innovative step to promote and improve the supply of public goods in China. PPP application does not start late in China. As early as the beginning of the reform and opening up in 1980s, there were traditional PPP modes such as BOT (Build-Operate-Transfer), TOT (Transfer-Operate-Transfer) and concessions. The PPP application in China’s infrastructure sector has roughly experienced four stages: in 1984 the pilot projects were initiated by foreign investors and promoted by the national ministries; in 2003 PPP was scaled up steadily by local governments across the country; in 2009 “the public sector forged ahead while the private sector fell behind” in the wake of the international financial crisis; and in 2014 PPP began its explosive growth (TUPPP 2017). The development of PPP in China plays an increasingly important role in innovating the system and mechanism of public service supply, relieving the financial pressure of local governments, pushing the development of the private-sector in economic field and giving a boost to the Belt and Road Initiative. Still, the new round of PPP development faces a series of challenges, including disparities in understanding of PPP, too many “pseudo-PPP projects”, too focus on financing and construction vs less focus on operation, low involvement of private enterprises and lagging in government capability and institutional building. To some extent, those challenges restrict the sustainable development of PPP in China. This report reviews each stage of PPP development in China, analyses and discusses the achievements, existing problems and future trends of PPP.

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1.2 History and Overview of PPP Development in China Since the reform and opening-up, China’s PPP development has undergone various stages under the influence of international economic development and national policies, showing different characteristics.

1.2.1 Stage of Spontaneous Exploration (Before 2002) Before 2002, following the reform and opening-up, especially the reform of the market economy system, PPP development in China showed the characteristic of project-driven policy making. Beginning from studying international practices to trying localization of international practice, the successful experiences and documentation outputs are still in wide use today, including cooperation mode, business boundaries, contract system and legal relationship, which have had a profound effect on subsequent PPP development and reform in China. Projects at this stage showed the following characteristics: (1) the application field focused on transportation, energy, water and environment; (2) the early phase was dominated by foreign investment, and the involvement of foreign investors and the mode of international operation played a role in introducing advanced technology and management practices to China to some extent. In the late phase, state-owned enterprises and private enterprises were main players, which promoted the localization of PPP projects; (3) the preliminary planning and investment promotion stage of PPP projects were well regulated and featured long duration, high cost and strong technical barriers, restricting the large-scale application of PPP. As the practicing and understanding of the market economy system went deeper, PPP projects launched by national ministries and local governments were gradually recognized among market players. At this stage, the PPP projects were highly valued by the state. The design of PPP deal structure, the organization of bid solicitation and evaluation and the compilation of contract documents were repeatedly discussed and verified by various parties involved, which are of great innovative significance in many aspects. Some PPP projects even delivered better quality and results than many current PPP projects. However, the vast majority of PPP projects at this stage adopted the BOT mode. The social capital parties’ income was not closely linked to their operation performance, even the local governments had no idea about the concept of “performance assessment” although operation was included in the process.

1.2.2 Stage of Active Promotion (2003–2008) From 2003 to 2008 with rapid economic growth and urbanization in China, PPP development showed the characteristics of active promotion by the government and

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positive response from the market. PPP was applied in many projects with a buildup in experience. It was widely used in municipal facilities, transportation, park development and other major public projects. The PPP projects at this stage are mainly concession projects that are commercial in nature and paid by users. At that time the “government-pay” mechanism for non-commercial projects was not yet established, so there were few government-purchased service projects. The concession projects vigorously developed at this stage provided samples and inputs for future PPP-related legislation, concept establishment, mode improvement, boundary demarcation, and professional capacity building for government agencies and business entities in China. Projects at this stage showed the following main characteristics: (1) The PPP mode was mainly applied to municipal utilities, including water supply, wastewater treatment, solid waste treatment and heating. Wastewater treatment projects were in a dominant position. (2) With regard to the types of social capital parties, foreign enterprises, state-owned enterprises and private enterprises co-existed. Foreign enterprises took up a larger proportion initially, but their weight gradually shrank in the late phase, with private enterprises and state-owned enterprises dominating the market. Especially in 2007 or so, rethinks and debates emerged on the impact of high-premium asset transfer on water price in the water supply sector, showing the mild trend that “the public sector forged ahead while the private sector fell behind”. (3) Large-scale selection of investors through open bidding effectively reduced the cost, improved the efficiency and standardized the operation mode. Meanwhile, the local government had more discretion to avoid black-box operation and better safeguard public interests. (4) Relatively mature implementation procedures, contract documents and operation mode were established for PPP projects, giving a boost to the extension and implementation of PPP projects. The most influential PPP projects at this stage were the Beijing National Stadium (Bird’s Nest) and Beijing Metro Line 4 (Hao et al. 2012). With China’s market economy system improved, the PPP mode reform, typically in municipal utilities, was progressing in a spiral amid controversies, including successive implementation of projects and continuous innovation in modes. Overall, local governments generally accepted the concepts and philosophies of such PPP modes as BOT and concession in the field of municipal utilities, paying more attention to how to achieve openness and transparency, improve operational efficiency, and promote a fairer pricing mechanism.

1.2.3 Stage of Volatile Development (2009–2013) The 2008 financial crisis reshaped the global financial landscape and had a great impact on the PPP development in China. In response to the crisis, the Chinese government launched an RMB4 trillion investment package in 2009. The government-led injection of massive public and credit funds into the infrastructure field posed a huge challenge to project financing, construction and operation under the

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PPP mode. Many preexisting PPP projects directly shifted from PPP to governmental investment, having a serious crowding-out effect on private-sector capital. PPP projects at this stage showed the following characteristics: (1) SOEs (state owned enterprises) were favored by local governments and banks for their strong capacity, high credit rating and backing from government resources. SOEs dominated infrastructure projects under BOT, BT (Build-Transfer) and other PPP modes. PPP projects at this stage principally featured partnership between the government and SOEs. (2) With the sharp expansion of capital demand and the maturing of financial market, diverse financing channels for PPP projects emerged, such as IPO (Initial Public Offering), enterprise bonds and trusts. (3) The BT mode featuring short duration, low cost and high performance catered to the government’s urgent need to implement projects and increase investment, thus applied widely. However, BT also led to a surge in government debts and became the main cause for the subsequent debt burden of local governments. Therefore, the central government issued the Notice on Stopping Illegal Financing by Local Governments (Caiyu No. [2012] 463) banning the use of BT.

1.2.4 Stage of Pervasive Application (2014 to 2017) Since 2014, PPP has entered the stage of pervasive application in China. The government has promoted the legislation, standardization and informatization of PPP in a top-down manner and achieved multi-party governance and cooperative production through mixed competition, in order to normalize PPP. China’s PPP at this stage might be viewed as “one of the world’s miracles”. The coverage, quantity and investment scale of PPP projects were unrivaled when compared with any other country, or any other phase of history worldwide. On the positive side, PPP became the third governance method to solve the failure of both government and market, with the rapid buildup in experience and insight in a short period of time and the deepening of understanding. On the negative side, PPP, though not suitable for quite a part of infrastructure, was pervasively applied to infrastructure before full preparedness in all respects. On the one hand, due to the complicated process, high threshold and long duration of PPP, most infrastructure projects cannot be implemented in a timely manner, having an adverse effect on local economy. On the other hand, as China lagged behind in the institutional and capacity building in PPP, local governments used PPP mostly as an alternative of local government financing vehicle (LGFV), resulting in a large number of “pseudo-PPP” projects intended primarily for financing, likely to form unreasonable new government debts and trigger financial risks. Therefore, the state pushed for the legislation, standardization and informatization of PPP and issued documents to thoroughly investigate and rectify pseudo-PPP, which were all timely measures to boost sustainability of PPP. This stage saw unprecedented intensity and breadth of PPP application across the country as well as frequency of relevant policy launches. Projects at this stage showed the following characteristics: (1) The implementation of PPP projects was

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encouraged and facilitated with all-out efforts; (2) PPP-related policies were continuously improved, with a series of policy documents in place to institutionally assure a well-regulated PPP industry and facilitate sound development of the PPP mode; (3) the “one-sided” promotion of PPP at this stage resulted in too many projects and gave rise to such problems as disguised financing and false PPP projects, which did not achieve the government’s goals of reducing debts and improving efficiency.

1.3 Main Achievements of PPP Development in China 1.3.1 Achievements in PPP Policy Innovation and Institutional Building The Legislative Affairs Office of the State Council announced the Regulations on Public-Private Partnership in Infrastructure and Public Services (Exposure Draft) (the “Draft PPP Regulations”) on 21 July 2017, marking a major progress in China’s PPP legislation and law-based PPP governance. If the formal edition is issued, it will help promote the standardized operation of PPP projects, urge the government to perform its obligations and protect public interests and the legitimate rights and interests of social capital parties. The Draft PPP Regulations, issued amid the complexities in PPP management and operation, reflected the wisdoms and hardships of the lead entities for legislation and relevant agencies. Many contents of the draft policy are worth applauding, with the brightest highlights outlined below: The purpose of the Draft PPP Regulations is clarified as “regulating” PPP, other than “promoting” PPP. In particular, it weakens the financing function of PPP, reiterates that the goal of PPP is to improve the quality and efficiency of public service supply and emphasizes the operational responsibility of social capital parties in the field of public services. This draft policy is conducive to solving the problem that “financing and construction overweighs operation” in current PPP development, so as to bring PPP back to track and achieve the healthy and sustainable development of PPP.

1.3.2 Strengthened PPP Supervision The Ministry of Finance (MOF) set up an integrated PPP information platform in late 2015, including PPP-related project pool, expert pool, consulting agency pool and other nationwide information. Relying on the online approval and supervision platform for investment projects, the National Development and Reform Commission (NDRC) added PPP-related modules to the online approval and supervision platform for investment projects and launched its PPP project information platform in 2016. In addition, relevant state policies also encourage positive response to and innovation in the PPP mode across the financial sector. The government has taken a

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wide spectrum of measures for thriving PPP. The government has issued a series of policies on financing, including PPP asset-backed securitization (ABS), specialpurpose government bonds, insurance capital plan, structured financing and other modes. Such moves represent active explorations to expand financing channels for involving social capital parties in PPP projects and create divestment channels. The issuance of financial supervision policies also has been strengthened to further diversify investments in China’s capital market.

1.3.3 Exploration and Innovation in PPP Mode PPP projects have become increasingly specialized, more mature in mode and more accurate in calculation. There are two main modes for PPP operation, namely, concession and government-purchased services (Wang and Wang 2017). Under concession mode, the government authorizes social capital parties or project company, according to law, to invest, construct and operate PPP projects within certain scope and period with a reasonable return, so as to provide public services in the form of BOT, ROT (Renewal-Operate-Transfer), TOT (TransferOperate-Transfer), and etc. The rights, obligations and risks are agreed between the government and the social capital parties or project companies by contract. The social capital parties or project company undertakes the funding, building and operation of a new or expanded PPP project in accordance with PPP project contract, or undertakes the operation of an existing project with operation right transferred by the government on a paid basis or free of charge when further investment is needed for expansion or reconstruction. Upon expiration of the partnership period, the asset and its auxiliary facilities and relevant documents will be transferred free of charge to the government. Concession projects fall in the category of service outsourcing. The focus of PPP mode design varies with industry, professional field and development stage. For example, rail transit projects emphasize both building and operation, municipal road projects feature building overweighs operation, while wetland park projects are characterized by operation overweighs building. As to outsource service package design, an appropriate mode should be selected based on the competition level, the weights of building and operation among other factors. Under government purchase of services, through a market mechanism, the qualified social capital parties or project company are selected to undertake the financing, building and operation of project, so as to provide public goods or services free (no payment from users) conventionally provided by the government, and to hand over the property and its auxiliary facilities and relevant documentation to the government free of charge upon expiration of the partnership period. The government pays reasonable fees to the social capital parties or the project company pursuant to the PPP contract. For example, hospitals, elder care organizations, schools and nuclear power plants are suitable for the mode of government purchase of services, i.e. the government retains the core service functions while cooperating with social capital parties through purchasing services.

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1.3.4 Stabilizing Environment of PPP Development In order to evaluate the PPP development environment in China in a scientific and objective manner, Tsinghua University’s PPP Research Center has established China’s PPP development environment evaluation system (including 33 indicators) with four dimensions, namely government governance, fiscal support, business environment and development demand. The Center also regularly compiles and publishes the Chinese Cities’ PPP Development Environment Index targeted 289 cities at or above the prefecture level, as a point of reference for local governments, social capital parties and intermediary service providers. The index aims to provide better guidance on the funding, building and operation of PPP projects and promote sustainable development of PPP. The tables below show the scores and rankings of Chinese local governments in terms of PPP development environment (TUPPP 2019). PPP development environment refers to the mix of various conditions and factors accompanying the entire lifecycle of a PPP project (spanning design, building, operation and delivery), including social factors, economic factors, political factors and legal factors that affect the PPP project. It is also an important measure of the overall competitiveness of a country or region Tan and Zhao (2019). These factors outline an overall picture of whether and to what extent a country or region is suitable for the PPP-based financing, building and operation of infrastructure and public services, and provide reference for the government and social capital parties on decision making about PPP mode, as well as guidance for local governments to improve their PPP development environment. At present, the overall PPP development environment is stabilizing in China, suggesting that the local governments have established their awareness and capability for applying PPP mode. Table 1.1 shows AAA cities. Among them, Ningbo was upgraded from AA in 2017 to AAA in 2018, and the other four cities retained AAA. However, AAA cities feature a relatively weak development demand, generally rated B or BB, with the remaining three dimensions rated AA or AAA. Beijing is a city ranked among the top few by government capability, fiscal support and business environment, indicating a very good PPP development environment. Table 1.1 Cities with AAA environment of PPP development S/N

City name

Rating in 2018

Rating in 2017

Government capability

Fiscal support

Business environment

Development demand

1

Beijing Municipality

AAA

AAA

AAA

AAA

AAA

B

2

Hangzhou City

AAA

AAA

AA

AA

AAA

B

3

Ningbo City

AAA

AA

AA

AA

AA

BB

4

Qingdao City AAA

AAA

AAA

AA

AA

BB

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Shenzhen City

AAA

AA

AAA

AAA

B

AAA

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However, the weakness of Beijing lies in its development demand. 2018 saw fewer new PPP projects in Beijing than before, while the development demand was similar to 2017 and remained weak. Like Beijing, Hangzhou is rated among the top few by business environment, and of the other three dimensions, government capability and fiscal support are also rated as high, indicating a good PPP development environment. However, Hangzhou also has a very weak development demand, which limits the PPP development in the city. Ningbo is rated high in terms of government capability, fiscal support and business environment. Ningbo shows balanced performance of the three dimensions of PPP development environment, but its low development demand curtails PPP development in the city. Qingdao is rated high by fiscal support and business environment and also ranks among the top few by government capability. It is the only one of the five AAA cities showing the same government capability rating as Beijing. It means that Qingdao has a very good PPP development environment and also possesses an edge in government capability. But Qingdao has a low development demand rating, the most prominent weakness among the five cities. Shenzhen is rated among the top few by fiscal support and business environment, like Beijing, and also enjoys a high rating of government capability. That means the city has a relatively good PPP development environment, yet with a low development demand. Table 1.2 shows AA cities. The characteristics of PPP development environment in these cities are that they do not have a very high rating in the three dimensions of government capability, fiscal support and business environment, showing no remarkable advantages, or that one of these dimensions has a very low rating in spite of good ratings of the other two dimensions, showing a noticeable area of weakness. However, in the rating of development demand, some cities show higher development demand, which to a certain extent drives the development of PPP.

1.4 How PPP Serves the Belt and Road Initiative In the context of global economic transformation, China’s Belt and Road Initiative became a new starting line for its reform and opening-up and, what’s more, a winwin move for boosting the economic growth of neighboring countries. The Belt and Road Initiative is attracting great attention and participation from countries in the region. The coordinated economic and social development of the Eurasian continent will become an important part and pole of the global economic growth in the future. According to statistics, the total investment in the core infrastructure fields of 66 countries and regions along the Belt and Road exceeded USD493 billion in 2016. Since the Belt and Road Initiative was launched in 2013, total project investment in the region has been on the rise with a compound annual growth rate (CAGR) of 33%, and this trend is still continuing. Thus, the countries along the Belt and Road have huge potential demand in infrastructure, which also provides broad room for the PPP

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Table 1.2 Cities with AA environment of PPP development S/N

City name

Rating in 2018

Rating in 2017

Government capability

Fiscal support

Business environment

Development demand

1

Changsha City

AA

AA

AA

A

AA

BB

2

Changzhou City

AA

AA

A

AA

AA

BB

3

Chenzhou City

AA

AA

AA

A

BBB

A

4

Chengdu City

AA

AA

AA

AA

AA

BB

5

Chongqing Municipality

AA

AA

A

A

A

BBB

6

Dongying City

AA

AA

AA

AA

AA

BB

7

Foshan City

AA

AA

A

AA

AA

B

8

Fuzhou City

AA

AA

AA

AA

A

BB

9

Ganzhou City

AA

AA

AAA

A

B

AA

10

Guangzhou City

AA

AA

AA

AA

AAA

B

11

Hefei City

AA

AA

AA

AA

A

BB

12

Huzhou City

AA

AA

AA

A

AA

BBB

13

Huizhou City AA

AA

A

AA

AA

BB

14

Jinan City

AA

AA

BBB

AA

AA

BBB

15

Jining City

AA

AA

AA

AA

A

A

16

Jiaxing City

AA

AA

AA

AA

AA

BBB

17

Jiangmen City

AA

A

AA

AA

A

BB

18

Kunming City

AA

AA

AAA

AA

BBB

BB

19

Lhasa City

AA

AA

BB

AA

BBB

AA

20

Liaocheng City

AA

A

AA

A

A

AA

21

Luoyang City

AA

A

AA

A

BBB

A

22

Nanchang City

AA

AA

A

A

A

BB

23

Nanjing City AA

AA

AA

AA

AA

B

24

Nanning City AA

A

AA

BBB

A

BBB

25

Nantong City AA

AA

A

A

AA

BB (continued)

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Table 1.2 (continued) S/N

City name

Rating in 2018

Rating in 2017

Government capability

Fiscal support

Business environment

Development demand

26

Quanzhou City

AA

A

AA

BBB

A

BB

27

Xiamen City

AA

AA

AA

AAA

AA

B

28

Shanghai Municipality

AA

AA

AA

AAA

AA

B

29

Shaoxing City

AA

AA

A

AA

AA

BB

30

Suzhou City

AA

AA

A

AA

AA

B

31

Taizhou City

AA

AA

AA

AA

AA

BBB

32

Taizhou City

AA

AA

A

A

AA

BBB

33

Tangshan City

AA

A

AA

BBB

AA

BBB

34

Tianjin City

AA

AA

A

AA

AA

B

35

Weihai City

AA

AA

BBB

AA

AA

BB

36

Weifang City AA

AA

AA

AA

A

A

37

Urumqi City

AA

A

AA

AAA

A

B

38

Wuxi City

AA

AA

BBB

AA

AA

B

39

Wuhan City

AA

AAA

AAA

AA

AA

B

40

Xiangtan City

AA

AA

A

A

A

A

41

Xiangyang City

AA

A

AA

A

A

AA

42

Xuzhou City

AA

AA

AA

A

A

BBB

43

Yantai City

AA

AA

AA

AA

AA

BB

44

Yangzhou City

AA

AA

AA

A

AA

BBB

45

Yibin City

AA

A

AA

BBB

B

AA

46

Yichang City AA

AA

AA

A

AA

BBB

47

Yuxi City

AA

AA

AA

AA

BBB

AA

48

Yueyang City AA

AA

AA

AA

BBB

BBB

49

Zhenjiang City

AA

AA

BBB

A

AA

BBB

50

Zhengzhou City

AA

AA

BBB

AA

AA

BBB

51

Zhoushan City

AA

A

BBB

A

AA

BBB

52

Zhuhai City

AA

AA

A

AA

AAA

B

53

Zibo City

AA

A

A

AA

AA

BB

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exploration and application. NDRC (National Development and Reform Commission) and the United Nations Economic Commission for Europe (UNECE) entered into a Memorandum of Understanding on PPP cooperation under the Belt and Road Initiative. At the opening ceremony of the Belt and Road Forum for International Cooperation (“BRF”) held in May 2017, President Xi Jinping called for establishing a stable and sustainable financial safeguard system that keeps risks under control, creating new modes of investment and financing and encouraging greater cooperation between government and social capital parties. In 2015, the Chinese government issued the Vision and Proposed Actions outlined on jointly building the Belt and Road, identifying infrastructure connectivity including transportation, energy and telecommunications as the priority in the Belt and Road Initiative. The total infrastructure investment is estimated to exceed USD6 trillion under the Belt and Road Initiative. Traditionally, public finance is the main source of funds for infrastructure construction. However, after the financial crisis, developed economies are facing the pressure of fiscal deficit and government deleveraging. The fiscal system of developing economies cannot meet the demand for future infrastructure funding, which also cannot receive sufficient support from the existing financial markets and international organizations. Therefore, the introduction of new investors and innovative financing channels is an urgent task to address the shortage in infrastructure funding. At present, PPP is broadly recognized as an effective way to solve the difficulties in infrastructure financing. Since the 1970s and 1980s, some economies have begun to explore infrastructure financing solutions involving the private sector participation, in which PPP has become the main direction of explorations. Developed European and American countries have seen a significant increase in private-sector involvement in infrastructure construction through PPP. Developing countries also have witnessed the emergence of PPP-based infrastructure projects. Chinese enterprises are “going global” actively under the framework of the Belt and Road Initiative. However, the great disparities among countries along the Belt and Road pose a lot of investment risks. China has a short history of PPP that remains in the stage of exploration. There are many risks in blind PPP investment in overseas infrastructure projects. In order to harness advantages and avoid disadvantages, it is necessary to study the existing PPP projects in these countries and find out the factors that contribute to the success of projects. In addition, in order to promote infrastructure investment in developing countries, China has sponsored Asian Infrastructure Investment Bank (AIIB). Currently there is an imbalance of economic development among countries or regions along the Belt and Road. Infrastructure facilities including roads, railways and ports are distributed unevenly in the region. The situation seriously curtails the upgrading of regional economic cooperation under the Belt and Road Initiative. According to Asian Development Bank (ADB) estimates, cross-border regional infrastructure projects in Asia alone require an annual investment of USD287 billion. Given the unlikelihood of a substantial growth in financial support from government finance, official assistance and multilateral development banks, PPP project financing is considered an effective way to bridge the huge funding gap. According to the data

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for 2016, the total financing of PPP projects in Belt and Road countries stood at USD493 billion. Turkey, India, Thailand, Laos and Vietnam boasted the largest sizes of project financing, while energy and transportation were the largest destination industries of project finance.

1.5 Key Issues and Challenges in the Development of PPP in China 1.5.1 The Legal System and Mechanisms Need to Be Improved China has issued many PPP-related policies since 2013. At the current stage, however, there is still a lack of clear top-level management body and top-level document (upper-level law), a lack of integrity of policies between ministries, a lack of continuity of policies of the same ministry, and the ambiguity of effectiveness and hierarchical level between policies. For example, NDRC and China Securities Regulatory Commission (CSRC) jointly issued an asset-backed securitization document in late 2016 before MOF issued the normative requirements in 2017. In 2014, MOF issued the Operational Guide to Public-Private Partnership Modes (Trial) (Caijing [2014] No. 113) setting out the operating procedures for PPP projects, while in 2016 NDRC gave a notice on distributing the Guidelines on Implementation of PPP Projects in Traditional Infrastructure Fields (NDRC Touzi [2016] No. 2231) in 2016, setting out the operating procedures for PPP in traditional infrastructure fields. In addition, the emergence of PPP has caused confusion in the preliminary approval procedures of many projects. Some projects even have no idea about whether to hire a consultant or not, some do not know how to use the project management mechanism, whether to conduct an audit or whether to go through financial review procedures. There is also confusion in the competition process of projects, such as choosing social capital parties according to the government procurement procedures or the bidding procedures, awarding the contract using the lowest bid method or the overall scoring method. Such confusions have bewildered PPP practitioners a lot. Since the promulgation of China’s Constitution in 1982, China’s approach to legislation has been accompanied by the transformation of government functions and the streamlining of the government-market relationship, and so has the legislation in the PPP field. At the present stage, however, China’s PPP-related policies are divorced from the overall framework of its legal development history. Various policies are issued only from the perspective of pragmatism. There is no clear legal basis for legal identity, contract effectiveness and dispute mechanism. At this stage, China’s PPP is still facing the embarrassing state of being “legislatively groundless”.

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1.5.2 Difference in Perceptions of PPP The form of PPP appeared in ancient and modern China and western countries, such as Leshan Giant Buddha in Sichuan Province built in China’s Tang Dynasty through private financing and the water supply facilities funded by private enterprises in French cities in the 1850s. However, their forms were not PPP in the contemporary sense. PPP in the contemporary sense dates back to the 1990s in Britain. In 1992, the British Treasury tried out PPP/Private Finance Initiative (PFI) on infrastructure projects such as the Channel Tunnel. When the Labor Party led by Tony Blair came to power in the UK in 1997, the new administration believed that the spirit of PPP was consistent with its governance philosophy and vigorously promoted the PPP/PFI mode. The UK government standardized a series of key elements for proper implementation of PPP/PFI, such as scope of implementation, operating procedures, core mechanism, evaluation principles, organizational structure, standard contracts and performance evaluation, and effectively applied it to infrastructure and public service projects. The European Union, the World Bank, the Asian Development Bank and other international institutions as well as traditional Commonwealth countries simplified and improved the UK version of PPP/PFI, and gradually extended this mode to European, American, Asian and African countries. The contemporary PPP has grown under the framework of a series of standardized operations. In 1986 former Turkish Prime Minister Özal proposed the BOT mode. At the same year China started to implement a number of BOT projects, such as Guangdong Shajiao B Power Plant. Then BOT projects peaked at the turn of the century in China. But there was no systematical operation specification issued at the national level or sufficient supervision over project implementation while too many of those projects applied BT (Build-Transfer) mode, under which the basic concepts and philosophy of contemporary PPP such as risk sharing, benefit sharing, value for money, performance payment were rarely seen. Therefore, BOT cannot be simply considered an equivalent to PPP. Since 2004 when the former Ministry of Construction’s Document No. 126 was promulgated, PPP in China has appeared in a large number of transportation, water, environment and energy projects in the basic form of “concession”. Similarly, various administrative measures or regulations on “concession” issued by central or local governments rarely involved the basic principles of PPP and the operating procedures were not sound or standardized, until 2015 when the Administrative Measures on Concession for Infrastructure and Public Utilities was issued by Decree No. 25 of six authorities led by the NDRC. Therefore, concession also cannot be simply considered an equivalent to PPP. Against such a backdrop, the academic and practical circles have not come up with any authoritative interpretation regarding the meanings and reasonable classification of PPP. And on this basis, no consensus has been reached on some important theoretical issues about PPP to date.

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1.5.3 The PPP Management Mechanism Has Not Yet Been Streamlined In countries where PPP has been well developed, a set of effective working bodies and mechanisms are in place from local to national levels. Governments at all levels actively formulate infrastructure plans and continuously improve the procurement process for PPP projects. In China, however, there is no unified or efficient organizational and managerial framework for PPP at the central government level (Wang et al. 2017). In 1994, the former State Planning Commission took the lead in piloting a number of BOT projects, while local governments carried out PPP projects at their discretion. After 2000, the former Ministry of Construction took the lead in advancing the market-oriented reform in the municipal sector and issued the template concession contract. The former State Planning Commission also promulgated relevant administrative measures. Some local governments such as Beijing Municipal Government also issued local regulations. Since 2014, both NDRC and MOF have been overseeing the PPP promotion work. The two authorities have frequently issued their own red tapes and established their respective PPP project banks, causing local governments to feel at a loss. At the local government level, PPP work is overseen by the fiscal authority in some places but by the development and reform commission in some other places. Even the overseeing authority is inconsistent between the provincial government and municipal or county-level governments. The multi-authority oversight and the inconsistency between upper and lower overseeing authorities will inevitably cause confusion and inefficiency in PPP work.

1.5.4 PPP Shows the Serious Problem of Financing Overweighing Operation The State Council issued the Opinions on Strengthening Management of Local Government Debts (the “Opinions”) (Guofa [2014] No. 43) on 2 October 2014, a milestone leading up to the current round of PPP. This document set forth the central government’s requirements on regulating the financing activities and controlling the aggregate funding amount from local government financing vehicles (LGFVs). Against this background, the State Council issued the Guidance on Innovating Investment and Financing Mechanisms in Key Fields to Encourage Private Investments (Guofa [2015] No. 60) and began to encourage local governments to adopt PPP. But after LGFVs were reigned in, PPP was regarded as a tool to attract social capital and defuse local government debts, in the view of the local governments, while the underlying function of PPP—to introduce social capital parties’ operation experience and efficiency and enhance public service supply—was ignored. Problems such as “debts in the disguise of equity” and “bridge financing” frequently occurred in various places

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(Tan and Zhao 2019). Furthermore, the tax incentives and financial subsidies granted by the central finance authority to PPP projects distort the behavior of local governments and market players to a certain extent. As a result, many local governments and social capital owners packaged a large number of projects unsuitable for PPP as fake PPP to apply for government subsidies, and some even committed “subsidy frauds” and “swindled the government out of subsidies”. Moreover, as shown by current PPP practices, many PPP projects are an extension of general contracting projects, caused by many contractors’ business strategy of “investment-driven projects” in the hope of getting rid of low-end competition or excessive competition. Therefore, many PPP project contracts are nothing more than construction contracts plus a clause of funding by the contractor, that is, the government de facto gets funding from the contractor, which could be detected from the construction involved deal structure, relatively shorter cooperation period, operation arrangements without necessary details and etc.

1.5.5 SOEs Are Over-Involved But Private Enterprises Are Less Motivated It is internationally accepted that the second “P” in PPP represents the private sector. PPP originally means attracting private enterprises (including foreign capital) to participate in public service supply and using the efficiency and innovation of private enterprises to enhance public service supply. As shown by practices in China, however, the social capital parties that currently dominate PPP projects in China are SOEs (Wang et al. 2018; Ke et al. 2013), which still belong to the public sector and are mainly central government-run enterprises. RMB2.23 trillion of PPP project contracts have been awarded to private enterprises since January 2014, representing a very small portion of the total. The survey has found that it is easier to establish trust between local governments and SOEs, especially central government-run enterprises, while there is a competitive discrimination against private enterprises. It is generally believed that private enterprises have high communication costs, are prone to short-term speculation, and are likely to cut corners on work and materials. However, private enterprises also lack confidence in the PPP policy environment and creditability of the local governments. These factors have restricted the involvement of private enterprises. In addition, private enterprises are financially weaker than SOEs. Compared with SOEs, private enterprises are more motivated to “make quick money” and focus on economic benefits. Moreover, private enterprises lack of many years’ experience in infrastructure operation and management and have no well-established social resources or political status in a certain place, thus unwilling to have their massive capital tied up in a single project for a long time. All of the above reasons have led to the situation that PPP in China is “public-public partnership” (Yang 2016) rather than “public-private partnership”.

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Furthermore, the operating performance of SOEs generally helps enhance the personal achievements of their staff, including corporate heads, project team leaders and team members. Relative to private enterprises, therefore, SOEs are more motivated to strike the present deal without accurately estimating the long-term return on investment. Some assumptions used may even be unrealizable at all. But that is not the case for private enterprises. Private enterprises are more conservative in their calculations and care more about the safety of funds, for what they invest are all money directly related to their own interests. To sum up, it is easier for SOEs to reach an agreement with the current local government, while it is harder for private enterprises to do so. This further worsens the situation that SOEs are over-involved but private enterprises are less motivated.

1.5.6 Governmental Capacity Building Lags Behind For the vast majority of local governments, PPP is a novelty. The domestic research on PPP-related theories from the perspectives of economics, law and politics has just begun. Local governments generally lack PPP-related theoretical knowledge and practical experience. Many of them are inexperienced in performing the PPP tasks assigned by the higher-level counterparty. Problems such as unsound management structure, lack of processes and incomplete policies lead to low efficiency and high costs of PPP projects, which directly affect the effectiveness of PPP projects. Some local governments are still used to implementing PPP projects by administrative means. Under the existing performance assessment system, they pay more attention to the implementation and fulfillment of projects but lack the ability to manage PPP projects by economic, market and legal means, especially in the negotiation, price calculation, asset disposal, contract management and service supervision of PPP projects. As a result, many PPP projects show unsound contract design, unreasonable performance assessment standards and unsound supervision and management mechanisms, which form long-term concerns for the operation and supervision of PPP projects.

1.6 Suggestions on Promoting the Healthy PPP Development in China 1.6.1 Unifying Thoughts and Fostering Consensus to Establish the Correct Development Philosophy for PPP After nearly 30 years of PPP practice in many countries in the world, including China, a certain consensus has been reached and gradually evolved into a universal

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rule, that is, PPP has both advantages and disadvantages for a country’s infrastructure and public services. It is not a universal mode to solve all problems or a panacea. A successful PPP project can not only bring capital and efficiency, but also provide long-term public services of value for money for the government and the public. However, it requires a series of supporting conditions; otherwise it is difficult for the project to run as a going concern. Such conditions are closely related to the social, economic and technological development stage of a country or region, the soundness of supporting systems, regimes and mechanisms, and the development level of the market and industry. None is dispensable. Apart from the external factors, the internal factors of PPP, including lengthy preliminary work, high transaction cost, relatively rigid contract boundary and high requirements for government capability are also important factors that restrict the broad application of PPP. To pursue PPP development in China, however, we must have rational perceptions of PPP and abandon the PPP-only theory or the pan-PPP theory. The main purpose of PPP is to make full use of the professional capabilities of social capital parties to accomplish the project and provide better and more efficient public services. The professional capabilities of social capital parties include not only planning, design, financing, building, operation and service skills, but also the integration of these professional skills. However, there are hidden dangers if PPP is only used as a powerful financing tool to smooth out government debts or even fully replace conventional financing vehicles. International practices show that, to improve efficiency, profitability and quality, the supply and delivery modes of infrastructure and public services need to be changed. This mode is to shift from the traditional separation of funding, planning, design, building, operation and service to the integration of the works mentioned above, and to change infrastructure from investment- and building-oriented projects to operation- and service-oriented ones. In China, infrastructure projects show the long-standing problem that building overweighs operation and, what’s more, service. The process is seriously fragmented into separate links, leading to low lifecycle efficiency and abnormally low profitability. The quality of public services cannot withstand strict inspection. In a successful PPP project, social capital party is not only an integrator of various links as well as internal and external resources, but also is the main risk taker. The government pays for operation and service performance. Therefore, the primary goal of PPP development in China is to fully leverage on the professional capabilities of social capital parties through PPP to provide high-quality and efficient infrastructure and public services. In China, the development of PPP has even more marginal effects and significance. In addition to promoting the transformation of traditional infrastructure and public service sectors, PPP also can readjust the boundary between the government and the market, introduce a competition mechanism and unleash the market’s decisive role in infrastructure and public services. In turn, PPP can improve how the government supplies and manages public goods and services, promote the government’s administration system reform and help build a more professional and honest government. The PPP mechanism for information disclosure, risk sharing and benefit sharing also facilitates the introduction of today’s public governance philosophy and system into public infrastructure and public services. What’s even more important is

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that PPP will help China speed up its upgrading of traditional infrastructure to the higher end, enhance the international competitiveness and professional capabilities of China’s overall infrastructure industry and better serve China’s Belt and Road Initiative. In addition, it must be noted that due to the unbalanced economic development in various parts of our country and the long-lasting dominance of the central and local governments in infrastructure, public utilities and public services, either subjective or objective conditions including market and legal environments are not fully conducive to PPP development. Perfection of these conditions and environment will not happen overnight. It requires protracted hard work and solid steps. In short, PPP development is a long-lasting and arduous task. We must always remain realistic and never act too hastily from beginning to end.

1.6.2 Optimizing Coordination, and Reshaping the Government Departmental Responsibility and Management System for PPP Countries with successful PPP practices generally have specialized departments and agencies at the national or central government level. In the UK, PPP is facilitated by the Treasury and the Partnership UK (PUK) set up by the Treasury. Though it is a finance ministry, the UK Treasury is different from China’s Ministry of Finance. In the UK with a super-ministry system, the HM Treasury, or the Treasury for short, has a broader range of functions, just like the combination of China’s NDRC and MOF. The Treasury is responsible for carrying out and implementing the public finance and economic policies of the UK government. Its main duties are to control public expenditure, determine the direction of the UK economic policies and maintain strong and sustainable economic growth. The French central government has set up the Ministry of Economy in charge of work on economic development and the Ministry of Finance in charge of public procurement management. The Ministry of Economy is responsible for formulating industrial policies and industrial plans for PPP (including concession and government procurement CP) projects, and conducting cost-benefit analysis and economic viability assessment for PPP projects. However, CP projects involving government-purchased services and concession projects requiring government subsidies shall be supervised by the Ministry of Finance from the perspective of public spending management. In 2005, France set up a special working group on service and partnership contract projects (MAPPP), which is mainly responsible for project assessment prior to approval by the budget department. China’s current mode of PPP facilitation by the finance authority and the development and reform (D&R) authority in parallel definitely does more harm than good. In view of China’s national conditions and the functional characteristics of its finance authority and D&R authority, as well as the comprehensiveness, complexity and difficulty of PPP itself, it is even more necessary to reshape the relationship among the finance authority, the D&R authority and relevant industrial authority.

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At present, PPP is a matter of projects, investments and reform at the micro level. However, project investment does involve the value-for-money evaluation, and project implementation involves the evaluation of fiscal affordability. Undoubtedly, the former falls in the duty of the D&R authority, while the latter is part of the finance authority’s function. No doubt that both the finance authority and the D&R authority play an important role in PPP facilitation. However, to meet the purpose that “PPP improves the quality and efficiency of public service supply”, duties should be resplit among the finance authority, the D&R authority and the industrial authority so as to further strengthen the substantive role of the competent industry authority in PPP management. It is advised to clarify the duties of and relationship among the D&R authority, the finance authority and the relevant industrial authority in PPP in the future. Specifically, the industrial authority is responsible for proposing, implementing and supervising PPP projects. The R&D authority is responsible for the approval and pooling of PPP projects, mainly including examining whether the project is fit for PPP, conforms to the economic and social development plan and meets the public interest. The finance authority should provide financial support and guarantee according to the mode, characteristics and operational requirements of PPP projects, including fiscal affordability assessment, value-for-money evaluation, debt risk prevention and control, and financial operation standardization. In this way, the planning, scheming and facilitation capabilities of the D&R function can be combined with the standardization, evaluation and control functions of the finance function, which is conducive to the active and stable promotion and application of PPP.

1.6.3 Strengthening Institutionalization to Create a Good Policy Environment for PPP The successful PPP promotion is first conditional upon the presence of a good institutional environment. It is also the only way for a country to turn PPP into a success. PPP institutionalization is a very complicated and systematic project that requires multitier construction. The central government authorities have issued many documents for PPP in recent years, including policies and mechanism arrangements, which are important deliverables of this round of PPP. But there are still many aspects of these policies and mechanisms that have yet to be further considered and improved. In the horizontal view, they are systematically deficient. In particular, there are no wellestablished rules regarding the relationship among central government authorities, the relationship between central and local authorities or the government-market relationship. From a vertical point of view, there are still inconsistencies, discontinuities and even contradictions between earlier and later documents, and there are still many patches to be put in place. This not only gives rise to a problem about operability, but also discounts the effectiveness of operation. Therefore, to further streamline these

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systems, it is necessary to design and construct PPP systems from the perspective of good PPP governance.

1.6.4 Strengthening Guidance of Model Projects and Scale up the PPP Application in an Orderly Manner Almost all countries that have successfully practiced PPP have taken a very cautious attitude towards project progression. They have done very detailed and in-depth analysis on the preliminary work of the project, thus minimizing the problems and risks in the implementation stage. Therefore, once PPP projects are commenced in these countries, the success rate is very high. Normally more than 90% can be executed, which is in sharp contrast to the current execution rate of 20%–30% for PPP projects in China. Take the UK as an example. The UK started PPP/PFI practice as early as in 1992, but it had been groping through the first five years. During this period, the central government took the lead in carrying out several major model projects, such as the Channel Tunnel. With regard to preliminary work, take PPP project consulting for example, general consulting norms and procedures are established. For example, the preliminary analysis, research and consulting of the project are divided into three stages. The first stage is the strategic planning, in which the main task is to study whether to carry out the project and whether it should be done in the PPP mode. The second stage is framework planning, in which we identify framework issues under the PPP mode and study how to address them. The third stage is detailed planning. At present, PPP consulting in China directly begins with the third stage, namely the implementation stage, but it is not detailed enough. Also, the PPP facilitation agency shifted from the original Treasury PPP Taskforce to the more powerful, comprehensive and professional Partnership UK (PUK), which plays an important role in the preliminary consulting stage of the project in addition to facilitating PPP/PFI policy making.

1.6.5 Strengthening Capacity Building and Enhancing the Ability of the Government and Social Capital Parties to Participate in PPP Although PPP has many advantages, it is still in vain if the people implementing it are not capable enough. In addition to the proper systems, mechanisms and modes, a successful PPP project has a considerable gap in the capacity building of relevant stakeholders, especially the government. Since China’s infrastructure sector has long been dominated by the government, especially in local provinces and cities. Local infrastructure projects are all handled within the government system, even though they are undertaken by local SOEs. In this way, not only is the information not

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transparent, but more importantly, there are still deficiencies in the execution of the original operating procedures and the supervision before and after the completion of the project. There are still many areas for improvement. Relevant government authorities show a lack of professional capabilities. However, PPP is an upgraded version of the traditional mode. It is not only based on the government’s ability to manage the traditional infrastructure and operations, but also requires government departments to deal with external social capital parties. The government needs to work with social capital parties to solve various complicated problems and risks before and after the project concession period, thus placing quite high requirements on the government’s and other parties’ capabilities. As far as social capital parties are concerned, since China’s infrastructure and public services have long been handled within the closed system of the government and local SOEs, this will indirectly lead to insufficient capacity of social capital parties, especially in terms of operation, financing and planning. In terms of intermediaries, a large number of consulting companies born in the current PPP wave have find their professional capabilities far from sufficient to meet the market demand. Even some famous experienced consulting companies just do simple replication work and are unable to provide consulting in the operation stage. In more specialized public service fields, such as health care and education, there are even fewer institutions and experts capable of providing professional PPP consulting. Therefore, it is urgent to strengthen the capacity building of all parties involved in PPP. According to comparative case studies, the required government capability building includes but not limited to identifying and selecting projects, selecting modes and scheme design, formulating the procurement scheme, grasping market trends, selecting appropriate partners to evaluate enterprise projects and schemes, selecting appropriate partners to implement project supervision and payment, negotiating and renegotiating project contracts, conducting process supervision (concession), cost supervision and examination (concession) as well as pricing and re-pricing (concession). The required capacity building on the side of social capital parties includes but not limited to identifying and evaluating projects and risks, proposing the project mode and plan, proposing detailed project scheme, selecting appropriate partners and integrating competitive dialogue and negotiation of projects, identifying and evaluating projects, proposing the project mode and plan, carrying out project implementation and risk management, renegotiating project contract changes, influencing government policies and decisions, controlling project operating costs and maintaining good cooperation with government departments. The capacity building of intermediaries includes expertise development. In addition to necessary PPP expertise, it is urgent to expand the industry-specific expertise and skills. It is also necessary to vigorously grow consulting firms in specialized areas, rather than all-rounders. In addition, the professional ethics and codes of conduct of intermediaries and experts are also very important and need to be established and monitored as soon as possible.

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1.6.6 Taking PPP as an Opportunity to Phase in Multi-level Reform With PPP going deeper, it will be increasingly felt that systematic and multi-level reform is needed for the success of PPP projects. On the other hand, a local PPP project implemented will drive the reform in philosophy, systems and mechanisms on various fronts, thus creating a positive interaction between local upgrades and systematic improvements. Taking PPP as an opportunity, reforms are necessary and should be carried out in the following areas: traditional public utilities, the governmental administration system, state capital and SOEs, public governance and financial system.

References Ke, Y., Wang, S., & Chan, A. P. (2013). Risk Misallocation in Public–Private Partnership Projects in China. International Public Management Journal, 16(3), 438–460. Savas, E. S. (2000), Privatization and Public–Private Partnerships. New York: Chatham House. Tan, J., & Zhao, J. Z. (2019). The Rise of Public–Private Partnerships in China: An Effective Financing Approach for Infrastructure Investment? Public Administration Review, 00, 1–5. Wang, H., Liu, Y., Xiong, W., & Zhu, D. (2018). Government Support Programs and Private Investments in PPP Markets. International Public Management Journal, 0(0), 1–25. Wang, S. Q., Tiong, R. L. K., Ting, S. K., Ashley, D. (2000). Evaluation and management of foreign exchange and revenue risks in China’s BOT projects. Construction Management and Economics, 18(2), 197–207. Yang, Y. H., Hou, Y, Wang, Y. (2013). On the Development of Public-Private Partnerships in Transitional Economies: An Explanatory Framework. Public Administration Review, 73(2), 301– 310. Yang Y. H. (2016). An Analysis of the Difficulties in Practice and Future Development of PPP. Xinhuanet, China Public Private Partnerships Center, business.sohu.com. http://www.sppm.tsi nghua.edu.cn/jsfc/26efe48955a1c4810155a4e57aa40002.html. Center for Public-Private Partnership, Tsinghua University. (2017). Blue Book of PPP:Annual Report of the Development of PPP in China (2017). Beijing: Social Sciences Academic Press (CHINA), (in Chinese). Center for Public-Private Partnership, Tsinghua University. (2019). Blue Book of PPP:Annual Report of the Development of PPP in China (2019). Beijing: Social Sciences Academic Press (CHINA), (in Chinese). Wang, S. Q., Wang, Y. Y. (2017). Core Idea of Wang Shouqing on PPP. Beijing: China Electric Power Press, (in Chinese). Wang, Y. Y., Feng, K., Wang, S.Q. (2017). 1000 Q&A about Financing of Concessions (PPP). Beijing:Tsinghua University Press, (in Chinese). Hao, W., Wang, Y. Y., Ding, H. P. (2012). Research on PPP mode in Urban Rail Transit – Case Analysis of Beijing Subway Line m. China Civil Engineering Journal (10), 183–188, (in Chinese).

Chapter 2

Establishment of PPP Body of Knowledge in China Shouqing Wang, Min Pang, and Yingying Wang

Abstract With the rapid development and standardization of Public-Private Partnership (PPP) in China, the need for professional talents in PPP is becoming increasingly urgent, and it is extremely important to establish a systematic and universal guide to the PPP body of knowledge. Based on the significance of the PPP body of knowledge, this report firstly introduces knowledge representation and knowledge management, and then analyzes various forms of PPP body of knowledge at home and abroad. Finally, it summarizes the shortcomings of existing body of knowledge and puts forward suggestions on the contents of the PPP body of knowledge as well as how to build it. Keywords PPP · Body of knowledge · Knowledge management

Project supported by the National Natural Science Foundation of China (Grant No. 71772098 and 71572089). S. Wang (B) · M. Pang Department of Construction Management, Tsinghua University, Beijing, China e-mail: [email protected] M. Pang e-mail: [email protected] S. Wang Center for Public-Private Partnership, Tsinghua University, Beijing, China PPP Lab of Hang Lung Center for Real Estate, Tsinghua University, Beijing, China Y. Wang PPP Research Center, Tsinghua University, Beijing, China e-mail: [email protected] © Social Sciences Academic Press and Springer Nature Singapore Pte Ltd. 2020 T. Wang et al. (eds.): Annual Report on The Development of PPP in China, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-15-5724-8_2

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2.1 Specify the Significance of PPP Body of Knowledge and PPP Knowledge Management 2.1.1 Rapid Development of PPP Mode Public-Private Partnership (PPP) is a long-term partnership established between the public sector and private sector through official contracts to provide public goods (or services). Before the concept of PPP was introduced to China, public goods and services were usually provided by the government or the local state-owned enterprises under the direct control of the government, which resulted in problems like fund shortage and inefficiency of government departments. In the middle 1980s, with the application of BOT mode in the construction of Shajiao B power station in Guangdong, China began its exploration of PPP. Since then, PPP development in China has gone through four stages including exploration, small-scale pilots, promotion and new development, and tried many types of PPP including concession. In 2014, the State Council, the Ministry of Finance and the National Development and Reform Commission successively issued documents to vigorously promote PPP projects from the central to local levels,1 so the PPP mode was widely adopted.2 In November, 2017, the Ministry of Finance issued Document No.923 to regulate PPP projects, which led to the reflection on how to exercise successful PPP projects, how to exploit the advantages of PPP to the full and what kind of body of knowledge we need for PPP projects.

2.1.2 Significance of PPP Body of Knowledge and PPP Knowledge Management 2.1.2.1

Satisfy the Urgent Need for PPP Knowledge Suitable for Chinese Market

According to the “Government Procurement Law of the People’s Republic of China”, traditional public facilities and services are provided by government procurement institutions through ways like bidding, negotiation and entrusting. As for many 1 In

2015, the Ministry of Finance issued "Notice on Further Efforts Relating to Model PublicPrivate-Partnership Projects"([2015], No.57, MOF), which stipulates that the duration of government and private sector cooperation should not be less than 10 years in principle, and distinguishes BT mode with PPP mode in a narrow sense. Unless otherwise specified, the following "PPP mode" refers to "PPP mode in a narrow sense different from the BT mode". 2 China Public Private Partnerships Center:"The 12th Quarterly Report of PPP Integrated Information Platform", April, 28th , 2018. 3 Ministry of Finance of the People’s Republic of China: "Circular on Regulating Project Database of the National PPP Integrated Information Platform" ([2017] No. 92, MOF).

2 Establishment of PPP Body of Knowledge in China

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municipal infrastructure and public utilities projects featuring large scale of investment, long-term and stable market demand, relatively flexible price adjustment mechanism and high degree of marketization, PPP mode can be applied to involve private sector which is more professional and efficient to reduce cost and improve efficiency. Just because of the large scale, long duration and multiple participants of the PPP projects, PPP mode is more complicated than the BT mode used to adopt widely in China. Table 2.1 shows the major differences between PPP and BT Wang et al. (2017). Table 2.1 Major differences between PPP and BT Cooperation

BT

PPP

Vertical mode. The government authorizes the enterprises to construct public facilities independently

Cooperative mode. The government authorizes private sector to establish a project company or becomes the shareholder of the project company to construct and operate public facilities together

Timing and level of enterprise Enterprises involve in the involvement project at the bidding stage and exit once the construction is completed

Enterprises involve at the stage of feasibility analysis and demonstration, and it is a long-term and continuous cooperative relationship

Duration of the project

Short construction period

A life cycle of over a decade or even three decades

Payment mechanism

The enterprises pay in advance during construction period and the government needs to pay after the construction is completed

The government and enterprises invest together and share the operating profits. It can be divided into three type including user pays, government pays and a combination of the two

Interest demand

The government and private partner only care about their own interests

Both parties take the project as the priority to maximize their interests

Risk taking

The enterprises focus on the Both parties share the risks in risks in collection of payments construction and operation while the government pays attention to operational risks

Information symmetry

The enterprises and the government do not share the information during the construction period, and only after the transfer of the project can the government obtain all the information

Both parties share the information and pay attention to the management during the whole life cycle of the project

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In the future, PPP will still be an important mode to supply public services and products in China. The establishment of a PPP body of knowledge, especially one that fits our market, will help to meet the needs of different PPP participants, provide strong support for the cultivation of future PPP talents and lay a solid foundation for the sustainable development of PPP in China.

2.1.2.2

Self-renewal of the PPP Body of Knowledge to Match the PPP Development in China

With the widespread application of the PPP mode since 2014, the central and local departments have enacted corresponding policies to provide a clearer path from the perspectives of the qualifications of participants, financing methods and ways of cooperation. At the same time, they have been constantly solving various problems during the development. Besides, the development of financial market has also provided more financing methods for PPP. PPP-related knowledge has been updated all the time and a PPP project often lasts over ten years, so sticking to the previous knowledge and experience may cause more problems in terms of compliance and other aspects in the future. Therefore, we should not only fully study and understand the existing PPP knowledge from all dimensions, but also incorporate knowledge of different fields into this area timely. PPP involves many disciplines, different industries and various stakeholders. To keep track of the updated PPP-related knowledge cannot be done by hand or by paperwork. As technology and the Internet continue to develop, a mature PPP body of knowledge in the future should enable anyone interested in PPP have easy access to the knowledge, and meanwhile, it should also be able to include the knowledge of many scholars and practitioners as well as amended polices and laws timely.

2.2 Current Situation of PPP Body of Knowledge 2.2.1 Knowledge Representation and Knowledge Management 2.2.1.1

Knowledge Representation

Knowledge representation is originally a concept in the fields of knowledge management, computer science and artificial intelligence. Knowledge is divided into two types in the field of knowledge management. One is the common written texts, charts and mathematical formulas, and the other is experience-based knowledge we acquire in our activities. The former is defined as explicit knowledge (with the manifestations including language, mathematical

2 Establishment of PPP Body of Knowledge in China

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formulas, various charts, Braille and sign language), while the latter is tacit knowledge, which is defined as the intelligence that cannot be separated from the cognitive subjects. Polanyi (2000) PPP projects involve a wide range of areas and last for a long period, so we need not only systematic knowledge about PPP and expertise in certain disciplines (explicit knowledge), but also the experience of experts (tacit knowledge), which is even more important in the successful practice of PPP. In the field of computer science and artificial intelligence, knowledge representation is the transformation of knowledge into standardized, formalized and modeled data structures, so that computers can process knowledge and control the knowledge structures. Xu and Ye (2007) PPP-related knowledge involves multi-dimensional knowledge concerning many fields and stakeholders. A major barrier to apply knowledge of PPP is the inadequate ability to fully utilize knowledge. If we can use knowledge representation technology to formalize and standardize the explicit and tacit knowledge of PPP and supplement it with a certain reasoning ability, the knowledge base will be more diversified and the PPP body of knowledge will be much more practical.

2.2.1.2

Knowledge Management

In knowledge management, there are many ways to abstract knowledge into models. Based on the purpose, it can be divided into two types - one takes knowledge management as the purpose and the other focuses on building knowledge-based system (KBS). Knowledge management models mainly manage documents, and existing books and articles about PPP fall into this category. The main purpose of KBS is to encode knowledge into forms that the KBS system can recognize so as to achieve management, reasoning and other goals. Common forms include frame diagram, list of notion and ontology. But all traditional knowledge management models focus on explicit knowledge and seldom include tacit knowledge or provide a collection of explicit knowledge for professionals who master tacit knowledge. Although Zhong Donglai proposes a way to allow experts to participate in ontology construction, it is just a more convenient tool and experts still need to build the ontology by themselves Zhong (2014). The knowledge of the experts, especially tacit knowledge cannot be included in the knowledge model effectively based on existing KBS. Therefore, it remains to be a problem as to how to manage knowledge of PPP and establish a suitable body of knowledge which can include both explicit and tacit knowledge as well as to classify, retrieve and even reason about knowledge.

2.2.2 Development of International PPP Body of Knowledge To better apply PPP mode, many international organizations and state government departments already have body of knowledge or guidelines of PPP. They all belong to

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the knowledge management model and display corresponding contents with documents. All guidelines and guides mentioned below will be referred to as the PPP body of knowledge for better statement. Table 2.2 shows the body of knowledge of relevant international organizations and countries as well as the contents. Many scholars and industry experts around the world have also published articles and books about PPP based on their academic research and practical experience. Journal articles on (or related) PPP between 2000 and 2015 with worldwide influences are listed in Table 2.3 and 2.4 respectively.

2.2.3 Development of PPP Body of Knowledge in China Since 2014, PPP academic and practical works have also sprung up in China. Scholars and practitioners have not only kept exploring theories of PPP, but also summarized the extensive practical experience accumulated in recent years and compiled the tacit knowledge of experts into books to drive the development of PPP. Considering domestic sales volume and the PPP bibliography recommended by Professor Wang Shouqing from Tsinghua University, 75 PPP-related works are selected, covering important topics such as process management in academic study and practice, financing management, risk management, supervision and information disclosure, as shown in Chart 2.1. Among those topics, financing management, development background and definition of PPP, laws, regulations and policies, process management, risk management, contract management, PPP mode, accounting as well as performance and evaluation are given special attention in over ten works. As is shown in Table 2.5, most of the academic works have discussed definition of PPP, financing, risk management, PPP modes and process management. Ke and Wang (2011) classified the risks of PPP projects in China in detail and proposed corresponding sharing mechanisms. Sheng and Wang (2015); Zhang and Hu 2018 as well as Ye 2018 discussed project financing, bankability of PPP projects and the design of capital structure in financing. In practical works, the choice of private sector, fiscal management of government and contract management have received more attention. In terms of financing, contract management, laws, regulations and policies, risk management, performance evaluation, accountings (including accounting and tax laws) and regulatory mechanisms, there are professional books that provide targeted guidance. In addition to the perspective of different topics in PPP-related knowledge Wang et al. 2016, Insurance Asset Management Association of China 2017, Ding et al. 2014, Cui et al. 2018, Yao et al. 2018, China Cost Engineering Association 2018 also interpret PPP from the perspective of specific stakeholders such as consulting company, SPV and government. Ma et al. 2017 and Zhu 2018 provide guidance for PPP practice from the perspective of the documents involved in PPP projects (as shown in Table 2.6). The works mentioned above are similar to the guidelines provided by international organizations and national government departments. They all introduce the knowledge of PPP from a certain dimension with forms of texts and charts. The

2 Establishment of PPP Body of Knowledge in China

31

Table 2.2 PPP body of knowledge of international organizations and countries Name of organization PPP body of or country knowledge

Main contents

Way of presentation

Word bank

PPP Reference Guide Version 3.0➀

Module1: PPP basics. Provides an overview of the definition, nature, financing and pitfalls of PPP; Module2: Establishing the PPP Framework. Describes the elements of a sound legal and institutional PPP framework (policy, processes, institutions, and rules) and governance of PPP programs; Module3: Implementing PPP projects. Provides guidance on each stage of developing and implementing a PPP project

Introduce PPP from both macro and micro perspective; Provide a general framework at the beginning of each module; List any useful overview for reference; Divided into modules

Word Bank Group, Other multilateral development banks, APMG International

The PPP Guide➁

Domains and major contents included in the PPP body of knowledge; Specify core concepts based on operating processes

Divide and elaborate on each part based on the order of project development

International Bank for Reconstruction and Development, Word bank

Guidance on PPP Contractual Provisions➂

Major legal issues involved in PPP contracts/structure such as force majeure, material adverse government action and change in law and termination payments

Logic of composing the Guidance; References to knowledge of laws and contracts

Asian Development Bank

Public-Private Partnership (PPP) Handbook➃

Choose an appropriate PPP structure based on industry, contract types and other elements; Implementation process of PPP projects: preparation, implementation and monitoring; Pro-poor activities in PPPs

Combination of PPP structures with different industries and contract types

(continued)

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Table 2.2 (continued) Name of organization PPP body of or country knowledge

Main contents

Way of presentation

United Nations Economic Commission for the European Union

Guidebook on Promoting Good Governance in Public-Private Partnerships PPP➄

Principles of good governance in PPPs: PPP policy; Capacity building: finance, negotiation, etc.; Legal framework, risk sharing, choice of private sector (PPP procurement); Putting people first: VfM, information disclosure and environment protection

Divided into modules; Explain every principle from multi dimensions including who, when and how to participate

European commission

Guidelines for Successful Public-Private Partnerships➅

PPP structures, suitability and success factors; Legal and regulatory structures; Risks of PPP projects and their impacts; Grant financing of PPP projects; PPP conception, planning and implementation

Divided into modules; Legal and regulatory structures worth considering

PPP basics; Application of PPP in different industries; Legal environment of PPP; Future development of PPP

Divided according to different industries

The National Council White Paper on For Public-Private PPP➆ Partnership of US

Australian government

National Public Procurement method, Private Partnership guide to stakeholders, Policy Framework➇ VFM, fiscal affairs, financing, etc.

Provide PPP guidance to different participants (stakeholders)

注: ➀ PPP Reference Guide Version 3.0, https://pppknowledgelab.org/guide/sections/1-introd uction ➁ The PPP Guide. https://ppp-certification.com/ppp-certification-guide ➂ International Bank for Reconstruction and Development, Word bank. Guidance on PPP Contractual Provisions 2017. 2017 ➃ Asian Development Bank. Public-Private Partnership (PPP) Handbook. 2008 ➄ Europe U N E C. Guidebook on Promoting Good Governance in Public-Private Partnerships 2008 ➅ European commission. Guidelines for Successful Public - Private Partnerships. 2005 ➆ The National Council For Public-Private Partnership, “For the Good of the People: Using PublicPrivate Partnerships To Meet America’s Essential Needs” 2013 ➇ Australian government. National Public Private Partnership Policy Framework. 2015. Source: corresponding official websites

2 Establishment of PPP Body of Knowledge in China

33

Table 2.3 Topic of focus in influential journal articles about PPP Author

Year

Title of article

Topic of focus

Grimsey and Lewis

2002

Evaluating the risk of public private partnerships for infrastructure projects

Risk

Li et al.

2005

The Allocation of Risk in PPP/PFI Construction Projects in the UK

Risk

Froud

2003

The private finance initiative: risk, uncertainty and the state

Risk

Shen et al.

2006

Role of public private partnerships to manage risks in public sector projects in Hong Kong

Risk

Ng and Loosemore

2007

Risk allocation in the private provision of public infrastructure

Risk

Wang et al.

2000

Evaluation and management of political risks in China’s BOT projects

Risk

Shen and Wu

2005

Risk concession model for build/operate/transfer contract projects

Risk

Graeme and Greve

2007

Public–private partnerships: Evaluation an international performance review

Grimsey and Lewis

2005

Are public private partnerships value for money? Evaluating alternative approaches and comparing academic and practitioner views

Evaluation

Froud and Shaoul

2001

Appraising and evaluating PFI for NHS hospitals

Evaluation

Akintoye et al.

2003

Achieving best value in private finance initiative project procurement

Evaluation of procurement

Zhang

2005

Criteria for selecting the private-sector partner in public–private partnerships

Procurement

Zhang

2005

Critical success factors for public–private partnerships in infrastructure development

Success factors

(continued)

34

S. Wang et al.

Table 2.3 (continued) Author

Year

Title of article

Li et al.

2005

Critical success factors for Success factors PPP/PFI projects in the UK construction industry

Topic of focus

Tiong

1996

CSFs in competitive tendering and negotiation model for BOT projects

Success factors

Tiong et al.

1992

Critical success factors in winning BOT contracts

Success factors

Kumaraswamy and Zhang

2001

Governmental role in BOT-led infrastructure development

Government

Bennett and Iossa

2006

Building and managing Management facilities for public services

Heald

2003

Value for money tests and Finance accounting treatment in PFI schemes

Yang and Meng

2000

Highway pricing and capacity choice in a road network under a build–operate–transfer scheme

Pricing industry

Shen et al.

2002

Alternative concession model for build operate transfer contract projects

Organization

Source: Song J, Zhang H, Dong W. A review of emerging trends in global PPP research: analysis and visualization. Scientometrics, 2016

knowledge is classified according to dimensions like industry, process, stakeholder or document. “1000 Q&A about Financing of Concessions (PPP)” written by Wang et al. 2017, “1000 Questions about Public-Private Partnership” edited by Zheng 2016 and “Public-Private Partnership - A Brief Introduction” compiled by Liu and Zhao 2017 present the knowledge of PPP to the readers with the form of questions and answers. Liu Shangxi and Zhao Fujun divided the questions from macro and micro level to facilitate the quick retrieval by readers with different purposes. In the form of texts, these works divide knowledge according to a certain dimension such as industry and process and present it with systematic description, Q&A and proposal of solutions. Although it can meet needs of those readers who want to have a systematic study or seek for answers to certain questions, general readers cannot learn from all aspects and retrieve information outside the question list. And static text display cannot truly show the inner connection of knowledge. Despite the various forms and perspectives, the PPP bodies of knowledge mentioned above are all in knowledge management model with documents as the

Financing management

Risk affairs

Fiscal

Module

method

Evaluation -ment

Procure

(renegotiate)

process

Operating

Industry

Government

Participant

Song J, Zhang H, Dong W. A review of emerging trends in global PPP research: analysis and

structure

Organization

visualization. Scientometrics, 2016.

Source

Levy (1996)

Osborne (2002)

Guasch (2004)

(2011)

Yescombe

Smith (1995)

Walker and

Savas (2000)

Lewis (2004)

Grimsey and

Content

Dimension

Table 2.4 Structures of influential works about PPP

2 Establishment of PPP Body of Knowledge in China 35

36

50 45 40 35 30 25 20 15 10 5 0

S. Wang et al.

46

30

27

25

24 20 13

12

10

9 5

4

3

2

2

Chart. 2.1 Statistics of major topics in the selected books Source: Information based on sales volume at Dangdang.com, JD.com and Amazon

major presentation form. Yuan Jingfeng and others have developed an OntologyBased Knowledge Base for Residual Value Risks in PPP Projects Chen et al. (2017). (see Chart 2.2). The source of knowledge in this knowledge base is literature reading and case analysis. The Ontology-Based Knowledge Base for Residual Value Risks is established manually based on summary of risk process and categories and analyzes the risks of PPP projects from the perspective of probability, public and private sector to build relations among different modules of knowledge. The use of ontology technology greatly improves the convenience of knowledge application and communication in the field of PPP risk management, which is worthy of reference. To sum up, complete PPP body of knowledge exists under the knowledge management model with documents as the main carrier. For example, the PPP Guide of APMG International elaborates on the operating process in many aspects such as risk management, financing and mode selection. In the chapter of project identification, it describes identification of needs, project prioritization, analysis and selection of operating methods, determination of project scope, analysis of economic feasibility, analysis of focuses and difficulties of PPP projects, test of PPP suitability and affordability, project management solutions, identification of stakeholders and development of the communication strategy, selection of advisors, screening report and outcomes of this phase. The interpretation of PPP in a large number of domestic works is more in line with the general environment for PPP projects in China. Therefore, it can be seen that we have already had adequate knowledge of PPP. However, the existing model to present knowledge is in single-formed focusing mainly on one dimension, which has greatly restricted the comprehensive understanding of PPP and flexible application of PPP knowledge. Due to the inconsistent

Author

Shouqing

Wang

Feng Ke,

Yingying,

Wang

2017

2016

Gu Gongyun

2015

2016

Fujun

2015

2011

2008

Li Jihong

et al.

Zhao

Shouqing

Wang

Sheng Hetai,

Shouqing

Wang

Ke Yongjian,

Ke Yongjian

Shouqing,

Wang

Year

2.5 Topic of focus in academic works

(continued)

2 Establishment of PPP Body of Knowledge in China 37

Others

Cases

mechanism

Regulatory

Accounting

Information disclosure

Performance evaluation

Risk

Financing

Law

Contract

Mode

Stakeholders

Process

Definition

Ouyang Fan

of the NDRC

Department

Investment

Tong Caixia

Luo Guilian,

Liu Shijian,

Tianyi,

Wang

et al.

Ding Bokang

Dashuang

Dai

et al

Luo Xuefu

Li Kang

Wanling etal.

Chen

Yingying

Wang

Shouqing,

Wang

2.5 (continued)

2018

2018

2018

2018

2018

2018

2017

2017

2017

Cases

Credit

(continued)

38 S. Wang et al.

2019

Xu Yude

denotes focus of some chapters

2019

Ye Sudong

Note

2018

2018

Ye Sudong

Hengsong

Hu

Jianhong,

Zhang

2.5 (continued)

denotes focus of the whole book

2 Establishment of PPP Body of Knowledge in China 39

et al.

Yihong

Wang

Che Er

et al.

Huazhen

Huang

(CPPPC)

Center

Partnerships

Private

Public

China

Law Firm

Winners

et al.

Bokang

Ding

2016

2016

2016

2015

2015

2014

Table 2.6 Topic of focus in practical works

Author

Year Definition

Process management Stakeholders Mode Contract management Laws Financing Risk Performance Evaluation Information disclosure Accounting Regulatory mechanism Choice of private sector Fiscal management

Cases

(continued)

Consulting

Others

40

S. Wang et al.

Lianzhu

Xin

et al.

Qin Yuxiu

Song Rui

et al.

Ma Haishun

Lin Hua

et al.

2017

2017

2017

2017

2017

2017

2017

Fu Junyuan

Liu Shijian

2016

2016

2016

2016

Lv Hanyang

et al.

Chen Min

Lanping

Zhou

Hall

Lecture

Industry

China PPP

Table 2.6 (continued)

Process

Document

Stakeholder

of

Perspective

Cases

Cases

2 Establishment of PPP Body of Knowledge in China 41

42

S. Wang et al.

Chart. 2.2 Example of an Ontology-Based Knowledge Base for Residual Value Risks in PPP Projects Source: Chen K, Xu X, Yuan F, et al. Developing an Ontology-Based Knowledge Base for Residual Value Risks in PPP Projects, Singapore, 2017[C]. Springer Singapore

terms and logics of different knowledge models, readers often have to refer to more than one book for solutions to different problems. Therefore, we need to unify the terms and logics of the PPP body of knowledge first so that it can be applied universally. Second, we should standardize knowledge with computer technology so readers can acquire knowledge of PPP from different dimensions freely. However, study in this aspect is not mature yet.

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43

2.3 The Framework and Establishment Method of the PPP Body of Knowledge in China 2.3.1 Suggestions to Build the PPP Body of Knowledge in China 2.3.1.1

Focus on the Tacit Knowledge of PPP Experts

As mentioned above, the rich academic theories and practical experience of experts in this area are all indispensable and significant parts. The establishment of the future PPP body of knowledge should be able to systematically and completely include the knowledge of PPP experts, including the academic theories, public speeches and news interviews, and integrate fragmented tacit knowledge so that readers can have easy access to the ideas of the experts when using the PPP body of knowledge product.

2.3.1.2

Use Modern Technology to Establish an Easily Accessible and Self-updating PPP Body of Knowledge

At present, if we want to learn something, the first option is to filter the information online for further study instead of reading professional books in a library. Just like that, the PPP body of knowledge in the future should meet the requirements of online retrieval and study. This requires the combination of PPP knowledge management and modern technology such as the ontology technology mentioned above to build a self-updating knowledge base with Internet access so that readers can have access to an online PPP body of knowledge with functions of retrieval and reasoning.

2.3.1.3

Establish an Officially Recognized PPP Body of Knowledge

In 2018, China has launched a large number of PPP training within the whole country and many consulting and educational institutions have also provided training programs. However, due to variant profession of the lecturers and differences in personal understanding, the results of PPP training vary. It is suggested that a PPP body of knowledge recognized by the authorities or the public can be built in the future, which will not only reduce the frictions caused by the inconsistent understanding, but also provide support for future training of PPP talents.

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2.3.2 Build an Ontology-Based PPP Body of Knowledge 2.3.2.1

Build a Network Structure

The PPP body of knowledge should be built in a network structure, with knowledge points as the nods and links between them known as knowledge relations. Therefore, the PPP body of knowledge should conceptualize subjective and objective knowledge in the PPP field, identify each knowledge points, and show the relations between knowledge points.

2.3.2.2

Establishment the PPP Body of Knowledge

Referring to many ontology construction methods, and based on the contents of PPP and purpose of building and applying the body of knowledge, Chart 2.3 shows the method of constructing the framework of PPP body of knowledge. According to the field, scope and purpose of applying the body of knowledge and considering the literature reading and expert opinions, the core contents are specified and conceptualized. A complete PPP body of knowledge should cover the items shown in Chart 2.4. Under the key knowledge sets shown in Chart 2.4, knowledge points at various levels are expanded from top down, and a tree-like multilayer framework of PPP body of knowledge is initially formed, as shown in Chart 2.5.

Chart. 2.3 Flow chart of building the framework of PPP body of knowledge

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PPP body of knowledge

Fiscal Management

Financeing

Choosing Private Sector

Regulation Mechanism

Accounting

Information Disclosure

Performence Evaluation

Laws

Contract Management

Modes

Stakeholders

Process

Background

Risk

Chart. 2.4 The first layer of the framework of PPP body of knowledge

Chart. 2.5 A tree-like frame diagram of the PPP body of knowledge (take “private sector” as an example)

Various dimensions are interconnected in a PPP project, so it is very important to identify the connection of each knowledge area. By defining the relations between knowledge areas in the ontology, knowledge areas can be connected, which provides the basis for reasoning between knowledge areas. Take the knowledge area “SPV”, a subset of “private sector”, for example. The flattened relationship between it and other knowledge areas is shown in Chart 2.6.

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Chart. 2.6 Relations between “SPV” and other knowledge points

Because the contribution of “SPV” accounts for over 50% of the total capital contribution of private sector, and the private sector is mainly responsible for the company’s operation, “SPV” is classified as the subset of “private sector”.

2.3.2.3

Identify Knowledge Areas

Besides “SPV”, the subsets of “private sector” include constructors, operators and investors. The subsets of “SPV” include “Stakeholder”, “organizational structure”, “Governance”, “Represent of government” and “operating structure”.

2.3.2.4

External Relations Between Knowledge Points

In addition to the meaning and hierarchical relations of subsets in a knowledge set, there are other relationships between PPP knowledge points. For example, in the actual operation, a PPP project company needs to be established at the beginning of the project implementation, so the second-level knowledge area “project implementation” under the concept set “process” will involve the knowledge point “SPV”. Therefore, “project implementation” and “SPV” are “mutually involved”, which is a symmetric relationship. Similarly, “shareholder of SPV” also involves subsets of “stakeholder” such as “government”, “constructor”, “operator” and “investor”. Therefore, “SPV shareholder” and other stakeholders are also “mutually involved”.

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In “contract management”, “SPV” will directly participate in the “PPP project contract”, so there is a relationship of “participate” (the opposite relationship with “has participant”). Similarly, the “government” will also participate in the “PPP project contract”, so the two also have a relationship of “participate”. The domain of the “participate” relationship itself is limited to “stakeholders”.

2.3.2.5

Examples of Knowledge Points

There are many definitions of PPP. For example, in the Guiding Opinions of the National Development and Reform Commission on Carrying out Public-PrivatePartnership (No. 2724 [2014], NDRC), the PPP mode means a long-term benefit sharing and risk sharing partnership established by the government with private sector through concession, purchase of services, equity cooperation, and other ways, to enhance capacity of supplying public products and services and to improve supply efficiency. In practice, there are various specific forms of PPP. Therefore, under the knowledge area “PPP mode”, several subsets are established, including but not limited to BOO, BOOT, BOT, BTO, MC, O&M and TOT. In practical application, participants of PPP projects can look up for the relevant information about different knowledge areas from the ontology-based system, understand the complexity and disciplines involved in a certain knowledge area quickly, and determine experts of which disciplines need to be hired for consultation. The process of establishing a body of knowledge with ontology technology fully reflects that in a multi-dimensional and complex knowledge network, computer technology can break the barriers between dimensions, connect knowledge areas of different disciplines, identify knowledge areas from the perspective of stakeholders and link the knowledge points with laws and regulations for retrieval, thus laying a solid foundation for the application in various scenarios by multi users in the future.

References Wang, Y.Y., Feng, K, Wang, S.Q. (2017). 1000 Q&A about Financing of Concessions (PPP). Beijing: Tsinghua University Press, (in Chinese) [UK] Michael Polanyi (2000). Personal Knowledge: Towards a Post-critical Philosophy, translated by Xu Zemin. Guizhou People’s Publishing House. Xu, B.X., Ye, P.H.(2007). Research on Methods of Knowledge Representation. Information Science, (5), 690–694 Zhong, D.L.(2014). Construction and Application of Smart City Ontology. Master Thesis of Tsinghua University. Ke, Y.J., Wang, S.Q. (2011). Concession Financing: Risk Sharing and Management. Tsinghua University Press (in Chinese). Sheng, H.T., Wang, S.Q.(2015). Concession Financing (PPP/BOT): Selection of Capital Structure. Tsinghua University Press (in Chinese). Zhang, J.H., Hu, H.S.(2018). The Financing Evaluation Research and Application of PPP. Economy & Management Publishing House (in Chinese).

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Ye, S.D. (2018). Project Financing. Beijing Jiaotong University Press (in Chinese). Wang, Y. H., et al. (2016). The Way to Win-Win:Manual of Whole Process Consulting in PublicPrivate Partnership Projects. Tianjin University Press, 767 (in Chinese). Insurance Asset Management Association of China. (2017). PPP Insurance Funds, China Financial Publishing Press, 239 (in Chinese). Ding, B.K. et al.(2014). Development and Transformation of Government Investment and Financing Platform in the New Urbanization. China Commerce and Trade Press. Cui, D.G. (2018). Guidelines for the Implementation of PPP Projects: An In-depth Analysis of 100 Practical Problems. Law Press·China, 16, 180 (in Chinese). Yao, H. L. et al. (2018). Guide to Core Business of PPP. China Building Materials Press, 145, (in Chinese). China Cost Engineering Association (2018). Guidelines on Whole Life-Cycle Consulting for PublicPrivate Partnerships. China Architecture & Building Press, 317 (in Chinese). Ma, H.S., et al.(2017). Public Private Partnership (PPP) Mode. China Building Materials Press, 478 (in Chinese). Zhu, J.(2018). A Practical Guide to PPP Projects. Intellectual Property Publishing House, 284 (in Chinese). Zheng, J.X. (2016). 1000 Questions about Public-Private Partnership. Hunan University Press, 378 (in Chinese). Zhao, F.J., Liu, S.X. (2017). Public-Private Partnership - A Brief Introduction. China Financial&Economic Publishing House, 237 (in Chinese). Chen K, Xu X, Yuan F, et al. (2017). Developing an Ontology-Based Knowledge Base for Residual Value Risks in PPP Projects. Springer Singapore.

Chapter 3

Key Points and Suggestions for Implementing the PPP Mode in Urbanization Field Guilian Luo

Abstract The PPP mode should rely on local government credit and the government’s ability to pay for PPP projects. It depends not only on the current fiscal resources but also on the long-term comprehensive financial resources based on land finance mainly. It is necessary to reduce the burden on PPP and form the investment and financing pattern of multiple synergies and symbiosis. The author suggests standardizing the PPP mode of government purchasing services and abolish the onesize-fits-all limit on government payment. We suggest straightening out the user payment mechanism, actively carry forward the concession-based PPP mode, define the legal status of the LGFVs and grant them the core function of realizing the value of public resources. Carry out a comprehensive review of PPP related policies since 2013 and reconstruct the policy system and working mechanism of the PPP mode. Keywords Urbanization · PPP · LGFVs · Land finance In mid-March 2019, the sixth meeting of the ministerial-level joint conference on promoting urbanization pointed out that currently there coexist the problems of insufficient funding for urbanization construction and the debt risk of local governments. To solve this problem, we need to start from basic logic, respect history, face reality, take a long-term perspective, see the essence through the phenomenon, promote the domestic theoretical, policy, and practical circles to reach a consensus on core issues related to the investment and financing of urbanization projects, and carry forward a diversified implementation mode including PPP onto the right track. Only in this way can it be possible to fulfill the task of overcoming the shortcomings of infrastructure with high quality and promote the sustainable development of urbanization. G. Luo (B) Tsinghua University, Beijing, China e-mail: [email protected] London School of Economics and Political Science, London, UK PPP Research Center, Tsinghua University, Beijing, China PPP Expert Database of National Development and Reform Commission, Beijing, China © Social Sciences Academic Press and Springer Nature Singapore Pte Ltd. 2020 T. Wang et al. (eds.): Annual Report on The Development of PPP in China, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-15-5724-8_3

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3.1 Political Responsibility and Government Credit Local governments bear the political responsibility of organizing municipal infrastructure investment and construction and providing basic public services. Investment in and financing for such projects must and should rely on government credit. This is the logical starting point for analyzing local government debt issues and promoting the PPP mode in the field of municipal infrastructure. (1) At the current stage, local governments bear the political responsibility for large-scale investment in municipal infrastructure. Since 1995, China has entered an unprecedented 40-year wave of rapid, comprehensive and unparalleled urbanization in human history. More than 1 billion people have started modern city life in one generation’s time. Infrastructure and real estate investment related to urbanization is the largest real economy sector in China today. According to statistics, China’s urban infrastructure investment reached 17.3 trillion yuan in 2017, a year-on-year increase of 13.9%. It is the political responsibility of local governments to provide urban residents with high-quality municipal infrastructure and basic public services according to the division of duties. Currently, with the exception of a few first-tier cities that have entered the mature stage of urbanization, most of the second- and third-tier cities are still at the accelerating stage of urbanization. The vast majority of less developed regions are still in the initial stage of urbanization. There are prominent problems of imbalances and inadequacies in terms of public infrastructure and its relevant provision of basic public services. The inherent demand for overcoming shortcomings and high-quality development is particularly strong. It is estimated that China will have less than 20 years of peak and opportunity period for infrastructure investment and construction. A city’s municipal infrastructure constructed during this period will determine the hardware level of the infrastructure system that locals of several future generations can use. This is the historical mission and responsibility of local party committees and governments. (2) Even if the municipal infrastructure outsources specific tasks through modes like PPP, the political responsibility of local governments will not be substantially reduced. Municipal infrastructure includes economic infrastructure such as urban roads and bridges, urban rail transit, water supply, drainage, flood control, sewage treatment, fuel gas, heat, landscaping, environmental sanitation, road lighting, and waste disposal (including industrial, living, constructional, medical waste, etc.) It also includes a wide range of social infrastructures such as education, scientific research, health, culture, sports, leisure, administration, public safety and so on. The initial investment scale of these facilities is large. The coordination of construction is difficult and the operation and maintenance are highly correlated. They are significantly affected by urban planning decisions and urban development potential. Without the strong coordination and promotion of local governments, commercial institutions cannot complete the construction, operation and maintenance work of such facilities successfully. Even if specific tasks such as construction, operation and maintenance

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are outsourced to a commercial organization through market-oriented modes such as PPP, the commercial organization cannot fully bear the serious consequences of being responsible to the people. The political responsibility of the government still cannot be substantially transferred or reduced. To this end, the local government needs to execute comprehensive and strict regulation and supervision of the project company and its related parties in order to be responsible to the people. (3) Municipal infrastructure investment and financing should rely on government credit. This is the logical starting point for analyzing the constructive debt and PPP payment problems of local governments. Due to the foresightedness, systematicity, and concentricity of it, the municipal infrastructure investment and construction is the necessary prerequisite and material foundation for starting and accelerating the development of local urbanization in an all-round way. If the investment is made strictly in accordance with how much money is available, the development of the city will miss the period of historical opportunity and inevitably lag behind surrounding cities. For the huge debts of large sums of investment funds and its accumulated capital cost, they can be expressed as the government debts, borrowing debts of financing platforms or other enterprises, and payment obligations of government in the PPP mode on accounts even if different project implementation methods are adopted. But In the end, the repayment of these debts can only depend on the comprehensive financial resources of the local government and the users’ payment. These debts are constructive debts undertaken by the local government on behalf of local users and are debts that cannot be transferred and repudiated. In the early and middle stages of urban development, large-scale accumulation of liabilities is inevitable. Denying the existence of such huge debts is irresponsible and against basic facts. To control local government debt, it is necessary to control the scale of investment, the pace of project implementation and the cost of financing, and to control the overall cost of the project’s whole life cycle through an efficient implementation mode in order to prevent unnecessary leakage. Simply and ruthlessly separating the investment and construction of municipal infrastructure from the credit of local governments would result in more difficult financing and higher financing costs. Ultimately, it will increase the payment pressure on public finances and users in the future. It needs to be emphasized that local government credit is the basis of the local credit system. Local governments should cherish in particular the credit status and investment environment of the region, gain a high degree of trust of various social capital including financial institutions, and lay a foundation for the financing availability and low-cost financing of the region. If the foundation is not solid, financial institutions will avoid the region and regard it as a high-risk area. Various market entities would fall into the dilemma of difficult and expensive financing. No only the infrastructure area, the local economic and social development would also suffer from severe damage.

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3.2 Government Purchase Services and Franchise The PPP mode is implemented in the field of municipal infrastructure, with government purchase services as the mainstay and franchise as the supplement, but neither of the two should be neglected. (1) Without a clear payment mechanism and predictable project cash flow, PPP projects cannot be financed. A PPP project has a large investment scale and a project company is usually set up as an operating carrier of the project, which is called a special purpose vehicle (SPV). As a newly established independent legal entity, the project company itself lacks project experience, financial data of previous years and the entity’s credit rating. The project company mainly relies on a set of mutually supportive agreements and contracts signed with the government, shareholders, financial institutions, construction enterprises, operation managers and so on. And it aggregates all kinds of resources to undertake the responsibilities of investment, construction, operation, maintenance and so on in the entire life cycle of the project. Investors other than the project sponsor need to analyze the contract system of the specific PPP project, evaluate the cash flow of the project company, and use it as the decision-making basis to provide funds to the project company. If the contract system fails to provide other relevant parties with sufficient confidence in the project’s expected cash flow, the project sponsor will be required to provide credit or financial guarantee for the financing of the project company. According to accounting standards, the sponsor’s asset-liability ratio will be increased, which is hard to bear. The number of projects that can be undertaken is very limited. (2) In the field of municipal infrastructure, government payment is the main payment mode for PPP projects, and user payment is only applicable to a small number of projects. In various related fields of domestic municipal infrastructure, the user payment mechanism has generally not been established except for a few areas such as water supply, sewage treatment, fuel gas, heating, public transportation and so on. Even in some industries where payment mechanisms have been established, such as subways, buses, etc., the charging standards are far from offsetting all investment, construction and operating costs. From domestic and foreign experience, the potential and space for recovering the investment through user charges are very limited in the field of municipal infrastructure. Many areas are indeed inappropriate or lack conditions for the establishment of user payment mechanisms that can cover costs, such as municipal roads, landscaping, drainage networks, subways and so on. Overall, more than 80% of municipal infrastructure investment cannot be recovered through direct user payment mechanisms. User payment is now not and will not become the main investment recovery method for municipal infrastructure. If the PPP mode is to be promoted in the field of municipal infrastructure, the main implementation mode is government purchase services and the franchise is only applicable for a small number of projects. The PPP mode of government purchase is the mainstream mode

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in the UK and Japan. It needs to refer to international experience to improve and standardize itself and it is inappropriate either connive or block from time to time in policy. (3) Relying on government credit to support commercial credit can significantly improve the possibility of project financing and substantially reduce financing costs. Municipal infrastructure PPP projects supported by government payments appear to be the commercial credit based on the cash flow of the project company, but the underlying credit is local government credit at the project location based on the government’s ability to perform and pay. Lack of solid government credit, commercial credit is illusory like the shadow of the moon in water, which is the most important reason why many so-called contracted PPP projects failed to gain support from mainstream financial institutions. Failure in financing will immediately lead to a halt of the project. Even if you start and complete the project relying on high-cost fund, the compound interest effect of excessive financing costs for decades will be particularly horrible, which will eventually cause the break of the project company’s capital chain and lead to financial risk. Only by relying on the commercial credit of the project company supported by a solid local government credit can the financing of the PPP project be secured, and the financing cost reduced. In this way, the PPP project can have conditions to be implemented in a standardized way and come to a successful end.

3.3 Current Fiscal and Long-Term Comprehensive Financial Resources The government’s ability to pay for PPP projects relies on not only the financial resources in the current budget but also the long-term comprehensive financial resources with land finance as the main resource. Land finance includes land transfer fees, value-added income from core land blocks, and the universally levied property tax in the future. (1) Different cities are at different stages of urbanization and face different input and output modes of municipal infrastructure. Urban development undergoes three major phases: the start-up and breakthrough period, the rapid development period and the mature and stable period. The development stages of urbanization in different regions of the country varied to a large degree. There are significant differences among cities of varying developmental stages in terms of project investment, debt increase, and comprehensive financial resources. After more than 20 years of development, a few cities represented by Beijing and Shanghai have entered a mature and stable period. The size and population of urban built-up areas are basically stable. The annual investment scale of new infrastructure projects in central urban areas has remained stable or even declined. Comprehensive

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financial resources, including land finance, have been able to digest the outstanding debt accumulated in previous years, and the scale of the total debt has begun to decline year by year. Some second-tier and third-tier cities represented by Wuhan, Changsha, and Zhengzhou are in the period of accelerated development of urban construction. The size of the city is expanding rapidly, and the urban population is rapidly increasing. Infrastructure investment and new debt are also increasing rapidly. The comprehensive financial resources including land revenue are also rapidly improved. The cities and counties where a large number of municipal governments are located in the central and western regions are generally still in the start-up and breakthrough period of urban development. They need to focus on investing in advance to build a set of backbone infrastructures to open up the urban structure. Land prices and other financial and tax resources have not yet taken shape. The current fiscal budget can only meet the demand for basic expenditures like salaries, and it is even difficult to maintain daily operations of government institutions. Infrastructure investment mainly relies on borrowing, and it can only maintain the capital chain by borrowing new debt to pay back the old. It is wrong to implement the same policy for cities in different stages of development no matter what policy is adopted. (2) The cost of the outstanding and new debt should be actually reduced, and the outstanding debt should be gradually digested over a longer period of several generations. The fact that there is a huge outstanding of local government debt should not be avoided, and there is no need to panic. We should take the long-term perspective, mitigate the risk of outstanding debt and gradually digest it. Firstly, look at it historically. Over the past 20 years, China has attained unprecedented achievements in urbanization. It is impossible to achieve it without the support of outstanding debt. Secondly, look at it from a comprehensive view. The centralized and advanced construction of municipal infrastructure provides prerequisites for area development, investment attraction, and livelihood projects. It will also bring the long-term, universal and substantial enhancement of the land and real property value, corporate tax, per capita GDP and life quality. These enhancements will increase the comprehensive financial capacity of local governments, thereby improving long-term debt repayment capabilities. Thirdly, look at from a developmental view. Urbanization is a great cause that requires continuous efforts and supported by local government credit. As long as there is continuous and orderly development, the per capita GDP and overall financial resources can generally double every 10 years. When the urbanization reaches the capital break-even point, the debt will not continue to accumulate, and the comprehensive financial resources and solvency will continue to increase. The debt repayment burden and pressure of the city government will be lighter and lighter, and the outstanding debt can be gradually absorbed. Consideration of the fund balance in the field of municipal infrastructure should take the long-term perspective of the entire life cycle of relevant infrastructure and the hundred-year trend of urban financial resources. This is a long-term development issue that involves generations of people for hundreds of years, rather than a current fiscal issue. Intergenerational equity and cost-sharing should be considered. Relying on the current generation of

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people to complete the capital recovery of such a huge amount of infrastructure investment and debt repayment is not necessary and impossible. (3) The long-term growth of comprehensive financial resources of local governments is the mainstream resources that supports the recovery of municipal infrastructure investment. Local governments hold huge amounts of public resources with value-added potential and market-oriented operational value, among which planning rights and land resources are the most valuable public resources of local governments. It is definite to expect the growth potential of long-term comprehensive financial resources, including land finance. The mechanism of “land revenue returns to the public”, referred to as “land finance” for short, is the mainstream resources for investment recovery of municipal infrastructure projects in various countries since the Industrial Revolution. It is the common result of human civilization and need not be avoided. The rise in house prices caused by complex factors such as currency expansion, supply suppression, industry anomie, and market hype cannot be simply attributed to land finance. The domestic land finance includes three aspects of the mechanism of “land revenue returns to the public”. The first is the land-transferring fee system. In China, urban land is owned by the country, which is called state ownership. Local governments should effectively monopolize the primary land market, and control land development costs such as land acquisition and demolition, and supporting facilities. The land-transferring fee system can raise huge amounts of funds as soon as possible to support the start-up and progressive development of the infrastructure construction of new urban area development and old city reconstruction. It is the economic foundation for the rapid development of domestic urbanization in the past 20 years. The second is the property tax system. Implementing the real estate tax system, local governments can continuously, stably, and universally share part of the land appreciation and real estate value brought by the improvement of infrastructure and public services. And it is a system to ensure that land value rise belongs to the public. The inherent logic and main purpose of levying property taxes are to establish a mechanism for internalizing the external effects of municipal infrastructure investment, not just to reduce housing prices. China should implement the property tax system as soon as possible, lead local governments to change the large-scale urban development mode that is over-dependent on the development of new areas, and pay more attention to the renovation and transformation of existing urban built-up areas. If the property tax system is absent, all the benefits of land value rise in the future a few decades belong to the house purchasers or land developers after the one-time transfer of land. In fact, the loss of public resources is likely to cause the prevailing housing speculation and unfair social wealth distribution. There is no stable source of repayment for the outstanding debt of municipal infrastructure. The third is differential land rental income. Due to urban planning and adjustment, the value of certain land blocks may increase several times or dozens of times. Such huge land value-added benefits should belong to the local government. Cities such as Shanghai, Chongqing, and Shenzhen have gained rich experience in

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transportation-oriented development (TOD) and environment-oriented development (EOD). While advancing the construction of public facilities such as transportation hubs, the government-owned financing platform achieved a huge land differential income of the core land parcel value rise brought by the adjustment of regional planning. This provided huge funds for the repayment of the existing government debt. The relevant experience is worth summarizing and should be generalized throughout the country. Successful cases include Hongqiao transportation hub, Century Avenue subway station cover, Lujiazui subway cover, Xinjiang Bay City development, the construction and reconstruction of both sides of the Huangpu River, Chongqing Steel relocation, and Qianhai subway station cover.

3.4 Financing Platform and PPP The financing platform is the most suitable mechanism to realize the value of public resources including land resources in the current fiscal and taxation management system. (1) The core responsibility of the financing platform is to gather, integrate, cultivate and realize the value of public resources including core land resources. Land finance is not simply land requisition and sale, but highly professional, systematic, and long-term work across the whole urbanization cycle of nearly one hundred years with a high demand for comprehensive ability. It requires professional institutions to undertake operations. In the early stages of urbanization, land prices were low, and financing platforms shouldered the responsibility to gather, integrate, cultivate, and realize core land assets with greater potential for future value increase for local governments while raising large-scale funds to invest in infrastructure. This is the irreplaceable institutional advantage and core responsibility of the financing platform. However, most local governments in China do not know enough about the development cycle and fundamental laws of urbanization. Due to the urgent need for funds to turn the situation around, they tend to prematurely sell land at a low price, and the price of core land resources with great value-added potential in the future was also very low. However, the cost of land acquisition and house demolition and capital costs are not well controlled. Thus, the utilization efficiency of resources such as land and funds are very low. Local governments have introduced large amounts of funds at a high cost for infrastructure investment and construction. As a result, local governments have accumulated debts, but they have not been able to obtain due land revenue, and they lack a source of follow-up debt repayment. Low-efficiency overdrafts and waste of valuable land resource benefits in the coming decades are particularly serious. (2) Giving play to the advantages of the system to cultivate core competences of and cooperating with market players with market mechanism and management advantages.

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With the support and coordination of main leaders of the local party committee and government, it is proposed to follow relevant national laws and regulations, learn from the mature experience of domestic similar cities, and integrate the currently decentralized resources, business and talents in various places in accordance with the reform direction of “substantialization, standardization, professionalization, and marketization” so as to transform and develop into a state-owned investment company with unified group operation. The main focus should be on the cultivation of core competences of the coordination and integration of public resources, major project reserve planning, project life-cycle management, lower comprehensive-cost financing, highefficiency and active management fund, asset management, capital operations, investment promotion, external cooperation and so on. A government investment company that fosters sustainable development, integrates the superior resources of all parties and plays a leading, organizational and bottom-up role should be built. The newly formed government investment company will play the three core roles of major project investment and construction entities, urban comprehensive operation entities and public resource integration operation entities. All places should effectively integrate resources with market operating potential distributed in various government departments, public-sponsored institutions, financing platforms, and state-owned enterprises. Except for the stock equity of state-owned enterprises, the integrated resources include, but are not limited to, core land, real estate, commercial facilities, operating assets such as various markets and trading facilities, as well as franchise rights for operating projects with monopoly characteristics such as public utilities, gas stations, advertising rights, and parking lots, forming three major elements of resources, i.e. land and real estate, franchise rights, and state-owned assets. (3) The financing platform plays a leading, supporting and promoting role in the stability and sustainability of the PPP mode. Financing platforms with strong comprehensive capabilities in developed regions should “go global” to serve the country and even the world, and become the main merger, acquisition and integration subject of the social capital and its industries of marketization projects such as PPP, on the basis of dealing well with the conflict of interest between the identity of local financing platforms and the identity of foreign market entities. Only when the financing platform and land finance are well established can local governments have qualified implementation entities, reliable payment capabilities, effective contract management, and performance monitoring capabilities, and can have the basis to do a good PPP project.

3.5 Main Recommendations and Appeals (1) Reduce the expectation on PPP, realize stability and sustainability, and form a new investment and financing pattern of synergy and symbiosis.

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Regarding the PPP mode, on the one hand, we should recognize the advancement of the PPP mode that combines the institutional advantages of public institutions and the management advantages of commercial institutions and actively explores it in regions and industries with feasible conditions. However, we must not push hard in the form of a campaign without having necessary conditions. On the other hand, we must recognize the rigor of the operation of the PPP mode and the complexity of the decades-long public governance process. We must not oversimplify and blindly reduce the initial work time and consulting costs or put too much emphasis on the pursuit of project scale and sensation. In a relatively long period of time, the transformation and upgrading of the investment and financing system of municipal infrastructure projects will be gradually realized, and a variety of modes such as local government bonds, financing platforms, government purchase services, franchising, and comprehensive area development will give full play to their advantages and form the new pattern of synergies and symbiosis. (2) Standardize the government-purchase-service type PPP mode, consolidate the government’s ability to pay, and cancel the one-size-fits-all payment limit of government. For individual projects in the field of municipal infrastructure where it is normal to implement without a user payment mechanism, local governments should do the preliminary work well, clarify the boundary conditions for project cooperation, and conduct rigorous program selection. For projects that are indeed necessary to adopt a PPP mode, social capital should be selected in accordance with standardized procedures, and government-purchase-service type PPP contracts should be signed. For such projects, it is possible to establish a payment mechanism with a gradual increase in the payment amount per period or to lengthen the payment period for cooperation, reduce the payment pressure on local governments in the first few years, and ensure that local governments have the ability to pay according to contracts. It is proposed to abolish the nationwide one-size-fits-all policy that government payments account for 5%, 7%, and 10% of the current budget. If it is necessary to set fiscal payment limits, each provincial government shall determine based on their actual situation. Local governments should practically avoid large-scale PPP projects with huge sums of money tied up by many projects and ensure that the financing of the project and implemented it in accordance with the contracted schedule. For projects that cannot be carried out according to the original contract, it is recommended that the parties negotiate to terminate the contract as soon as possible. (3) Streamline the user payment mechanism, explore the comprehensive income of the project, and actively carry forward the franchise PPP mode. The franchise has more than 30 years of practice in china and much social capital and successful cases that have stood the test of time. It can be actively promoted in areas with conditions. Projects of high-end-service level in the municipal public areas

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like natural gas supply, urban water supply, sewage treatment, garbage treatment, urban heating, and transportation hub and in the public service field including multilevel elderly care, nursing, medical, non-government funded education (including pre-school education, basic education, vocational education, higher education), and wisdom city, can establish a user payment mechanism that can cover the entire cost of the project with a reasonable income if they have conditions, make full use of the mechanism and management advantages of commercial institutions, and can also explore comprehensive income of other aspects of the project. These projects are suitable for the franchise mode. (4) Define the legal status of the LGFVs and grant them the core function of realizing the value of public resources. It is recommended to draw on the experience of developed countries and make it clear through legislation that financing platforms are not general commercial institutions, but public institutions that undertake financing tasks of municipal infrastructure investment and integrating, enhancing, and realizing the value of various types of public resources on behalf of governments. The municipal and county governments can only establish or retain a financing platform supported by the credit of the government at the same level. It is proposed to withdraw a large number of other existing financing platforms in various places. For those that cannot be withdrawn, the leftover issues should be dealt with and any form of debt and investment and construction tasks should not be added any longer. For some of the existing financing platforms that do have market-oriented transformation conditions, divest their existing government debt, decouple from local government credit thoroughly, and transform into marketcompetitive commercial institutions. Provincial governments can organize financial institutions to restructure debt and provide the necessary support to municipal and county governments with serious debt problems. (5) Trim the PPP policy in an all-round way since 2013 and reconstruct the policy and regulatory system and working mechanism of the PPP mode. To reconstruct the PPP policy and regulatory system, it is recommended to pay attention to several points. First, we must pay attention to the hierarchy, division and cooperation of laws, policies, and self-discipline rules under the statutory law system and should not confuse them. Second, carefully formulate policies, maintain policy stability, guide all parties to have reasonable expectations, pay attention to the overall coordination and synergy of policies, and prevent the conflicts and contradictions of documents between different ministries and commissions, between different departments and bureaus, and among the same departments. Third, the policy documents of the ministries and commissions should not be too specific, too detailed and comprehensive. It is enough to grasp the key and bottom-line issues. Reasonable policy flexibility should be maintained to give local governments and market entities sufficient innovation space. The fourth is to summarize theoretical research results and practical experience at home and abroad and extract the key points from the policy and make it the law, but the legislation should not be hasty. Regarding the working

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mechanism of PPP, the ministries and commissions should provide good policy guidance. It is not appropriate to interfere too much with local governments. At the level of local government, it is recommended that provincial governments establish special PPP implementation agencies to coordinate and organize the implementation of PPP projects across the province so as to enhance the professionalism and standardization of project implementation.

Chapter 4

A New Exploration on Infrastructure Investment and Financing Mode Shijian Liu

Abstract This report briefly analyzes the overall situation of China’s infrastructure investment and financing in 2018 from the aspects of legislation, governance, PPP projects and market relations. Starting with the four dimensions, namely, obtaining external support based on the nonprofit or quasi-nonprofit nature of PPP projects, capturing value based on the externality nature of PPP projects, obtaining equity interest based on the conditioned delivery of the government rights and obligations, and obtaining debt financing based on the nature of commerciality, this report sorts out the inherent logic of infrastructure investment and financing comprehensively. Based on the above, this report sets forth the direction of the research and application of relevant mainstream ideas. By combination with the Chinese perspective of PPP, this report proposes relevant suggestions for the reform of China’s infrastructure investment and financing system and mechanism, i.e., with the XOD concept as the main guide, creating an investment and financing mode that can realize an effective balance between the central and local governments, market relations, and ownership relations, to lay a solid foundation for China’s sustainable development in the next ten to twenty years. Keywords Infrastructure investment and financing · XOD concept · Value capture Infrastructure projects have always been an important tong for sustaining China’s socio-economic development. From the central government to local governments, policies to promote large amounts of investment have been frequently issued in the past two decades. In recent years, affected by the overall economic environment and financial risk prevention and control policies, infrastructure investment and financing is facing an unprecedentedly new situation. Problems and challenges co-exist, and it is unprecedentedly difficult to break through these difficulties.

S. Liu (B) Center for Public-Private Partnership, Tsinghua University (TUPPP), Beijing, China e-mail: [email protected] Industry Development Department, TUPPP, Beijing, China © Social Sciences Academic Press and Springer Nature Singapore Pte Ltd. 2020 T. Wang et al. (eds.): Annual Report on The Development of PPP in China, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-15-5724-8_4

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4.1 Overview of Infrastructure Investment and Financing in 2018 The main features of China’s infrastructure investment and financing in 2018 are as follows:

4.1.1 Progress of Legislation Is Slowing Down, and There Are Uncertainties in Governance and Investment Expectations The “Regulations on Public and Private Capital Partnership in Infrastructure and Public Services (draft for comments)” was issued in July 2017, causing a heated discussion. With the promulgation of rules regulating the development of PPP, toplevel designs of PPP basically stopped in 2018, not to mention the systemic legislation that needs to be followed up. On March 14, 2018, the General Office of the State Council of the People’s Republic of China issued the “Legislative Work Plan of the State Council in 2018”, which explicitly mentions that the “Regulations on Public and Private Capital Partnership in Infrastructure and Public Services (Drafted by the Legal Affairs Office of the State Council, the National Development and Reform Commission, and the Ministry of Finance)” is to be submitted to the Standing Committee of the National People’s Congress for deliberation. But the above-mentioned regulation eventually failed to be promulgated that year.

4.1.2 Focusing on Their Respective Role, Competent Ministries and Commissions Strengthen Risk Prevention and Control, as Well as Risk Diversification Under the trend of stricter and tighter financial risk prevention and control, in 2018, competent ministries and commissions have all responded to the call of the central government, to prevent and control the financial risk in a stricter and tighter manner by focusing on their respective role and starting with their own work. The Ministry of Finance and the State-owned Assets Supervision and Administration Commission have both made progress in their PPP-related work. The National Development and Reform Commission continued to support private capital and encourage the revitalization of existing assets, meanwhile emphasized regulating the performance and pointed out debt risks. The “reply to the No. 2915 proposal (No. 144 proposal relating to economic development), namely, the ‘Proposal on Establishing a PPP Exit Mechanism’ submitted by the Fifth session of the 12th national committee of the

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CPPCC” focuses on risk diversification, which is undoubtedly a policy signal of the same direction.

4.1.3 PPP Fluctuates, and Government-Paid Projects Linger Among the PPP projects n implemented since 2014, 3,317 are government-paid projects with an investment amount of 3.4 trillion yuan, covering 38.0% and 26.0% of the project management database respectively. However, the number of PPP projects declined as quickly as it bloomed. The government-paid projects have first undergone drastic adjustments in 2018. Some provinces and cities have directly closed the channel of entering the project database for such projects, and some projects already in the project database also face difficulties in being withdrawn from the database or failing to be financed.

4.1.4 “Major Practices” Are Limited, and New Market Relations Need to Be Formed In recent years, from the aspects of industry categories, project types, financing methods, payback mechanisms, performance evaluations, exit paths, etc., market players and market rules in the field of infrastructure investment and financing have presented a lively scene of cross games, thus forming a series of major practices including “debt invested in the name of equity”, “small equity carrying large debt”, fund investment, and share repurchase. As for the innovations in investment and financing modes (typically means a collision with existing policies and regulations), an inevitable result is the “strategically” shrink of certain taboos or red lines (such as the two separate route of land revenue and expenditure) at the compliance level under certain conditions„ and, some gray areas and “innovation modes” appear, including some disguised financing methods that bypass PPP, such as “government purchase services”. They can only find other way-outs after related prohibitions are released. The above is the normal practice of market relations in the PPP field before the prevention and control of financial risks. under the environment of financial risk prevention and control, the newer, compliant and stable market relations have not yet been formed, and most market players are still waiting. Generally speaking, traditional approaches to promoting infrastructure investment, such as government direct investment, platform financing, investment promotion, concession, or PPP, seem to be inadequate or no longer considered strategically effective. The momentum of all major infrastructure investment approaches has obviously weakened. What is relatively clear is the insistence on the dual goals of local debt control and local economic development. As the common focus of the two goals, infrastructure has naturally become one of the areas that are most likely to

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break through the current difficulties, and thus are worthy of being observed. Correspondingly, the issue of reform of the infrastructure investment and financing system and mechanism needs to be put on the agenda again.

4.2 The Inherent Logic of Infrastructure Investment and Financing There are many ways of classification of infrastructure. But no matter how infrastructure is classified, the strong nonprofit or quasi-nonprofit nature, and the weakness or lack in the ability in the profitability are the two most prominent characteristics of infrastructure projects, and they also determine the inherent logic of the system and mechanism of the infrastructure investment and financing.

4.2.1 Logic One: Obtaining External Support Based on the Nonprofit or Quasi-nonprofit Nature of Infrastructure Based on the nonprofit or quasi-nonprofit nature of infrastructure projects and their significant impact on urban and rural socio-economic life, this kind of projects are particularly in need and have good reasons to receive support from the government for free or at low cost in all aspects. These supports mainly include government direct investment, fiscal subsidies, tax preferences, and policy-oriented financial support, etc. It can be said that whether the government can fulfill its responsibility and have the capability to support or subsidize the infrastructure in case of the lack in capital determines the “quality of service” of most infrastructure projects in their entire service cycle. In China, the central government is stronger in policy guidance, while local governments are stronger in policy implementation. Investment and financing modes that can pave the way for infrastructure projects and create sufficient space for policy support and project operation can generally lead the way in a specific period. Platform company invested by local government for such purpose (Chengtou), BT, BOT, government purchase services, PPP and the like are all of this kind. Those that are contrary to the development trend of the policy, even if they can do well by catering to the short-term demands of local governments, can hardly escape the fate of being regulated or abandoned in the current national conditions.

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4.2.2 Logic Two: Capturing Value Based on Externalities Infrastructure projects have strong externalities, and the beneficiaries affected by their external effect mainly refer to the beneficiaries benefitted from land value appreciation and property development income brought about by the improved infrastructure conditions, which include but not limited to local governments, real estate developers, various commercial entities, real estate owners or long-term leasers, etc. Based on the concept of “investment should be borne by the beneficiary”, a beneficiary-bearing system suitable for the local legal and policy framework can be formulated and implemented to share the fruits of regional economic growth brought about by externalities of infrastructure projects (mainly reflected in related land value-added income and the growth of taxes and fees for specific beneficiary groups) and form the related value capture brought about by infrastructure projects. This should become one of the preferred paths for investment and financing of such projects. In this regards, the concepts of the Transit-Oriented Development, the TransitOriented Renewal, the Environment-Oriented Development, and the X-Oriented Development with the focus on Value Capture mechanism as the core, the establishment of mainstream theoretical framework based on the value capture mechanism and the application and the promotion of the value capture mechanism in policy and practice should be the priority among priorities. Hopefully this can draw attention from policy-makers and policy executors.

4.2.3 Logic Three: Obtaining Equity Interest Based on the Conditioned Delivery of Government Rights and Obligations On one hand, investors or operators of infrastructure projects can obtain the equity interest based on the conditioned delivery of government’s rights and obligations (such as franchise rights), and the relevant expected benefits of the project (mainly from government payments or subsidies). On the other hand, the investment of construction companies in infrastructure projects, as well as the arrangements of “debt invested in the name of equity” and “small equity carrying large debt” favored by financial investors also depend on whether the above-mentioned delivery is legally established and remains stable, especially in terms of the guarantee of the source of funds required by the government to pay or to subsidize. Under the same logic, any arrangement that can provide compliance endorsement for such guarantee will be quickly identified by the market and hence become part of the market rules, such as the “two evaluations and one implementation scheme”1 and the entrance of PPP projects into project database. 1 Note:

refers to the compulsory documents required to be prepared and to be approved for PPP projects.

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4.2.4 Logic Four: Obtaining Debt Financing Based on Nature of Commerciality If an infrastructure projects can obtain stable cash flow during its operation period, it can also apply market-based methods such as project financing, corporate financing and the like to raise funds based on the expected returns of project and credit guarantee of the project company or third parties. The above-mentioned market-based methods include bank loans, project income bond, asset securitization, quasi-REITs and the like. Restricted by the fact that such projects have high costs and poor returns, even as for project financing, the financiers often have more requirements for credit enhancement besides the project itself. If the project is to be tested in the capital market, the common compliance flaws of such projects (usually refers to project approval procedures, the completeness and effectiveness of government authorization, the nature of the project land and the ownership of its land use rights, the ownership of project assets and the like) will become a potential obstacle to project financing, which will directly raise the financing costs, and even lead to the failure of financing. As for private investors, the shortcomings of financing difficulties and high financing costs are particularly prominent in this aspect. The intensive and scale operation of infrastructure encouraged by relevant policies recently can, to some extent, enhance the logic of obtaining debt financing based on commerciality. Supplemented by a more complete financing path, the said intensive and scale operation of infrastructure should also be able to break through the funding bottlenecks of some infrastructure projects, but it is fundamentally not enough to free the infrastructure project and its responsible person (investor or local government) from the path dependent on government’s subsidies in case of the lack of money, and thus difficult to answer the ultimate question of where government can raise funds to subsidize the project in case of the lack of money. The question of how to realize the value capture of infrastructure projects and expand the capital sources for the government to subsidize infrastructure projects in case of the lack of capital based on the effective combination of such projects with surrounding social and economic resources and the basic principle of “the investment should be borne by the beneficiary” is derived from the inherent logic of the above-said four kinds of investment and financing of infrastructure projects, which is required to answer.

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4.3 The Mainstream Concept of Infrastructure Investment and Financing Needs to Be Restructured 4.3.1 The Theoretical System Is Weak and the Mainstream Views Cannot Break Through the Bottleneck of Investment and Financing of Infrastructure Projects In terms of specific modes and project practices, domestic infrastructure projects have always been limited to traditional paths such as government direct investment, financing based on government credit, “Take or Pay”, minimum demand guarantees, and the like. In terms of the capital sources of infrastructure projects paid or subsidized by government, it is hard to make breakthroughs, and no mainstream theory can be used as a basis for systematic reform or innovation. This is the case for individual projects, especially for intensive projects and projects in large scale. At present, China has done relatively well in the fields of rail transit and developing new industrial cities. The “TOD” in the field of rail transit and the theory of “city-industry integration” applied in the integrated urban development have spread widely and thus have a wide influence in China. In China, a number of cities have formulated and implemented local regulations related to TOD. A number of PPP projects of new industrial cities, with Gu’an Industrial Park as an example, have also become demonstration projects at state level, and was therefore obtained positive confirmation from the National Development and Reform Commission and the Ministry of Finance. To a large extent, the establishment of theoretical systems and popularization of the relevant concepts, and the promotion and implementation of the corresponding project operation mode, should be complementary and mutually beneficial. However, in the field of infrastructure in China, this relationship has not been fully verified. Let’s take TOD and new industrial cities as an example. The theoretical system of TOD is relatively complete, and the related concepts of TOD can be said to be deeply rooted in the rail transit industry, and there are policy endorsements at the national and local levels. However, it is still hard to put the theory into practice. In contrast, the situation with the new industrial city is exactly opposite. The theoretical system of new industrial cities is not very complete, and the central and local governments have not specifically issued relevant policies and regulations. However, under the guidance of “concept first and practice first”, a large number of projects have been implemented in new industrial cities. Moreover, it has formed an inverse effect on related policies at the compliance level. The contrast between the two is stark. It doesn’t mean that the theoretical research and the construction of the theoretical system are not important. The reason for the difference is that the relevant investment and financing modes and the problems that the projects need to face and solve are too complicated, and the relevant parties, especially the government, are in a hasty mood. Moreover, it involves the disposal of a large number of existing assets, as well as the combing and gaming of the relationships between different beneficiaries. In this case, it is

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indeed easier for the field of new industrial cities which purely focus on increment to make progress than the field of TOD or TOR which has to focus on both increment and stock. However, the sustainable development of new industrial cities mode still depends on the establishment of a theoretical system and the matching of policies and legal systems.

4.3.2 “EOD + PPP” and XOD Related Concepts Can Facilitate the Breakthrough of Infrastructure Investment and Financing System and Mechanism On August 31, 2018, the Ministry of Ecology and Environment issued the “Guiding Opinions on Further Deepening the Reform of ‘Decentralization, Central Government Supervision and Refined Services’ in the Ecology and Environment Field to Promote High-Quality Economic Development (MOE [2018] No. 86)”, which explicitly advocates the “EOD” Concept, emphasizes the exploration of eco-environmentoriented urban development modes, promotes the integrated development of ecoenvironment governance with eco-tourism, urban development and other industries, establishes pilot projects and provides support to such projects. Meanwhile, the above-said guiding opinions mentioned that the “Implementation Opinions on Doing a Good Job in Pollution Prevention and Control and Promoting Public and Private Capital Partnership in the Ecology and Environment Field” will soon be released to support PPP projects with strong supportive effects and significant ecological and environmental benefits in achieving the goals of pollution prevention and control. The “EOD + PPP” concept is eye-catching. If infrastructure projects are to effectively break through capital bottlenecks and meanwhile avoid causing major concerns for local debt risk, the relationship between the above-said theories, concepts and project practices should be combed and breakthroughs should be made by policy guidance and pilot projects. In this regard, the Ministry of Ecology and Environment of PRC has taken an important step. However, considering the adjustment pressure currently faced by the PPP mode, this policy does come a little later. If it can be issued a year or two earlier, the situation should be very different. The EOD concept and its homogeneous TOD, TOR, XOD concepts, etc. (collectively referred to as “XOD”), whether combined with PPP or not, are expected to make up for the inherent deficiencies of traditional infrastructure investment and financing methods and concepts from the following aspects, and are worth promoting and putting into practice. Firstly, focus on and resolve an essential issue, that is, where the capital needed by infrastructure projects comes from, where the capital goes, and where the capital is recollected to maintain sustainable development. Only by establishing a reasonable and feasible value capture mechanism to internalize the externalities of infrastructure can the initial requirements of infrastructure projects for the huge amount of funds,

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the efficiency of using the funds and the subsequent replenishment of recycling the funds be revitalized. Otherwise, infrastructure projects will become a long-term consumption of government financial resources. Secondly, be in full accordance with the four logics of infrastructure investment and financing mentioned above, and thus meet the four principles that infrastructure investment and financing usually needs to follow, i.e., the project is feasible, the capital is affordable by government, the financing is obtainable, and the returns are realizable. If the mainstream concept of infrastructure investment and financing system and mechanism can be reconstructed within a certain range, and breakthroughs can be made by pilot project mode to promote the linkage between relevant policy guidance and implementation of the policy, it will be possible to find a new way in the post-PPP era.

4.4 Reform in Infrastructure Investment and Financing System and Mechanism from the Perspective of PPP Despite all changes in infrastructure investment and financing modes in China, the essence remains. On one hand, no matter it is government direct investment, platform company investment, concession or PPP, the endorsement of government credit is indispensable, and the only difference lies in the extent of endorsement or subsidies from government in case of the lack of capital. On the other hand, related laws and policies have played a role in facilitating or restricting specific investment and financing modes in different historical periods due to different macroeconomic development backgrounds and priorities, different perspectives and strengths of the ministries and commissions in charge, and different responses of local governments and markets. Taking concession as an example: the main promoter of concession is the former Ministry of Construction, and its main application area is the municipal public utility. Although the development and reform departments were involved, they failed to make a breakthrough in time at the top-level designs. After the “Managing Methods on Franchising in Municipal Public Construction (No. 126)” was issued by the Ministry of Construction in 2014, the “Managing Methods on Franchising in infrastructure and public utilities (No. 25)”, a super-level regulation issued by six big ministries led by the National Development and Reform Commission, finally came in 2015. Generally speaking, the concession mode has worked as a great demonstration and played a big role in promoting the marketization of the municipal public utility industry. The most important thing is, during the period from 1990 to 2014, the policies and regulations related to the concession mode did not fluctuate too much (the cleaning up of “fixed return” and “BT mode” did not cause too much fluctuation, and the concession mode and local economy was not essentially hurt), local initiative

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and market spontaneity were thus well maintained, and the stability and predictability of policies were good. Looking back at the developing path of PPP in recent years, there are similarities and differences between PPP and the concession mode. Both are initiated and promoted by central ministries and commissions, and both are under protections of regulations and regulatory documents issued by relevant ministries. However, the development momentum, scope and influence of PPP are much stronger and larger than that of concession that is limited to the field of municipal infrastructure. In general, it was brought about by three coincidences, which can also be called three lanes that allow PPP to overtake franchising. First Overtaking Lane: The promotion of PPP mode fits with the dual goals of debt control and development. Debt control and development have been two major policy goals since 2014. They compete with each other and are meanwhile mutually reinforcing. In general, the control of local government debt, especially the prevention and control policies on financial risks since the middle of 2017, is still more dominant, while the policy drivers of development are relatively weak. Even so, as the major ministry responsible for solving the problem of local government debt, the Ministry of Finance, through formulating and implementing a series of regulatory documents, integrated the two very cleverly, and forged PPP mode into an important path for achieving the abovesaid dual goals, which No. 126 regulation and No. 25 regulation failed to do. Second Overtaking Lane: There is a coincidence between the leading department of local debt control (the Ministry of Finance) and the primary party responsible for regional economic development (local government) in terms of political goals and realization paths. In the second half of 2014, the author went to different provinces and cities for research. The strongest feeling at that time was that under “Opinions of the State Council on Strengthening Local Government Debt Management (NDRC [2014] no. 43)”, the newly-issued policy on local government debt, the local economic development has slightly lost the direction. Local government officials at all levels were looking forward to the unity of differences between the ministries and commissions in charge, thus giving them a clear “new runway for GDP development”. Since then, relevant departments have started to make efforts, holding up the PPP banner to lead the “relevant parties” (local governments, investors, financial institutions and industry authorities), and the effect has been surprisingly significant. Third Overtaking Lane: The huge social and economic benefits generated by PPP projects coincide with the interest demands of market entities (construction companies, financial investors and strategic investors). It shares similarities with the concession era, but there are also big differences between them. The main difference lies in the scope of the application of PPP, which has extended from the industry of municipal public utilities that mainly consists of

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“user pay + government subsidy” to most infrastructure and public relation services. A large number of purely government-paid infrastructure projects have been brought into the vision of policy makers and policy executors. This kind of projects have been highly favored by market entities (construction companies, financial investors, strategic investors) for their huge investment volume, “two evaluations and one implement scheme”, and government credit behind the entrance into project database and budget arrangements. In this case, many construction enterprises invested by central governments (Yang Qi), state-owned enterprises and private enterprises that have all changed their direction, combined with the financial investors who have entered the PPP market by “debt invested in the name of equity” and “small equity carrying large debt”, and the strategic investors who have already been in the sector, once made the market extremely crowded and prosperous. The dispute between PPP and government purchase services from 2016–2017 has further demonstrated the substantial expansion of PPP’s sphere of influence and the restlessness of other modes of government act it has brought about. As for the new round of reform in infrastructure investment and financing system and mechanism, if a key path in line with the inherent logic of infrastructure investment and financing can be refined from the above-mentioned “three coincidences”, then by combining such path with the long-and-mid-term trend of economic development at home and abroad, and taking XOD or quasi-XOD concepts as the main direction to comb and integrate the top-level designs of infrastructure investment and financing system and mechanism from top to bottom to build and optimize investment and financing modes that can effectively balance the central and local relations (property ownership and authority of office), market relations (financing of projects), and the ownership relations (participation of private enterprises and foreign capital), and to make it serve the dual goals of debt control and development. If so, the chronic illness that can’t be cured for a long time in the field of infrastructure investment and financing will be cured, which can lay a foundation for the sustainable development of China in the next ten to twenty years.

Chapter 5

Development and Practice Frontiers of PPP in Typical Countries Tianyi Wang

Abstract This article analyzes the development history and practice frontiers of PPP in countries and regions such as the United Kingdom, France, Japan, Singapore and Australia through the use of existing academic literature and databases of international organizations including the United Nations and the World Bank, and explores their enlightenment and references for China’s PPP development. Keywords International experience · Singapore · Japan · US · UK · PPP

Singapore

5.1 PPP Application Overview in Singapore The Singapore government started to introduce the PPP mode for infrastructure construction in 2003. The first PPP contract authorized by the Public Facilities Commission was a desalination project. The Ministry of Finance of Singapore issued the “PPP Project Guide” the following year (2004), which provided guidance on how to successfully structure and manage local PPP projects. Since then, the Singapore government has approved a series of PPP projects. About 70% of the projects have been successfully implemented or are progressing in an orderly manner, but some projects have been suspended or terminated due to various reasons. According to the regulations of the Singapore government, the PPP mode is only considered for projects with a purchase contract value of more than 50 million US dollars. After

T. Wang (B) Government and Social Capital Cooperation Research Center, Tsinghua University, Beijing, China e-mail: [email protected] Tsinghua University, Beijing, China China Everbright International Co., Ltd., Admiralty, Hong Kong © Social Sciences Academic Press and Springer Nature Singapore Pte Ltd. 2020 T. Wang et al. (eds.): Annual Report on The Development of PPP in China, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-15-5724-8_5

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many years of practice, the Singapore government believes that the PPP mode infrastructure projects suitable for Singapore are mainly in the fields of sports facilities, drinking water and sewage treatment, waste incineration, education and medical facilities, highways and government municipal buildings.1 Although the Singapore government vigorously promotes PPP projects, due to the limited local development space and population, the average scale and market potential of Singapore’s local projects are not large enough to attract the active participation of international giants. The Singapore government’s contribution to the PPP mode lies in its positioning as an “Asian infrastructure construction center”, making full use of Singapore’s status as an international financial center, infrastructure, domestic innovative engineering technology solutions, and the entire industrial chain layout of infrastructure construction. Strategic advantages such as internationally competitive companies and high-quality human resources have contributed to the Asian PPP infrastructure market.

5.2 The PPP Policy Background in Singapore The PPP concept was introduced by the Singapore government through the “best sourcing framework” in 2003 after Singapore promulgated the “Government Procurement Law” in 1997. So far, Singapore has no laws or regulations specifically for PPP. The provisions of Chapter 120 of the Government Procurement Law apply to specific types of direct government procurement depending on the structure and nature of the procurement, but not for PPP procurement. Singapore does not have central government institutions or agencies that manage PPPs, but the Singapore Ministry of Finance (“MOF”) plays a key role in PPP projects and is responsible for developing the overall framework of government procurement policy. The Ministry of Finance has formulated related PPP policies and guidelines and strengthened publicity among government procurement entities (“GPE”) to improve the understanding of PPP and work closely with GPE on specific projects. Government procurement entities are generally responsible for selecting private partners and working with them to implement projects. In terms of government policies, the Ministry of Finance of Singapore officially launched the first edition of Singapore PPP Manual in 2004, giving clear guidelines on the concepts, structure, procedures, and subsequent management of PPP. After nearly a decade of practice, the Ministry of Finance updated the manual in 2012. The manual introduces the concept, structure, procurement procedures, and post-management of PPP. One of the ways to research and interpret the manual is to understand the promulgation and revision background of the manual. For Singapore, the government will first publish draft documents for public consultation before promulgating guidance documents. In addition to the documents to be promulgated, the consultation documents will also raise issues that the government considers important, seeking feedback from the public. After receiving public feedback, the government 1 http://www.pmreview.com.cn/show-43-95-1.html.

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will publish the feedback and proposed amendments again until the legal documents are promulgated. Similarly, the same procedure is usually followed when a file is modified.

5.3 The PPP Practice Features in Singapore The key to the success of Singapore’s PPP is the government’s implementation of a rigorous procurement process. Singapore’s government procurement process requires that each key procedure should seek relevant approvals and distinguishes between key procurement roles and responsibilities in order to ensure that there are sufficiently effective supervision and balance throughout the procurement process. Singapore’s procurement process is roughly divided into four stages: Sourcing, Evaluation, Approval of Award, and Contract Management. (1) Sourcing Approval from relevant government institutions is required before any procurement can begin. Based on the value of government procurement, the procurement process can be roughly divided into Small Value Purchase (the planned purchase value does not exceed 5,000 Singapore dollars2 ), Quotation (the proposed purchase value is between 5,000 and 70,000 Singapore dollars), Tender (the purchase value exceeds 70,000 Singapore dollars). (2) Evaluation The government conducts a comprehensive evaluation of bids in accordance with the principle of Value for Money. The price is only one of the evaluation factors. The remaining factors include whether the bidding plan meets the requirements specified in the bidding documents, the quality of products and services, the timeliness and reliability of delivery, post-delivery services, and payment of fees. After the evaluation, the evaluator makes a recommendation and submits it to the government institution for approval. (3) Approval of award To ensure that the procurement process is effectively monitored and contained, the officer responsible for the evaluation and the one who ultimately approves the award of the contract must be different. Procurement by quotation must be approved by at least one official, while procurement by bidding must be approved by a committee of at least three officials. After the award of the contract is approved, the name of the private party awarded, and the total amount of the contract will be announced on the Singapore Government Electronic Business (GeBIZ) platform. 2 According

to the recent announcement by the People’s Bank of China of the central parity rate of the RMB exchange rate, 1 Singapore dollar is equivalent to approximately 4.84 RMB.

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(4) Contract management Contract management involves a series of contract management matters after the contract is signed. Government institutions will participate in relevant contract management training and work in accordance with the relevant guidelines for contract management in order to: (a) Ensure that the services or products provided by the private party meet the contract requirements; (b) Monitor project costs and make appropriate records; (c) Detect and resolve potential problems in contract implementation as early as possible. In the above procurement procedures, the government’s public bidding is usually to ensure the transparency of the procedure and the fairness of competition, so as to obtain the best public value through fair competition. PPP was introduced by the Singapore government in 2003 based on the “Best Resource Positioning” framework. In other words, in addition to choosing traditional bidding methods, the government can also consider the PPP mode when locating resources to leverage the financing capacity and professional skills of the private sector, so as to achieve better standards for public goods and services.

5.4 The PPP Development Process in Singapore (1) The PPP institution development in Singapore In the process of advancing PPP projects, different government departments in Singapore have played various roles. Depending on the project area, the government departments implementing PPP projects are very extensive (such as the Ministry of Cultural Communities and Youth, the Ministry of National Defense, the Customs, etc.); government contract parties in PPP projects also include public service agencies (such as the Public Utilities Bureau, the National Environment Agency, Information Development Bureau, etc.); during the implementation of PPP projects, the Public Project Management Center under the Ministry of Finance provides advisory opinions to government agencies. Singapore’s Centre for Public Project Management is a subsidiary of Singapore’s Ministry of Finance. Its main responsibility is to provide government institutions with project management services related to public projects. The center evaluates and supervises government projects with the aim of maximizing the overall value of government in public projects. The main responsibilities of the center include: (a) Work with government institutions (i.e. client agencies) to make up project development plans and offer advice on value maximization and design improvement;

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(b) Identify project risks with the client and design a series of risk prevention and reduction measures from the concept stage to the completion stage of the project; (c) Formulate best practices for public projects, summarize project experiences and lessons, and compile them for publication to government agencies. (2) The PPP procurement procedures in Singapore The Singapore PPP Handbook describes the following PPP procurement procedures as an example of how government procurement entities conduct PPP procurement. The first step, letter of invitation. Before formal bidding, the government needs to decide whether to purchase through the PPP mode. Once determined, the PPP contract structure will be drafted together with the PPP consultant and then approved by the relevant government. Subsequently, the government procurement entity will hold a pre-purchase briefing session for the entire market approximately three to six months before the PPP bidding, conduct market tests, evaluate the market participation enthusiasm of the bidding project, and whether the industry has concerns about the PPP structure of the project. If market tests show that the industry believes that the PPP project is not feasible or that the number of competitors is too small, the government procurement entity will re-examine the plan and structure of the PPP contract to decide whether it needs to be adjusted or even canceled. After the market test, the government procurement entity formally invites the private party to submit a letter of intent, marking the official start of the procurement process. Although the government procurement entity does not need to provide a complete PPP contract at this stage, the letter of invitation should at least clarify the main points of the PPP contract, the evaluation factors and weights of pre-qualification, and the specific steps for selecting a PPP private party. The second step is pre-qualification of bidders. According to the evaluation criteria of pre-qualification specified in the invitation letter, the evaluation committee evaluates the technical strength and financial capabilities of the intended supplier. Suppliers that meet the evaluation criteria pass the preliminary selection and are shortlisted for the bidding stage. If the pre-qualification is conducted properly, it will help reduce the number of unqualified investors as early as possible, thereby keeping the cost of bidding at a comparatively low level for government departments and private sectors. However, the evaluation committee shall not deliberately limit the number of bidders entering the bidding stage during the pre-qualification stage. Step three, bidding. The government procurement entity issues a tender notice on the GeBIZ platform, informing and inviting suppliers who have passed the preliminary selection to submit bidding documents for PPP projects. The content of the tender notice includes the PPP contract to be signed, conditions and timetable of the PPP contract, the form of the bid bond, the format of bank confirmation letter, and the format of the letter of intent. Subsequently, the government procurement entity issued an Invitation to

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Tender document and provided as much and more accurate project information as possible. Before issuing the invitation to tender, the government procurement entity should list the questions that potential bidders may ask and draft a reply for internal approval to ensure that the government procurement entity has a firm position on the issues raised during the clarification stage after tender invitation. And any issues between government institutions (such as land planning, land evaluation, etc.) should be resolved before bidding. The proposed bidding period is four to six months (i.e. the period between the date of the issue of tender notice and the deadline for receiving bids). The fourth step is market feedback. The market feedback period runs from the date the invitation to tender is issued to the deadline for bidding, and the recommended period is at least three months. The main purpose of the market feedback period is to help government procurement entities and potential bidders understand the terms and conditions of PPP contracts and allow government procurement entities to modify the terms and conditions of PPP contracts, making PPP contracts more robust and feasible. During this period, any supplier that has passed the preliminary selection may submit a written inquiry to the government procurement entity on any aspect of the PPP project, and the government procurement entity will issue a written response to such inquiries to all suppliers that have passed the preliminary selection. Step five, issue the final tender announcement. If necessary, after the end of the market feedback period, the government procurement entity may issue additional documents to make corrections for the invitation to tender. If it is generally difficult for bidders to submit bidding documents within the prescribed time limit, the government procurement entity needs to consider an extension for at least one month after the issuance of the supplementary documents in order to give all potential bidders sufficient notice of extension. The sixth step, the deadline for bidding. The government procurement entity shall publish the bidding schedule on the GeBIZ platform within three days after the closing of the bid. Evaluation of bidders will be conducted by an evaluation committee, which should include technical, operational, commercial, financial and senior management representatives. When the evaluation is completed, the government procurement entity needs to prepare a detailed bid evaluation report that lists all the evaluation factors and detailed reasons and recommendations for choosing the preferred bidder. Step seven, the award of PPP contract and financial settlement. A PPP project requires a mandatory written contract, and the contract should specify: (1) the risk allocation between the government procurement entity and the private partner and their respective responsibilities; (2) the financial terms of the contract; (3) the agreed performance standards, key dates, the delivery of products or services, and the termination of the contract. It is recommended that government procurement entities consider giving private partners approximately three months to arrange funds for PPP contracts.

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In short, the procurement process in the Singapore PPP Handbook emphasizes ensuring more and stronger potential PPP private partners to bid through transparent and effective procurement procedures and promotes the establishment of robust, balanced and financeable PPP contracts through market tests and feedback.

5.5 Key Experiences of PPP Project Practice in Singapore (1) Singapore case notes Singapore has successfully implemented more than a dozen of PPP projects so far, most of which have been in the modes of DBFO (design-build-finance-operate) and DBO (design-build-operate) modes. The scale of a single project ranges from several hundred million Singapore dollars to several billion Singapore dollars. Mr. Li Yixian, the current senior minister of government affairs from the Ministry of Trade and Industry and Ministry of National Development of Singapore, mentioned at the 2015 Asia-Singapore Infrastructure Roundtable that Singapore’s development is based on small geographical space and financial sustainability: The small geographical space requires Singapore has to plan its urban development carefully and sustainably; financial sustainability means that Singapore’s investment in infrastructure must generate sufficient economic returns directly or indirectly. Based on this, Singapore has produced a series of projects that have been recognized in the global PPP field. Singapore’s first PPP project, the SingSpring desalination project, has won the “Best Desalination Plant of the Year” of the Global Water Awards and the “Asia-Pacific Water Deal of the Year” of EuroMoney. The Singapore Institute of Technical Education completed in 2009 is the first social infrastructure PPP project (vocational and technical education) in Asia. It won the “Asia-Pacific PPP Deal of the Year” of the Project Finance International (PFI) and was included in the “Global 100 Most Interesting Infrastructure Project”. The Singapore Sports City, which officially opened in 2015, is by far the largest PPP project in Singapore and the largest PPP sports facility project in the world, with a construction cost of 1.33 billion Singapore dollars (about 6.65 billion yuan). It won awards of the Project Finance International (PFI) and awards of the World Architecture Festival like the “Best Future Project Award” and the “Best Stadium Award of the Year”. In addition, the governments of Singapore and Malaysia signed a memorandum of understanding in July 2016 to officially launch the Singapore-Malaysia High-Speed Rail Project. In August 2016, the two governments officially solicited partners with largescale PPP infrastructure projects experience. If the Singapore-Malaysia High-Speed Railway Project is successfully implemented in the PPP mode, it will also become a demonstration project in the field of high-speed railway PPP and multi-country PPP cooperation. Besides, Singapore also had failed PPP experience. The “University Town” project of the National University of Singapore was implemented in PPP mode after public consultation. Later, due to diverse interests, various stakeholders and the tight project

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schedule, the government eventually canceled the PPP solution and built and operated it on its own. The Singapore government summed up some negative experiences and lessons in the implementation of PPP projects, such as emphasizing that government procurement entities need to do adequate due diligence investigation into industries, markets, and projects before PPP projects bidding, and seek necessary capital commitments and management approval for the PPP projects in advance, to minimize the possibility of a midway cancellation of the PPP project after its announcement. (2) Summary of practical experience (a) The need for a full evaluation of the PPP mode in advance. Market tests and feedback is conducive to the successful implementation of the project. The Singapore government makes an assessment of areas and projects that may adopt the PPP mode and shall not blindly apply it. For example, the treated water from the Singapore sewage treatment plant will be sent to a recycled water plant for further processing to produce recycled water. If the sewage treatment plant fails to meet the standards of treatment, it will further affect the operating results of the recycled water plant. Therefore, the government evaluates that there is a too high risk for the sewage treatment plant to use the PPP mode, and it still insists on being run by the government itself. Due diligence investigation and market tests conducted before the project’s official bidding provides the government with an opportunity to understand the feedback and concerns of the industry about PPP projects, help the government to re-examine the project plan and make reasonable adjustments, which can not only reduce the bidding costs of public and private sectors, but also lay the foundation for the formulation of a balanced and robust PPP contract and the smooth implementation of the PPP project. (b) The standardized and transparent procurement bidding process is very important for PPP projects. With the establishment of a standardized government bidding and procurement platform and procedures and the guidance of clear laws and regulations, the Singapore government’s bidding for PPP projects is more standardized, open and transparent. This not only establishes a good institutional environment for the PPP market but also ensures that more powerful private parties participate in it and realizes the optimization of value for money for public goods and services. An open and transparent competitive environment has also reduced project financing costs and risk premiums of the projects, keeping the domestic costs of Singapore’s infrastructure and service at a reasonable level. (c) Appropriate risk-allocating and profit-sharing mechanisms are conducive to long-term win-win in PPP projects. Successful PPP partnerships guide providers of public goods or services to meet the requirements specified in the PPP contract. Therefore, the commercial arrangement in the PPP contract must be acceptable to both parties. The government procurement entity can realize the value for

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money, and the private partner can also make sufficient profits from the PPP contract. Excessive transfer of risk by the government sector to the private sector would be detrimental to the realization of the value for money because the risk premium would eventually be passed on to the project by the PPP supplier. Government procurement entities and private partners should also recognize and cooperate with each other throughout the PPP contract period (there is also a monitoring and management relationship of course), which is also the key to ensuring that the PPP project realizes the value for money.

5.6 Problems and Development Trends of Singapore PPP Projects (1) The main problems faced Although Singapore’s PPP has developed well in recent years, there are also some problems that make some contractors reluctant to participate in PPP projects. The first is that the PPP project negotiation period is too long or even postponed. The long PPP negotiation period or procurement cycle is caused by the large scale, complexity and procedural requirements of PPP projects. Such problems not only occur in Singapore, but also in the United Kingdom, Australia, and areas like Hong Kong and Taiwan. This is the major issue that leads to the reluctance of some contractors in Singapore to participate directly in PPP projects bidding. Secondly, the high participation costs have also become one of the issues preventing contractors from participating in PPP project investment. The complexity of PPP projects increases the participation costs of the private sector. The bidding cost of privately financed projects is much higher than the cost of traditional procurement projects, which greatly reduces the attractiveness of Singapore’s PPP projects to contractors. Finally, the confusion between the targets and evaluation standards of the contractor and the government public sector directly leads to inefficient operation of the participants. At the same time, the lack of capacity building and the lack of experienced or appropriate contractors have led to losses in the middle and later stages of the project, which is also one of the problems in the reduction of PPP projects (see footnote 1). (2) Future PPP development trend in Singapore The Singapore government vigorously promotes PPP projects, but due to the limited local development space and population, the average scale and market potential of Singapore’s local projects are not large enough to attract the active participation of international giants. The Singapore government’s contribution to the PPP mode lies in positioning itself as an “Asian infrastructure construction center”, making full use of Singapore’s status as an international financial center, infrastructure and domestic innovative engineering technology solutions, and the entire industrial chain layout of infrastructure construction. Strategic advantages such as internationally competitive enterprises and high-quality human resources have contributed to the Asian PPP

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infrastructure market. Through various measures and platforms, the government is vigorously and actively promoting the development of infrastructure industries in Southeast Asia with the PPP mode as the core and is fully prepared to seize the business opportunities of Asian urbanization.3 On the other hand, there is still much room for development in the PPP mode in Singapore. It remains to be seen whether the Ministry of Finance will take effective measures to standardize the project agreement with reference to the PF2 framework, and how much the standardization differs from the PF2 provisions. In addition, it remains to be seen whether the government will implement projects in other areas through PPP. It is worth mentioning that most of the PPP projects in Singapore belong to the public utilities and waste management sectors so far. After having some successful experiences in implementing PPP, it is worthy of the consideration of the government to implement projects through the PPP mode in areas where there is room for further development.4 Japan

5.7 Overview of the PFI/PPP Background in Japan (1) PFI and PPP Various forms of public-private cooperation related to public facilities construction and public services are generally referred to as PFI/PPP. PFI appeared first. The advanced practice and experience of PFI then continued to broaden the approach of public-private cooperation. The PFI (Private Finance Initiative) is called a system in Japan. It is based on the “Related Laws on the Full Utilization of Private Funds to Promote the Construction of Public Facilities” enacted in July 1999 to use private capital and private vitality to construct public facilities. The law was substantially revised in 2011. PFI is different from traditional public utilities in that it makes full use of private capital, operating capabilities and technical capabilities to provide the same level of services at lower prices, or better services at the same price, in the construction, maintenance, and management of public facilities. PPP (Public Private Partnership) is known as a practice in Japan, which refers to a framework for public-private cooperation. It refers to a wider range of publicprivate cooperation methods including PFI, covering a variety of entrusted methods, the effective use of public assets in cooperation with private institutions, or the cooperation with NPOs and citizens, and the “New Public” concept. The scope and content of PPP are wider than those of PFI. 3 https://www.douban.com/note/573137097/. 4 http://opinion.hexun.com/2016-07-30/185219048.html.

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(2) Division of laws and regulations for public Infrastructure Various industrial regulations clearly specify the main body responsible for the establishment, maintenance and management of public facilities. In the absence of special regulations, the provisions of industry law and common law are also applicable for PFI. PFI projects are mainly divided into areas involving individual public property management law and areas not involving it. The areas involving individual public property management law mainly include areas where managers are limited to public subjects (road law, river law, sewer law, etc.), areas that are in principle municipalities but also allow the inclusion of private capital (watercourse law, industrial water law, social welfare projects, etc.), areas with no restrictions on entry and no distinction between government and the public (road transportation law, medical law, etc.). Areas not involved in individual public property management laws include Article 244 of the Local Autonomy Law and restrictions on the use of the administrative property. (3) Situation of municipalities Modern Japanese society is characteristic of the complexity and diversity of administrative issues. Limited financial resources and slow tax growth have led to increased financial pressure. At the same time, issues like the increasing number of the aging population with few children, the increase of alimony, the new need for maintenance and renewal of the deteriorating public buildings such as disaster prevention requirements have forced the government to rethink how to effectively advance the construction, maintenance and management of public facilities and infrastructure, and the provision of public services. Therefore, carrying out administrative and financial reforms and mobilizing private power is currently the most effective way to increase the rate of public infrastructure.

5.8 Overview of PFI/PPP Practice in Japan (1) Practice overview After 17 years of practice, Japan’s PFI/PPP has become a recognized administrative means in the market. However, the overall number of public facilities is still limited. From a practical point of view, there are only a few local municipalities that have put it into practice. There are three main constraints that restrict the development of regional PFI projects: First, the leadership have different views about the necessity of administrative reform; second, the staff has diverse experience, ability, and knowledge; third, the willingness to challenge new administrative methods varies from place to place. According to data from the Cabinet Office, the number of projects implemented, and the value of contracts have steadily increased in stages from 1999 to 2016. As of March 31, 2016, the cumulative number of projects was 527, with a total contract value of 4896.5 billion Japanese yen. Japan has a total of 1,741 local governments,

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and the PFI/PPP projects implemented are mainly distributed in the municipalities of the metropolitan and larger areas (prefectures). Local governments shoulder the main responsibilities in project management. 75.9% of the projects are dominantly managed by large-area municipalities and local governments, and 15% are directly managed by the central government. The approach of operating projects is mainly BTO (service purchase type). The BTO approach accounts for 71%, and the BOO/BTO approach accounts for 15.7%. The scope of PFI for implemented projects covers a wide range (across 53 areas). Its characteristic is that there are far more projects in the field of social infrastructure field than in the field of basic economic facilities, with education and culture, health and environment, and urban construction as the main areas. The main reason for the comparatively small number of basic economic facilities projects is that public entities have completed the improvement work of social-level facilities in the past. (2) Practice process Japan adopts the regime of local autonomy, so the conceiving, planning, necessary evaluation and implementation judgment of PFI projects are to be decided by managers of public facilities. Except for special regulations of the law, no approval of the higher-level government is required, but a resolution of the parliament needs to be passed. After making a decision of the implementation of a PFI project, the public facility manager follows the procedures of the PFI Law, determines the implementation policy, selects a specific business, and then enters the public recruitment process and determines the private business. Among them, the VFM (Value for money) evaluation needs to be fulfilled by managers, and the data are used to be compared with previous data to infer whether the government department or the private enterprise should be responsible for the project. The implementation of PFI is determined by whether the same service can be offered at a lower price or whether a higher-quality service can be obtained at the same price. LCC: All costs related to the design, construction costs, maintenance and management costs during the implementation period, and operating costs of the project. PSC: The discounted value of the estimated government fiscal burden during the entire implementation period of business when implemented by the public sector itself. PFI-LCC: The discounted value of the estimated government financial burden for the implementation period of business in the case of PFI project implementation.

5.9 The Development Process of PFI/PPP in Japan (1) Institutional advancement It is the duty of the state to develop the institutional framework for project promotion and provide corresponding support. Japan standardizes procedures and

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approaches and entrusts specific practices to managers of relevant public facilities. The specific projects do not need to be certified by the state. First of all, the state and managers have a clear division of work. The state is only responsible for the formulation of policies, guidelines, and operation instruction and does not participate in the evaluation and promotion of specific projects. The managers are responsible for the planning of projects and putting them into practice, including budgeting. It is up to the managers to decide which projects and methods to choose. In terms of the implementation of specific projects, there is no mechanism that requires approval from higher authorities. Secondly, formulate guidelines of standardized promotion, and summarize, organize and release the standard information that should be performed during the project. The PFI promotion meetings summarize the purpose of the system, the outline of the procedures, main provisions of the contract, and relevant business guidelines such as points of attention to a guide and publish it. After the guidelines are formed, various rules will be formulated and published. Third, unify proposals, consultations and dialogue windows from the private sector and set up more efficient institutions. Meanwhile, a permanent platform for project consultation, dialogue, and exchange of opinions, a regional public-private forum, will be set up to help improve the exchange of knowledge, information, opinions, and capacity building of government and enterprises and help the formation of enterprise consortia. Finally, the PFI promoted institutional funding and financing to obtain more financial support. In 2013, the revision of the PFI Law and the establishment of private fund promotion institutions (public-private cooperation infrastructure fund) started financial support for independent accounting PFI projects, such as the start-up effect, reduction of financial burden, and opportunities for private business. (2) Government measures Since Japan implemented PFI in 1999, the government’s policy for implementing PFI projects has been changing. The government adheres to the principle of gradually expanding the scope and depth and from easy to difficult, implement staged deregulation, and gradually improves the operating environment of the project. The complexity of the project, the difficulty of implementation, and the degree of risk for the private sector follow the principle of “from simple to difficult” and “from small to large”. From 1999 to 2005, the project was simple and easy to operate. Practice before promotion. From 2006 to 2010, gradually expand the target areas. Phased expansion of responsibility and risks of the private sector, such as auxiliary services, joint construction, etc. Since 2011, the project has been expanded to include projects with the private sector undertaking more risks and more challenging. A number of government policy measures indicate that the current government still considers making full use of private capital, including PFI, as one of the important policy tools. First, the newly revised Japan Revitalization Strategy was passed in 2016, allowing PFI/PPP to further expand public services and assets to be further opened to the public. The scale of PFI/PPP projects in the 10 years from 2013 to 2022 will be expanded to 21 trillion yen. The target of PFI projects using operating rights such as public facilities or franchises is 7 trillion yen. Second, the basic policy of economic and financial operations and reforms of 2016 stated that in order to

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further expand opportunities for private business investment in the construction and operation of public facilities, efforts will be made to establish and adopt a more effective framework for prioritizing research in local public organizations with a population of 200,000 or more; building and using regional platforms designed to enhance the project-formation ability of private operators in the region; giving full play to the role of promoting institutions like non-governmental funds, and striving to accomplish more specific projects and promote the virtuous circle of regional economies. Third, the resolution of the PFI promotion meeting on December 15, 2015 proposed that local public groups, ministries, bureaus, and public entities with a population of more than 200,000 should formulate priority research regulations based on the priority research guidelines and stipulates relevant procedures of introducing advanced PPP/PPT in a prioritized way. At the same time, there are more and more signs of rethinking the integration and allocation of public facilities in the country and in the municipality. Facing the current situation and problems of public facilities, we must understand the status quo and estimate the future trend, form consensus on the priority of functions that must be maintained, re-examine how public facilities should be configured, and how to respond to the new needs of citizens brought with the change of age structure. The reconfiguration plan for public facilities and the comprehensive management plan for public facilities both focus on shifting from “new construction” to “intelligent use”, making full use of PFI as an important means to achieve the goal.

5.10 Key Lessons from PFI/PPP Practices in Japan (1) PFI practices and typical cases After 17 years of practice in Japan, the project has evolved from the original simple project to a more complex and riskier project. The depth of the project is also constantly expanding, which fully reflects public ideas and thoughts. Most of Japan’s PFIs adopt BTO (service purchase type) modes, with the main body being municipal facilities rather than economic facilities and the protagonists being local public groups rather than the central government. The main requirements of the project are: no demand risk, limited risk transfer, financing methods almost all through debts, public service payment and debt repayment completed through the process, almost close to installments, and locked risks. At present, PFI has been widely accepted by the market. Although it is an approach, the number of projects in the market is more balanced and has been reduced. In terms of the contract behavior, the capabilities of both governments and the private have also been substantially improved. Banks are still the mainstay of financing, and the role of the securities market in this area is still immature. At the same time, the government does not only apply the PFI mode, and is willing to adopt a more diversified public-private partnership (PPP) approach. It is becoming a practice to seek the best approach and integrate various approaches to make full use of land and assets. Of course, since the establishment of

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the project takes time and costs and oppose burdens on both the government and the public, local governments sometimes tend to avoid PFI. At the same time, through the introduction of franchising, those complex projects that have risks in transferring the operating right of existing public facilities are being more commonly used in projects such as airports, highways, and sewers. The prison facilities PFI project of the Japanese Ministry of Justice is a typical case of government-paid projects. The PFI project of Mine Social Rehabilitation Promotion Center, Mine City, Yamaguchi Prefecture, Ministry of Justice, adopts the BOT mode. The cooperation period of the project is 20 years, with the total contract amount 51.7 billion yen. The center can accommodate 1,000 people after it is completed. In this project, the private entity undertakes fund-raising, facility construction, partial maintenance, management, and operation, and owns the entire facility. It leases the facility to the Ministry of Justice and then charges the government for service fees. The operation is jointly operated by the private entity and this administrative subject. This project actually divides the responsibilities of the government and the private with a dual-structured operating mode. The part involving public power is the responsibility of the prison police who are civil servants, while the rest of the business is left to private enterprises. For the BTO mode, the public housing convergence PFI Project of the Tokushima Prefecture is a typical case. The project adopts the BTO mode, with a contract period of 22 years and a total contract value of 5.55 billion yen. This project is mainly to renovate 3 deteriorated residential quarters (300 households). It is responsible for assisting local residents in the resettlement and maintenance and management work caused by the construction and renovation of public housing. Meanwhile, servicetype elderly apartments (independent accounting projects on the premise of land concession by the county government) will be constructed and operated on the spare land. And the construction will be able to play the role of evacuation facilities during the tsunami and the residential area providing services to the elderly. The innovation of this project is to carry out cost-effective management of public housing in three places and then use the spare rooms as various public welfare facilities. It is not a simple construction project but focuses on the additional value. The project seeks to create new added value. This is also a new idea of the local government when transforming public housing, and it also represents some of the features of Japan’s recent new PFI projects. (2) Failed cases and reasons Japan’s PFI projects are not 100% successful. During the past 15 years, the contract that was eventually terminated or partially canceled was only about 2% of the total projects. No major failed cases have been found in recent years. Projects that failed due to different reasons include the City Citizens Hall PFI Project of the Kokubunji Temple, the Cleanup Plant Waste Heat Utilization PFI project of Fukuoka City, HIBIKI Harbor Container Terminal PFI project of Kitakyushu City, and so on. Based on the failed cases, there are direct and indirect reasons for project failure. The direct causes are as follows: First, excessive demand forecasting and misjudgment of demand. Second, there is a growing distrust between the government and

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the public. Third, the lack of rigorous assessment of the plan and the VFM made it infeasible. Fourth, the opposition for political purposes and social opposition. The indirect reasons for the failure are as follows: First, public officials are not used to it and the communication is insufficient. Secondly, there are shortcomings in functional specification orders, and the contract terms are not rigorous. Third, over time, the phenomenon of contract rigidity and increasing deviation from reality gradually emerged, which then led to greater problems. Fourth, there is a lack of urgency between the government and the private.

5.11 Practical Experience and Main Issues of PFI/PPP in Japan (1) Practical experience PFI is clearly an effective administrative method. At the same time, strict governance, fair and impartial assessments and procedures are also important factors in nurturing the market. Care should be taken in concrete practice, and blindness will bring the risk of misjudgment. Japan’s experience shows that the principle of “from small to large”, pragmatic practice and staged maturity are important for the implementation of PFI/PPP projects. First of all, a rigorous institutional framework must be determined. The basic ideas and procedures are stipulated through legislation. Although specific business operations (screening, determination, evaluation, and practice of projects) are directed by guidelines, the final decision-making is up to the managers of public facilities (the selection, implementation, judgment, and evaluation of specific projects are the responsibility and decision of each facility manager). Secondly, start with simple and easy-to-start projects and projects of local public groups. After accumulating some experience and practical knowledge, the scope can be expanded to more complex, national projects and large-scale projects with more risk transfer stage by stage. At the same time, on the basis of continuously accumulating the professional skills and practical capabilities of relevant personnel, the level of projects can gradually be improved. Thirdly, the government and the public build platforms including forums and seminars to exchange opinions and share knowledge and practical experience and cultivate relevant markets in stages. The capacity building, practical experience and knowledge sharing between the government and the public have played a significant role in advancing the project. Finally, it takes a long time to change the mindset of the public sector, and to establish, understand and be familiar with the concept of contracts in actual work. Even now, continuous efforts are needed. While maintaining a competitive environment, it is necessary to expand the scope of market participants through policy efforts. Managers can also select the best methods to evaluate and choose from various options such as restriction-relaxing ways including PFI, designated managers, marketization experiments, special zone systems, and the flexible use of public lands. Japan has currently entered such an era.

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(2) Main problems Although Japan’s PFI has not experienced many failures, there are still many problems with both the public and the private sector. The main issues with regard to the public subjects are as follows. First, the division of responsibilities of public subjects has become the main factor hindering the innovation of modes. Local governments do not consider the whole, but only the locally best. Only consider issues from their own standpoint. For those facilities that are the same as before, they are usually only constructed, maintained, managed and updated in the same way. It will not produce a new idea of management and risk-sharing. Second, maintaining the status quo and empiricism often hinders the innovation and creativity of public subjects. Maintaining the status quo, which is difficult to cope with environmental changes, and empiric thinking have become obstacles to entrusting businesses to the private sector. Third, the disadvantages caused by the public’s excessive expectations and demands on the private. When there is no much room for creative innovation, it is impossible to produce more added value to have too excessive expectations in the private sector. Excessive requirements will only result in higher costs. The idea of forcibly shifting risk to the private in order to seek more VFMs is just an illusion, and it will not bring reasonable risk-sharing. Fourth, there is insufficient awareness of public sector reform. Official-centered thinking hinders the formation of the equal relationship between government and people. Fifth, indispensable political and administrative leadership. In terms of reform awareness within the administrative departments, reducing fiscal burdens, and advancing administrative reforms, the bureaucracy will not take the initiative to adopt new methods without strong leadership at the top. Sixth, the continuous enhancement of skills and capabilities of civil servants (capacity building) is a necessary factor. The improvement of managers’ skills and abilities is directly related to the success of projects. Although it has reached a certain level, it does not represent the whole. And there are still large differences in the capabilities between various types of public subjects. Seventh, there still exist obstacles brought by supervision, necessary deregulation and supervision reforms. There are various institutional problems and constraints in the common law and industry law. Although much improvement has been made, continuous deregulation is still needed. Eighth, the key to revitalizing PFI is to build a mechanism that can give full play to the strength of the private. It is necessary to provide good results standards, contract conditions, etc., which can mobilize the private capacity and vitality. Failure to do so will likely reduce the impulse and desire for the private sector to participate in the project. On the other hand, there are also some problems that need to be solved urgently in the private sector. First, the private is unfamiliar and inexperienced with long-term continuous contracts with the administrative department. When the administrative department is the subject of the contract, what should be agreed upon and to what extent? There are still problems with unaccustomedness and inexperience in this regard. Although much has changed, it is still not enough. Second, the gap in capabilities and experience between different companies is widening. Only some enterprises have accumulated skills and experience, and the gap between the capabilities

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of enterprises is widening. Local SMEs are constantly complaining about reduced business opportunities, and local city councils have cooperated and regarded this as a political issue. Third, the increase in the degree of familiarity brings about a reduction in the range of benefits. With the intensification of competition and the sharing of market knowledge and skills, it is more and more difficult to profit from simple BTO installment lease projects. Some private enterprises have already been reducing and adjusting the scale of their counterpart departments. Fourth, the vulnerability of risk awareness and response measures. The tendency to avoid risks is getting stronger, but the awareness of risks is still weak. Commercial activities cannot be risk-free. And occasionally there is a risk that it will not be executed in full compliance with the contract. For public benefit and publicity, compromises may also need to be made within a reasonable and affordable range. Fifth, good business opportunities are lost due to increased transaction costs. Due to the high costs of research, bidding, and negotiation of a project, private enterprises often choose projects carefully. Tender only those projects that have a high degree of certainty and those that can ensure income, and usually avoid other projects. Sixth, we need to recognize that PFI is a good opportunity for new business. Efficiently transforming inefficient business operations and use intelligence in innovative ideas that cannot be achieved by the administration can often increase their added value. There are huge business opportunities here, and private enterprises should fully understand this. Seventh, the lack of challenging spirit. Taking risks and managing risks appropriately can create added value. Facing challenges will broaden your business. Do not avoid competition and constantly make yourself stronger in a competitive environment will bring more innovation and creativity to yourself.

5.12 Future Development Direction of PFI/PPP in Japan In the future, while actively disclosing relevant administrative information, the Japanese government will strive to seek dialogue and exchanges with the public and regard each other as potential business partners. With this kind of understanding, we can solve many problems we face. It requires more wisdom and efforts from both the government and the public to achieve this. First, thorough information disclosure, publicity, and accountability statements will help build a stable and healthy market. Thorough information disclosure and accountability statement will attract more market participants to take part in the project, thereby building a more stable and healthy market. This is conducive to keeping the PFI active. Second, fairness and impartiality, and the equality between the government and the private are the fundamental prerequisites of PFI. Procedures and evaluation of fair and impartial project and operator selection are very important prerequisites. The government and the private should stand on an equal footing and jointly have a platform where they can exchange knowledge and share information, and opportunities to exchange ideas, which is very effective for the promotion

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of PFI. Thirdly, improving the market participant system and enhancing the trust in government departments are necessary elements for the practice of PFI. The trust and integrity of market participants in institutions and business practices will effectively promote market formation. The willingness and commitment to market creation is the responsibility of the public subject. Finally, the establishment of a mechanism that can effectively mobilize the enthusiasm of both the government and the public can better activate the development of PFI. Creating a good and healthy competition environment and inspiring more free ideas and proposals will bring VFM and promote more active government-private cooperation. A mechanism that can promote the more active participation of the non-governmental will effectively stimulate the vitality of the market. The United States

5.13 Development Background and Process of PPP in the US In the 19th century, the United States had the traditional practice of the private sector providing public facilities such as toll roads and bridges, but PPP was not a common mode. By the beginning of the 20th century, public transportation facilities other than roads were almost entirely provided by the government. At that time, the U.S. Treasury funded road construction through general funds. Until 1956, the US enacted the Federal-aid Highway Act and the Federal Highway Tax Act, which stipulated that the revenue from fuel taxes was dedicated to the construction and maintenance of highways. Therefore, the private sector had no opportunity to enter the field of transportation infrastructure. These two bills provide a financing mechanism for the construction of interstate highways. The funds for interstate highway development come from the Federal Highway Trust Fund (HTF) composed of fuel taxes, tire taxes, and vehicle purchase taxes. The Federal Highway Tax Act stipulated a fuel tax of 3 cents per gallon at the time. The Surface Transportation Assistance Act, introduced in 1982, and the establishment of a public transportation account further increased fuel taxes. Later, in order to fill the funding gap, the Reagan, Bush, and Clinton governments repeatedly raised the tax, reaching 18.4 cents per gallon for petrol and 24.4 cents per gallon for diesel oil in 1993 and are maintained to this day. Since the end of the 20th century, the income of the federal highway trust fund has continuously fallen below the level of annual spending approved by Congress. The growing gap is caused by the following three main factors: First, the actual purchasing power of federal fuel tax revenues has decreased due to inflation; second, fewer Americans drive, and the total number of vehicle trips has declined, with the per capita mileage decreasing significantly; third, the vehicle fuel efficiency has improved. The US government has compulsorily required to increase the fuel efficiency of vehicles by formulating the Corporate Average Fuel Economy standards, which has inadvertently reduced fuel taxes based on fuel consumption. In addition, due to

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the development of electric cars, drivers do not need to pay fuel taxes and related taxes. As a result, the federal, state, and municipal governments have significantly reduced funding for infrastructure development. At the same time, the demand for infrastructure in the US is constantly growing. The infrastructure is aging, requiring a large number of funds for maintenance, repair, and long-term system expansion and updates. Against this background, the US governments at various levels have begun to explore the PPP mode. Since the 1980s and 1990s, drawing on the successful experiences of the United Kingdom, Australia, and Canada in developing PPPs, the US has begun to make more use of private sector resources, accelerate the supply of public goods and services, save funds, improve innovation capabilities, and improve service quality. PPP has thus begun to develop rapidly in the US. In 1998, Virginia used a private company to design and build a $ 42 million prison that set a successful example for the development of PPP in the US. It is estimated that the use of PPP saved 15–20% of construction and operating costs for this project. Six years later, Virginia passed the Public-Private Education Act, which allowed the use of PPP to build schools from kindergartens to high schools. Soon after, the state passed laws to extend PPP to areas such as water supply, parking, university dormitories, and hospitals. The rest of the state, including Florida, follows the practice of Virginia and extends PPP legislation to housing, water, and transportation projects, allowing different levels of governments such as the county, city, and education bureaus to adopt the PPP mode. After the financial crisis in 2007, due to the low fuel consumption caused by the economic recession and high oil prices, the federal highway fund gap of about 35 billion US dollars between 2008 and 2010 could only be offset by general funds, but this is not a long-term solution. To stimulate the recovery and development of US economy, governments at all levels have focused their attention on infrastructure investment. The American Recovery and Reinvestment Act (ARRA), which came into effect in 2009, is an important measure stipulating that a large portion of ARRA’s funds should be dedicated to road and bridge investment. The act was regarded as leverage to include private capital. One of the most important factors driving the development of the US PPPs in recent years is the “Build America Investment Initiative” proposed by the Obama administration in July 2014. This is an important initiative at the government level aiming to promote cooperation between the federal and local governments to increase infrastructure investment and expand the PPP market.

5.14 The Status Quo of PPP Development in the US (1) Quantity and scale From 2005 to 2014, 58 PPP infrastructure projects with a total value of $ 61 billion in the US reached the official announcement stage, of which 40 projects (80%) have been successfully completed with a value of $ 39 billion. Globally, from 1985 to

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2011, US investment in PPP infrastructure projects accounted for only 9% of the global total. The US is relatively slower in PPP development than other developed countries. For example, Canada has implemented PPP since 1991. So far, 243 projects have adopted the PPP mode with a value of 116.8 billion Canadian dollars, or about 90 billion US dollars. There are also significant differences in the application of PPP in different industries of the US. From 1986 to 2012, in terms of the PPP projects that reached the financing stage, they were mainly in three major areas of transportation (295, 42.5%), drinking water and wastewater treatment (232, 33%), and construction (161, 23%). The proportion of PPPs in total US infrastructure investment remains comparatively low. For example, from 2007 to 2013, the amount of public and private capital used for PPP transportation projects was US $ 22.7 billion, which only accounted for 2% of the total US highway investment during the same period (Fig. 5.1). There are also regional differences in the development of US PPPs. The states that have been more active in implementing PPPs include California, Florida, Texas, Massachusetts, New York, and Virginia. As can be seen from Fig. 5.2, as of December 2015, 21 highway DBFOM projects in the US have reached the financing completion stage, and two-thirds of them were in four states: Texas (4), Virginia (4), California (3) and Florida (3). The total investment for these 21 projects was $ 24.6 billion, of which these four states accounted for about 79%. (2) Application area The US adheres to the purpose of pursuing public interests when implementing PPP projects. PPP has been applied to various aspects of infrastructure and services. Building

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Toll road

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Highway

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Railway

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Parking lot

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Seaport

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Others

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Fig. 5.1 Data source: Law Business Research. The number of PPP projects in the US that reached the financing completion stage from 1982 to 2012

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Fig. 5.2 Data source: US Department of Transportation Report. The number and value of highway DBFOM projects under construction or operation in the United States (1993–2015)

Although transportation facilities dominate, PPPs also play a role in the construction and renovation of schools, hospitals and other health care facilities, renewable energy, drinking water and wastewater treatment, government buildings, prisons, police stations, fire stations, and national defense projects. PPP is widely used in the transportation industry, including highway, bridge, railway, public transportation, aviation, ferry and port projects. (3) Different modes The National Council for Public-Private Partnerships currently recognizes 18 PPP modes, which are classified into new projects and existing facilities and services (Table 5.1).

5.15 Main Development Characteristics of PPP in the US (1) Management structure As a federal state, the US has a relatively large degree of autonomy in states and local governments, which is also embodied in the development of PPP. Each state and local government will adopt different PPP modes according to their local characteristics and needs, and advance projects at different development rate. There is no unified national government that promotes PPP, but the following non-governmental organizations and other institutions spare no efforts to promote the development of PPP in the US.

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Table 5.1 18 PPP modes in the US New projects using PPP

Existing facilities and services using PPP

• • • • • • • • • • • • •

• • • • •

Design-build Design-build-maintain Design-build-operate Design-build-operate-maintain Design-build-finance-operate-maintain Design-finance-operate-maintain-transfer Build-operate-transfer Build-own-operate Developer financing Lease/buy Sale/leaseback Tax-free lease Turnkey

Operation and maintenance Operations, maintenance and management Buy-build-operate Enhanced use lease Lease-develop-operate

Data source: Law Business Research

(a) National Council for Public-Private Partnerships (NCPPP) A non-profit, non-partisan organization established in 1985 provides its members with advice and training on PPPs, publicize and promote public-private partnerships at the federal, state and local levels through social activities such as conferences and forums, and targeted forms of participation such as committees, research institutes and websites to improve the effectiveness of governments and enterprises in the implementation of PPPs. It also provides the public with accurate and timely PPP information through expert consultants, participates in the public dialogue on PPPs, removes civil barriers to the implementation of PPPs, and promotes international dialogues on the development of PPPs. (b) The Mayors Business Council The United States Conference of Mayors is a non-profit, non-partisan organization founded in 1932. Its members are the mayors of more than 1,200 American cities with a population of more than 30,000. The Mayor Business Council is a core part of the organization and its main goal is to improve the city’s business environment. Promoting PPP through the “Best Case Center”, the mayor and business leaders believe that the continuous transfer of government responsibility to the creative local level PPP will be the deciding power of urban development in the 21st century. (c) Federal Highway Administration of the US As an agency of the U.S. Department of Transportation, the Federal Highway Administration provides technical and financial support to state and local governments in the design, construction, and maintenance of highways, and encourages the use of PPP to improve transportation. Its subordinate the Center for Innovative Finance Support provides information and expertise on different PPP modes, and assists with the use of relevant policy tools including SEP-15, private activity bonds (PABs), and TIFIA federal credit to promote the development of PPP in transportation projects.

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(2) Policies and regulations Due to the federal system in the US, different states have their own development methods. The federal law provides basic guidance of PPP implementation for states, and the details and whether to allow the PPP mode are left to the discretion of the states. Federal legislation and policies related to PPP issued by the US in the past 20 years mainly include: 1998: Transportation Equity Act for the Twenty-First Century (TEA-21) 1998: Transportation Infrastructure Finance and Innovation Act (TIFIA) 2005: Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users, SAFETEA-LU 2014: Model Public-Private Partnerships Core Toll Concessions Contract Guide 2014: Water Infrastructure Finance Innovation Act (WIFIA) 2015: Qualified Public Infrastructure Bonds (QPIBs) 2015: Fixing America’s Surface Transportation (FAST) Act At the state level, legislation is often required to give the public sector legal power to cooperate with the private sector. In 1989, California passed the first publicprivate partnership law on transportation projects. Florida and Missouri followed in the second year. In 1995, Virginia passed the extensive Public-Private Transportation Partnership Act. The Puerto Rico PPP regulations came into effect in 2009, including the establishment of a public-private partnership management agency. Since 2010, Connecticut, Ohio, Maryland, Pennsylvania, and the District of Columbia have all passed PPP legislation. As shown in the figure below, as of April 2016, 36 states and Washington, DC have implemented PPP legislation. That means nearly 75% of the states have passed laws permitting the use of PPP on a project or a kind of project. Among these, 23 states and Washington, DC allow a certain level of horizontal and vertical PPP; 3 states allow only a certain level of vertical PPP, and 11 states allow only a certain level of horizontal PPP. It is also common to modify PPP regulations based on practice. For example, Florida has revised its PPP regulations for the state’s Department of Transportation seven times since it was enacted in 1991. Since most PPP projects in the US are related to transportation, there are many regulations in this regard. Many states have clearly stipulated in the legislation that the public sector in the cooperative relationship is the state department of transportation. The Transportation Funds and Financial Regulations database of the National Conference of State Legislatures (NCSL) tracks and collects PPP legislation data from 50 states. These figures indicate that the number of PPP regulations for transportation has increased significantly in the past six years. In particular, the number of legislations in 2013 and 2014 more than doubled that of the previous two years. The number of legislations related to transportation PPP projects considered since 2009 is as follows: (a) (b) (c) (d)

2015—47 regulations in 25 states and the District of Columbia 2014—68 regulations in 21 states and the District of Columbia 2013—81 regulations in 28 states 2012—30 regulations in 16 states

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(e) 2011—40 regulations in 20 states (f) 2010—22 regulations in 9 states and the District of Columbia (g) 2009—37 regulations in 20 states and Puerto Rico PPP legislation also has different scopes. It can only target the transportation industry or include other industries. There can be different agencies authorized to use the regulation, which can be limited to the state level or include the regional, county or municipal level. The situation of each state’s legislation is closely related to the development of PPP. Some states have extensive legislation, which has stimulated the development of PPP; some states have PPP regulations but little practice; and some states have no legislation or PPP practice at all. The US has some successful practices in state PPP legislation: (a) Determine the focus of government responsibility; (b) Grant appropriate legal authority to an administrative department of the state (such as the governor’s office); (c) Adequate personnel and financial support for consultants; (d) The state government encourages people or things in support of PPP; (e) Specify the bidding process in detail; (f) Explicitly require the government to take responsibility for purchasing land and meeting environmental requirements; (g) Specify how to ensure that the state government receives the funding it needs.

5.16 Financing Mechanism In the development of the US PPP, the following three financing tools provided by the federal government have played an important role: Private Activity Bonds (PABs), the Transportation Infrastructure Finance and Innovation Act (TIFIA) Credit plans, and the Water Infrastructure Finance and Innovation Act (WIFIA) credit plans. Private activity bonds are tax-exempt debt instruments that are issued by state or local governments, and their income is used to support projects that the private sector participates in more. The “Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users” enacted by the US in 2005 requires $ 15 billion in private activity bond revenue to be determined by the Department of Transportation for road, public transportation, and multimodal transportation projects. Private activity bonds form an important part of many PPP projects. From 2008 to 2013, PABs accounted for 17% of the value of all PPP projects and 25% of project liabilities. In order to qualify for tax exemption, more than 95% of the bond revenue must be used for appropriate purposes, such as for ground transportation projects. Transporttype PPP projects gradually see private activity bonds as advanced borrowing tools for project financing. TIFIA provides long-term, flexible financing channels for highway and public transportation projects. Its focus is on attracting co-investment from important private and non-federal agencies by providing supplementary funding. From 2008 to 2013,

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TIFIA accounted for approximately 23% of the total PPP project value and 35% of PPP project debt. Applicants eligible for this credit support include state and local governments, railway companies, the public transport sector, and private entities. TIFIA provides three forms of financial support: The first is a term loan that reaches 49% of the total project cost, at a fixed interest rate of government bonds; the loan repayment must begin five years after the project is actually completed, and be paid off within 35 years after the project is actually completed or before the funded assets are unused. The second is the loan guarantee by the federal government to institutional investors. The third is to provide credit support for the first 10 years of project development, which does not exceed 33% of the project cost. Similar to TIFIA, WIFIA is a low-interest loan managed by the U.S. Environmental Protection Agency. Projects supported are mainly related to drinking water and sewage treatment, including pipeline renovation, construction and maintenance of water treatment plants, groundwater, energy conservation, and so on. For larger projects, the cost must be at least $ 20 million (for a community of no more than 25,000 people, it needs to reach $ 5 million). The government provides loan guarantee and direct loans of the long-term treasury interest rates. The loan must be paid off within 35 years of the project’s actual completion. WIFIA’s loan amount cannot exceed 49% of the project cost and all forms of federal support should not exceed 80% of the cost.

5.17 Problems Facing the US in the Development of PPP (1) The public sector lacks sufficient understanding of the PPP mode. Some U.S. government agencies are reluctant to consider using the PPP mode because they lack sufficient understanding of the details of PPP. In 2009, Halcrow Consulting conducted a survey of 75 state and local government officials in the US, and the results showed that there is a correlation between the PPP related experience and the interest in implementing PPP. 61% of the respondents did not have direct experience with PPP and did not fully understand its operating conditions and potential benefits, while the majority of those with relevant experience expressed interest in implementing PPP. Government officials with some PPP knowledge find it difficult to implement PPP projects, while inexperienced officials worry about losing cash flow in the future and believe that the government will be better at managing infrastructure projects than the private sector. Regardless of whether they have any knowledge of PPP, they are worried that the private sector will seek high profits at the expense of the interests of facility users, and inexperienced officials are particularly concerned that the private sector will palter with facilities maintenance and repairs to expand profit margins.

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(2) The skills and capabilities of the public departments need to be improved. Many states in the US do not have a department specifically responsible for PPP development. They cannot link national development policies in infrastructure with PPP projects. They also lack the technical capabilities and expertise to negotiate and implement PPP projects. The private sector often attaches great importance to them and have specialized personnel and technology to participate in PPP projects. This puts the public sector at a disadvantage when negotiating partnerships with the private sector and cannot adequately protect the public interest. (3) Need More Federal Support Due to the implementation of the federal system, the US has relatively loose management of PPPs, which are dominated by states and have high autonomy. For example, the Federal Highway Administration’s Office of Innovation Programs can provide some PPP development guidance for states, but only for a small number of projects that are federal in nature. In 2008, the Office of Government Responsibility warned in its report that while the Department of Transportation has been promoting the development of highway PPP projects, it has done nothing to help states assess the potential costs and benefits of those projects. For another example, some early PPP projects were unsuccessful, and some were terminated ahead of time. When the project encountered these problems, the contract terms needed to be renegotiated. However, the current US laws and PPP practices have not seriously considered a relevant resolution mechanism. (4) Public skepticism Some Americans are skeptical of PPP, especially when the partners are from abroad, and they worry that important US assets and infrastructure will be controlled by foreign countries. Some government officials are concerned that private companies abroad will require facility users to pay higher tolls for ultra-high profits. Residents of Texas once rejected PPP because of concerns about losing national sovereignty and sacrificing national security. (5) Boycott from labor unions Some PPP projects are difficult to implement because of resistance from publicsector labor unions, who are reluctant to see the original job opportunities diminished because the private sector owns and operates public facilities. For example, California planned to rebuild the road to the Golden Gate Bridge to make it more earthquakeresistant, but the state’s engineer union sued and tried to prevent the project from implementation, though it lost the lawsuit.

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5.18 Development Prospects of the PPP in the US The future development of the PPP in the US has good prospects, which is based on the judgment of the current status of its infrastructure and the need for infrastructure in future economic growth. A survey by 401 members of the American Manufacturers’ Association in 2013 showed that 70% of members believe that the state of the US infrastructure is on average ordinary or poor and needs to be improved. Respondents believe that none of the eight kinds of major infrastructures: communications, drinking water/wastewater, aerospace, railways, energy, seawater, public transportation, and highways can meet the needs of corporate development and will affect the international competitiveness of American companies. Some professional organizations and research institutions have also forecasted the scale of infrastructure investment in the US. According to an estimate by the American Society of Civil Engineers in May 2016, the US will need to spend 3.32 trillion US dollars on infrastructure by 2025. But currently, only 1.88 trillion yuan of funds are guaranteed, and the funding gap will reach 1.44 trillion US dollars, which will lead to the loss of 2.5 million jobs and 4 trillion GDP. If there is no new guarantee of funding, the funding gap will increase to 5.18 trillion US dollars by 2040. According to the estimate of the United States Conference of Mayors, the infrastructure investment in the US will reach 2.8 trillion US dollars by 2028. From a practical point of view, in the past few years, more and more states in the US have permitted the use of the PPP mode to develop infrastructure projects. In the future, the US will rely on PPP more to solve the problem of capital shortage and meet the increasingly urgent challenges of infrastructure development. Moody’s, a well-known credit rating company, stated in its Global PPP Development Report that “given the size of the US infrastructure and growing urban population, the United States has the potential to become the world’s largest PPP market”. However, promoting the continued growth of the US PPP market will also be subject to some factors. In addition to the issues mentioned in Part 4 which need to be resolved gradually, the overall health of the US economy and the development of the claims and liabilities capital market must also be considered. The United Kingdom

5.19 Development Background and Status Quo The United Kingdom is the earliest country that used the Public-Private Partnership (PPP) mode in the world. It has a relatively complete institutional system and rich practical experience. In the 1980s, Britain began to implement large-scale privatization in the fields of water, electricity and natural gas and introduced private capital to improve the efficiency and quality of public services. This is also the embryonic form of modern PPP. The PPP mode was originally a “public-private partnership”

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financing mechanism that originated in the United Kingdom. The development of its PPP mode has roughly gone through two stages of a Private Finance Initiative (PFI) and a new type of private financing (PF2) (Yan 2015). PFI/PF2 is a typical British PPP operation mode, and it is also a narrow PPP with official statistics. As of the end of 2013, there were 725 PFI/PF2 projects in the UK with a total capital value of 54.2 billion pounds, of which 665 projects entered the operational phase. PFI/PF2 projects account for about 11% of the total public sector investment. From the perspective of practical effects, PFI has significantly improved the efficiency of public services. In 2008, the rate of British PFI project delivered on-time and on-budget was more than 85%, while the rate of traditional procurement projects on-time and on-budget was less than 45%.5

5.20 Policy Support of State-owned Assets and Enterprises in the Field of PPP Investment and Financing In order to better promote the implementation of the PFI/PF2 project, the British government has issued a number of financing support policies, which mainly include five policies. The first is the establishment of a pension investment platform (PIP), with 10 major pension funds as founding investors to jointly invest in PFI/PF2 project. The platform is set up by the government, but its operation is completely independent of the government. The first platform fund was established in 2014, and it plans to raise 2 billion pounds. The existing capital is 650 million pounds, two-thirds of which has been invested in 41 projects. The second is to hold an infrastructure investment forum of insurance companies so that members of insurance associations can communicate relevant infrastructure policies with each other and increase opportunities for insurance fund investment. The third is to establish a government equity investment fund, introduce government-owned shares in the PF2 project, and increase credit for project financing while increasing project capital. The fourth is to implement the UK guarantee scheme. For major infrastructure projects that meet the requirements, the government will provide repayment guarantees and the guarantee scale will not exceed 40 billion pounds. At present, 1.7 billion pounds of guarantee business has been conducted. 39 projects with a total capital of 34 billion pounds have passed the preliminary examination. Fifth, encourage the use of Green Investment Bank and European investment banks to provide funding for infrastructure construction. Among them, the Green Investment Bank, the only policy bank in the UK, was established in 2010 and it mainly provides debt and equity financing for green projects such as offshore wind power and waste treatment.

5 Cai

J. S., Construction and Enlightenment of British PPP Mode.

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5.21 Advantages of PF2 Equity Financing Mode In view of the difficulty of private investment to obtain capital market financing with high leverage, and in order to reduce the high returns of private capital equity financing, the British government requires an increase in the proportion of capital in the PF2 mode. The government funds are introduced in the form of small shareholders in equity capital, thus alleviating the financing pressure of private investors, giving play to the professional initiative of private capital, and minimizing government risks.6

5.22 Enlightenments of the Application of British PPP Mode for China (1) Strengthen public-private cooperation on the project framework In the promotion and application of the PPP mode, a PPP project guidance fund should be established as the public equity holder of the government. The guidance fund will conduct project financing in a competitive manner for specific PPP projects, and introduce long-term investors through equity investment PPP projects. It will establish “Special Purpose Company”, which acts as a contractor to carry out project construction and operation. As a minority equity investor, the government can not only enhance the confidence and initiative of social capital participation but more importantly, it can increase the transparency of the project and strengthen the supervision and control of private-sector contractors and operators by means of having directors onboard and information disclosure to further reduce capital costs.7 (2) Attracting Broad Participation in Project Financing Launch guarantee plans, introduce pensions, insurance companies, and other infrastructure financing methods and risk-reduction tools that are applicable to China, and attracting and encouraging foreign participation to provide financing support for PPP projects. The first is to encourage the participation of social security funds, insurance, enterprise annuities and other platforms that can ensure long-term value preservation and appreciation and guide them to carry out equity investment in specific PPP projects or related investment funds through policies. The second is the introduction of internationally used financing instruments, including infrastructure development funds, infrastructure development banks, joint loan instruments, and the financing of the international financial institutions, so that they can be used directly or indirectly for PPP project financing. The third is to strengthen financial guarantees, including the introduction of government guarantees and third-party 6 Sun

X. H., The Enlightenment of the Development Characteristics, Main Supervision Measures of British PPP Mode for China. 7 http://sanwen.net/a/ftnenbo.html.

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financial guarantee tools that support government debt, such as partial risk guarantee (PRG) and partial credit guarantee (PCG) tools of the Asian Development Bank and other multilateral development banks.

Reference Yan, H. L., Lessons Learned from the Development of the British PPP Mode. Funded Project, 2015.

Chapter 6

Application and Development of PPP in Public Culture Services Wenjuan Song, Yingying Wang, and Pu Gong

Abstract Building a modern public cultural service system with Chinese characteristics is an important measure to protect and improve people’s livelihood and enhance our cultural soft power. In order to realize this strategy, it is necessary to introduce the competition mechanism and encourage social forces and social capital to participate in building the public cultural service system and promote the socialized development of public cultural services. Based on the statistics of public cultural PPP project entries in 2017 and 2018 in the project database of China Public Private Partnerships Center of the Ministry of Finance, this report summarizes the prominent features of such projects from multiple dimensions and analyzes the major problems in applying PPP in public cultural services and proposes corresponding suggestions. Keywords Public cultural services · PPP mode · BOT

6.1 Introduction In recent years, public cultural networks covering both urban and rural areas have been basically established, but the overall level of public cultural services in China is still low. In general, the quantity and quality of public cultural products and services supplied are not compatible with the people’s ever-growing needs for a better life. Problem of unbalanced and inadequate development between urban and rural areas and different regions still exists. There is still a large gap in comparison with the requirements of a modern public cultural service system. Under the new situation, the W. Song (B) · P. Gong School of Public Policy and Management, Tsinghua University, Beijing, China e-mail: [email protected] P. Gong e-mail: [email protected] Y. Wang PPP Research Center, Tsinghua University, Beijing, China e-mail: [email protected] Public Management, Tsinghua University, Beijing, China © Social Sciences Academic Press and Springer Nature Singapore Pte Ltd. 2020 T. Wang et al. (eds.): Annual Report on The Development of PPP in China, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-15-5724-8_6

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construction of a modern public cultural service system with Chinese characteristics is an important measure to protect and improve people’s livelihood, an inevitable requirement for comprehensively deepening the reform of the cultural system and promoting cultural prosperity, as well as a major task to promote core socialist values and develop a great socialist culture in China.1 In the “Opinions on Accelerating the Construction of the Modern Public Cultural Service System” issued by the General Office of the Central Government and the State Council in 2015, it is clearly stated that “PPP and other modes should be promoted to diversify the providers of public cultural services and ways of service delivery. We should encourage and support social forces to participate in building the public cultural service system by investing or donating facilities and equipment, establishing entities, funding projects, sponsoring activities, providing products and services, etc.”2 In May of the same year, the General Office of the State Council forwarded the “Opinions of the Ministry of Culture and Other Departments on Effectively Implementing Government Purchase of Public Culture Service from Social Forces” and “Guidelines of the Ministry of Finance on Advancing the Public-Private Partnership in Public Services”, which included culture service industry into the areas in which government purchase of services and PPP mode can be applied. In May 2017, the General Office of the Central Committee of the CPC and the General Office of the State Council printed and issued the “Outline of the National Plan for Cultural Development and Reform During the Period of the Thirteenth Five-year”, which required to “improve the modern cultural market system and industry system, lower the entry barriers for social capital and encourage and lead non-public cultural enterprises to develop themselves…allow social capital to participate in the construction and operation of public cultural facilities such as libraries, cultural centers, museums and theaters.”3 With the continuous introduction of favorable policies, social forces are increasing passionate in providing public cultural services. In November 2018, the Ministry of Culture and Tourism and the Ministry of Finance issued the “Guiding Opinions on Promoting PPP in the Cultural Field” (No. 96, [2018], MCT)”, encouraging the application of PPP in operational and pay-for-performance public cultural projects with stable social demand. The focus includes, but is not limited to, the agglomeration and development of profitable cultural industries, inheritance and innovation of distinctive culture, public cultural services, protection and inheritance of intangible cultural heritages, and cultural projects which can promote the

1 Opinions

on Accelerating the Construction of the Modern Public Cultural Service System. http:// www.gov.cn/xinwen/2015-01/14/content_2804240.htm. 2 Opinions on Accelerating the Construction of the Modern Public Cultural Service System. Guang Ming Daily, January 15th , 2015. 3 Outline of the National Plan for Cultural Development and Reform During the Period of the Thirteenth Five-year Plan, People’s Daily Online. http://cpc.people.com.cn/n1/2017/0508/c6438729259808.html.

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integration of culture and other areas such as agriculture, technology, sports and healthcare.”4 After the favorable policies introduced between 2014 and 2017, the government began to regulate PPP development, so the originally flourishing PPP suffered a setback. From “being favored” to “being left in the cold” as described jokingly by the public, the sudden turn in developing PPP caught many people off guard. Investment in PPP projects of public cultural facilities has also been greatly affected, but the general trend is to develop in a more scientific and standardized direction. This report makes a comparative analysis of the public cultural projects included in the project database of China Public Private Partnerships Center (CPPPCP) in 2017 and 2018 and summarizes the main features and experience of such projects to better serve the standardized and orderly development of public cultural PPP projects in China.

6.2 Dynamic Analysis of Public Cultural PPP Projects This part will analyze the public cultural5 PPP project entries in 2017 and 2018 from multiple perspectives including regional distribution, project stage, return mechanism and operation mode. Because in 2017, the “management database” and “pre-pipeline database” were not distinguished, to facilitate comparison, PPP projects in “prepipeline database”6 and “management database”7 in 2018 are combined in this report and collectively referred to as the “project database” below. In terms of the number of projects, as of the end of 2017, there were 654 public cultural PPP projects in the project database. Due to the database cleanup, at the end of 2018, the number was reduced to 511 (305 in management database and 206 in pre-pipeline database), with a total investment of 441.332 billion yuan. Compared with 2017, 318 projects were removed and 175 were newly admitted. Figure 6.1 shows the year when the public cultural PPP projects in the project database in 2018 were initiated, mainly concentrated in 2015–2017. 4 Guiding Opinions of the Ministry of Culture and Tourism and the Ministry of Finance on Promoting

Public-Private Partnership in the Tourism Field. http://www.gov.cn/xinwen/2018-11/24/content_5 343003.htm, 2018-11-24. 5 According to the Law of the People’s Republic of China on the Protection of Public Cultural Services, public cultural facilities refer to buildings, venues and equipment used to provide public cultural services, which mainly include libraries, museums, cultural centers (stations), art galleries, science and technology museums, memorial halls, stadium, workers cultural palaces, children’s palaces, women’s and children’s activity centers, seniors’ activity centers, township (street) and village (community) grassroots comprehensive cultural service centers, farm (staff) libraries, public reading boards (screens), radio and television broadcast transmission facilities and public digital cultural services. Therefore, the public cultural projects in this report cover both cultural and sports projects in the CPPPC database. 6 PPP projects in the pre-pipeline database are all in the identification phase. 7 The management database includes the PPP projects that are in the preparation, procurement and implementation phases.

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Fig. 6.1 Pubic cultural PPP projects initiated in 2012–2018 (Source CPPPC.)

6.2.1 Regional Distribution As shown in Fig. 6.2, regional distribution of projects in 2018 changed a lot. The number of project entries in the two western provinces of Xinjiang and Inner Mongolia decreased significantly from 70 to 25 and 65 to 24 respectively. At the same time, Hubei province made great achievements, with number of project entries increasing from 15 in 2017 to 38. Shandong, Guizhou and He’nan are relatively stable and have been ranking high. Generally speaking, after the database cleanup, regional distribution of public cultural PPP projects is more reasonable, and eastern

Shanghai Hainan Chongqing Qinghai Central level Beijing Gansu Ningxia Guangxi Heilongjiang Jilin Jiangxi Guangdong Fujian Liaoning Yunnan Anhui Hunan Shanxi Hebei Shanxi Neimenggu Jiangsu Xinjiang Zhejiang Hubei Sichuan Henan Guizhou Shandong

90 80 70 60 50 40 30 20 10 0

2017

2018

Fig. 6.2 Regional distribution of cultural PPP projects in 2017 and 2018 (Source CPPPC.)

6 Application and Development of PPP in Public Culture Services

400

109

354

350 300 250

206

200 146

150

113

100

100

93

66

87

50 0 Identification phase

Preparation phase 2017

Procurement phase

Implementation phase

2018

Fig. 6.3 Number of public cultural PPP projects in each phase in 2017 and 2018 (Source CPPPC)

region with a higher level of economic development has developed well, which lays a good economic foundation for the later application of user-pays mechanism.

6.2.2 Project Phases Figure 6.3 shows the number of projects at different stages in 2017 and 2018. Compared with 2017, there was an improvement in the implementation of projects, with an increase of 59 projects that have started construction and an implementation rate reaching 28.57%. The distribution of projects in different phases is more reasonable. However, in 2018, 40.31% of the public cultural PPP projects are still in identification phase, so we need to further promote the orderly implementation of the projects.

6.2.3 Return Mechanism The major return mechanism of public cultural PPP projects is Viability Gap Funding (VGF). As shown in Fig. 6.4, in 2008, there were 77 government-pays projects, 104 user-pays projects and 330 VGF projects, accounting for 15.07%, 20.35% and 64.58% of the total respectively. Compared with 2017, the proportion of VGF projects increased significantly from 43.58% to 64.58%, while that of the government-pays projects decreased form

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Fig. 6.4 Proportion of return mechanisms in public cultural PPP projects in 2018 (Source CPPPC.)

15.07%

20.35% 64.58%

Viability gap funding

User-pays

Government-pays

21.71% to 15.07% and user-pays projects, from 34.71% to 20.35%. It can be seen that the continuous optimization of the return mechanism has effectively alleviated debt burden of the government in public cultural PPP projects.

6.2.4 Operation Mode8 The operating companies of cultural venues are usually service companies. For a long time, the main cooperation mode has been O&M. In 2014, the government promoted the application of PPP in infrastructure and public services and BOT became the major mode of the PPP projects in cultural and sports facilities. Different market players such as builders, equipment producers and operators began to get involved in public cultural facilities. Figures 6.5 and 6.6 reflect the proportion of different operation modes in public cultural PPP projects in 2017 and 2018. In 2017, more than 70% of the projects chose the BOT mode and in 2018, the proportion further increased to 80.45%. The government and social capital are also continuously practicing TOT, ROT and other operation modes without including the construction stage, which added the diversity to a certain extent. However, the proportion of these types was rather low and continued to decline, with the proportion of TOT dropping from 7.47% to 7.28% and ROT, from 3.13% to 1.73%. In addition, the comparison of 2017 and 2018 shows that the types of operation modes in public cultural PPP projects have not changed, and it remains to be explored and innovated by the participating entities.

8 Because

projects in the pre-pipeline database are in identification phase, the operation mode of many has not yet been determined. The operation mode of 108 projects in 2018 and 240 in 2017 are not shown in the database, so they are not included in the pie charts.

6 Application and Development of PPP in Public Culture Services

4.58%

3.13%

1.45%

0.24%

111

0.24%

BOT 7.47%

Others TOT

9.40%

BOO ROT TOT+BOT 73.49%

MC O&M

Fig. 6.5 Operation modes of public cultural PPP projects in 2017

1.73%

1.73%

0.25%

0.25%

1.73% BOT

6.68%

TOT

7.18%

Others BOO ROT TOT+BOT 80.45%

MC O&M

Fig. 6.6 Operation modes of public cultural PPP projects in 2018 (Source CPPPC.)

6.3 Static Analysis of Public Cultural PPP Projects This part only focuses on the static analysis of the data in the project database in 2018, especially whether there are preferences in different venues in terms of return mechanism, operation mode and investment amount.

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6.3.1 Venuses of Public Cultural PPP Projects Based on the definition in the “Law of the People’s Republic of China on the Protection of Public Cultural Services”, we have classified the public cultural PPP projects, and the statistics are shown in Fig. 6.7. Venues with the most PPP projects are sports centers, with a total number of 146, accounting for 28.57%. A sports center usually consists of a stadium, a gymnasium and a natatorium. Some large-scale sports centers will also include a comprehensive training hall or a national fitness center. Some sports centers are located in sports parks, which require some outdoor facilities. Some undertake professional training tasks, so supporting facilities such as athlete dormitories and canteens are needed. There are 99 complexes, accounting for 19.37%. With various contents, this type of venue can meet the diverse needs of different consumer groups. Complexes usually combine cultural centers, libraries, and museums and large-scale ones also include exhibition halls, theaters, etc. 2.74% 3.33% 0.98% 3.91%

Library Theater

3.91%

28.57%

Museum

4.50% 4.50% 5.28%

Public cultural industrial park Exhibition halls Civic activities center National fitness center Ancient city and cultural relics protection

6.46%

Culture & sports center Others

19.37%

7.24% 9.20%

Cultural center Complexes venue Sports center

Fig. 6.7 Public cultural PPP projects of different venues (Note: This classification is mainly based on the definition of public cultural facilities in the “Law of the People’s Republic of China on the Protection of Public Cultural Services”. Among them, stadiums, cultural centers, museums, exhibition halls and libraries are all venues with a single purpose. Culture & sports centers are combination of cultural centers and sports centers. A complex consists of over three venues, for example, the commonly seen combination of a culture center, a library and a museum. The civic activities center covers the civic activities center, civic center, civic service center, youth activities center and elderly activities center. Since the numbers of art museums, science museums, memorials and archives are all less than three, they are classified as others (Source CPPPC.)

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Cultural center is also known as the “cultural activities center” or “culture and art center”. It is an organization that holds cultural activities and provides places for cultural and recreational activities of the masses. PPP is also widely used in projects of cultural centers, with 47 project entries, accounting for 9.2%. The culture & sports center combines cultural centers and sports centers like theaters, stadiums and natatoriums. Considering that it is different from the cultural or sports center with single function and also has unique features compared with a complex, it is listed as a separate category for further analysis of its return mechanism, operation mode and other characteristics. The number of other types of venues is about 20. PPP projects of commonly seen exhibition halls, museums and libraries are much less than sports halls and cultural centers. We will explain the reasons in the subsequent analysis of the return mechanism.

6.3.2 Operation Mode of Different Venues Table 6.1 shows different types of public cultural PPP projects and their operation modes, which can reflect in detail the preferences of different venues. In general, the public cultural PPP projects have fully achieved diversified development with 7 specific types of PPP. Of course, BOT remains to be the major mode, accounting for 80.45% on average. Analysis of Table 6.2 further shows that in traditional public cultural projects such as libraries, exhibition halls and museums, BOT mode takes up a particularly high proportion of over 90% on average. These three types of venues are heavy asset projects, with construction occupying an important position in the whole life cycle and large-scale investment. What’s more, they are mainly non-profit projects which lack the basis for user payment. This may be one of the important reasons why these projects mainly adopt BOT. However, this also reflects that our public cultural infrastructure construction is still relatively backward and China is actively promoting public cultural investment with PPP to accelerate the construction of local cultural facilities. Theaters, national fitness centers and public cultural industrial parks often apply asset-light strategy, so the proportion of BOT in these projects is relatively low. Figure 6.8 shows the operation mode of various venues. ROT, TOT, and O&M which don’t include construction phase are mainly applied in stadiums, complexes and cultural centers to revitalize stock assets and improve the efficiency of asset operation. However, as an important supply mode of public culture services, there is only one case of O&M in the project database. Maybe the data in the project database is incomplete, but it also reflects that the market operation of public cultural projects in China needs to be further developed. With the improvement of infrastructure, we should instead give full play to the advantage of PPP in efficiency, apply it in operation and revitalize stock assets through modes like ROT, TOT and O&M.

5 12 13 13 15 16 17 21 27 79 86 16 325

National fitness center

Museum

Public cultural industrial park

Civic activities center

Exhibition hall

Ancient city and cultural relics protection

Culture & sports center

Cultural center

Complex venues

Sports center

Others

Total

Source CPPPC

5

Theater

BOT

Library

Type of venue

7

2

1

2

1

1

BOO

1

1

MC

1

1

O&M

7

2

1

1

1

1

1

ROT

Table 6.1 Number of public cultural PPP projects by type of venue and operation mode

29

4

9

5

5

1

2

1

1

1

TOT

7

2

2

1

1

1

TOT + BOT

27

2

9

6

1

1

1

1

1

1

3

1

Others

107

13

38

5

11

8

7

3

5

3

3

5

6

Not defined

511

37

146

99

47

33

27

20

23

20

17

23

14

5

Total

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6 Application and Development of PPP in Public Culture Services Table 6.2 Number and proportion of BOT projects in public cultural PPP projects

Type of venue

115 Number

Library

Proportion

5

100.00%

Exhibition hall

16

94.12%

Museum

13

92.86%

Ancient city and cultural relics protection

17

85.00%

Complex venue

79

84.04%

Culture & sports center

21

84.00%

Civil activities center

15

83.33%

Sports center

86

79.63%

Public cultural industrial park

13

76.47%

Cultural center

27

75.00%

National fitness center

12

66.67%

Others

16

66.67%

Theater

5

62.50%

Source CPPPC

Sports center Complexes venue Cultural center Others Culture & sports center Ancient city and cultural relics protection National fitness center Civic activities center Exhibition halls Public cultural industrial park Museum Theater Library 0 BOO

BOT

MC

20 O&M

ROT

40 TOT

60 TOT+BOT

80

100

120

Others

Fig. 6.8 Operation modes of different venues

6.3.3 Return Mechanism of Different Venues In general, due to small scale investment in each project, cultural infrastructure projects such as cultural tourism, sports centers and theaters can generate cash flow

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37

Complexes venue

9

Cultural center

9

Others

10

Culture & sports center

7

Ancient city and cultural relics protection

8

National fitness center

4

Civic activities center

2

Exhibition halls

9

Public cultural industrial park Museum

2

Theater

7

Library 0% User-pays

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Viability gap funding

Government-pays

Fig. 6.9 Return mechanisms of different venues

by themselves, which is not easy to cause debt pressure on local governments, so they are suitable for PPP. Especially with the in-depth exploration and standardized development of PPP in public cultural services, the proportion of VGF is increasing. Figure 6.9 reflects the return mechanism of different types of venues. Operational projects such as theaters, public cultural industrial parks, sports centers and culture & sports centers tend to apply user-pays mechanism. On the contrary, non-profit projects like libraries, museums and civic activities centers are more likely to be government-pays projects. The return mechanism needs to be further explored and innovated. For example, multiple venues can be integrated into a complex to balance the profit and loss and form a dynamic revenue adjustment mechanism, so we can promote a PPP mode which keeping developing and realize the self-sustainability of the public cultural PPP projects.

6.3.4 Investment Amount of Different Venues Table 6.3 reflects the investment amount of different venues, among which sports centers, cultural centers and complexes are distributed in each section, but mainly concentrated in the section of 100 million–1 billion yuan. In projects with large-scale investment of over 1 billion yuan, public cultural industrial parks and ancient city

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Table 6.3 Investment amount of different venues Type of venue

Under 100 million yuan

Library

100 million yuan–500 million yuan

500 million yuan–1 billion yuan

Over 1 billion yuan

Total

2

3

National fitness center

6

14

2

1

5 23

Others

7

19

8

3

37

Museum

2

10

3

2

17

Civic activities center

2

12

5

4

23

Culture & sports center

1

17

9

6

33

Complex

5

45

31

18

99

Cultural center

6

17

14

10

47

Sports center

25

56

33

32

146

Theater

2

3

5

4

14

Exhibition hall

1

7

5

7

20

Ancient city and cultural relics protection

4

4

6

13

27

6

4

10

20

Public cultural industrial park

and cultural relics protection account for a relatively high proportion of 50% and 48.15% respectively, as shown in Fig. 6.10.

6.3.5 Cooperation Term of Different Venues In terms of cooperation terms, different venues have a lot in common and are evenly distributed over different sections (see Fig. 6.11).

6.3.6 Return Mechanism of Different Regions Figure 6.12 reflects the differences of various provinces in return mechanism. In terms of the proportion of user-pays projects, Beijing, Guizhou, Chongqing and Hainan with higher levels of economic development rank high, while the less developed Gansu, Ningxia Hui Autonomous Region and Guangxi Zhuang Autonomous Region have no user-pays projects. The advantages of user-pays projects for local

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50.00%

Ancient city and cultural relics protection

48.15%

Public cultural industrial park

35.00%

Theater

28.57%

Sports center

21.92%

Cultural center

21.28%

Complexes venue

18.18%

Culture & sports center

18.18%

National fitness center

17.39%

Museum

11.76%

Others

8.11%

Civic activities center Library

4.35% 0.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

Fig. 6.10 Proportion of projects with investment of over 1 billion yuan in different types of venues

Sports center Complexes venue Cultural center Others Culture & sports center Ancient city and cultural relics protection National fitness center Civic activities center Exhibition halls Public cultural industrial park Museum Theater Library 0 5-10 years

11-15 years

16-20 years

Fig. 6.11 Cooperation term of different venues

20

40

21-25 years

60

80

26-30 years

100

120

Over 30 years

6 Application and Development of PPP in Public Culture Services

Beijing

119

3

Central level

2

Guizhou

28

Chongqing

1

Hainan

1

Qinghai

1

Shandong

15

Sichuan

10

Shanxi

5

Liaoning

2

Zhejiang

7

Neimenggu

5

Xinjiang

5

Jiangsu

5

Heilongjiang

1

Hubei

5

Guangdong

1

Yunnan

1

Henan

4

Hunan

1

Hebei

1

Shanxi 0 Anhui 0 Fujian 0 Jiangxi 0 Jilin 0 Guangxi 0 Ningxia 0 Gansu 0 Shanghai 0 0%

20% User-pays

40%

60%

Viability gap funding

Fig. 6.12 Proportion of different return mechanisms by region

80%

Government-pays

100%

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W. Song et al.

governments are that they do not need to arrange a budget and can supply public sports facilities relying solely on social forces without causing fiscal burden. However, this type of projects is closely related with the development level of local economy and cultural industry, location of the venues, the consumption level and tendency of the masses, so the future cash flow is uncertain, and social capital remains cautious about it. Therefore, the overall proportion of user-pays projects is not high.

6.3.7 Investment Amount of Different Regions In terms of investment amount of each province, Shandong, Hainan, Guizhou and Hubei with higher economic development level have more large-scale public cultural PPP projects with investment of over 1 billion yuan. In Guizhou, Sichuan, Zhejiang and Xinjiang, projects are distributed rather evenly in each section. Instead of blindly seeking for expansion, they choose appropriate investment scales based on local economic development and market demand (see Fig. 6.13).

6.4 Major Problems of PPP Application in Public Cultural Services By comparing the basic characteristics of public cultural PPP project entries in CPPPC in 2017 and 2018, we can see that the projects are more standardized with 60 50 9 10

40 3

30 20 10 1 1

1

5 4

3

2 3 5

8 7

5 7 3

Shanghai Hainan Chongqing Central level Qinghai Gansu Ningxia Beijing Heilongjiang Guangxi Jilin Jiangxi Guangdong Fujian Liaoning Yunnan Anhui Hunan Shanxi Hebei Shanxi Neimenggu Jiangsu Xinjiang Zhejiang Hubei Sichuan Henan Guizhou Shandong

0

1 3 2

5 7

15

under 100 million yuan

100 million yuan – 500 million yuan

500 million yuan-1 billion yuan

Over 1 billion yuan

Fig. 6.13 Investment amount of public cultural PPP projects by region

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higher quality and more reasonable regional distribution. However, we should also recognize the problems and deficiencies despite all the achievements.

6.4.1 Problems in the Return Mechanism Not all public cultural projects are suitable for the PPP mode. At present, some local governments are not rational in promoting PPP and have forcibly launched a batch of projects unsuitable for PPP mode without objective analysis of the basic conditions, so the projects are not in line with the realities and the results are affected. Therefore, social capital is not highly motivated to participate in public cultural operation, which has objectively restricted the promotion and application of PPP. In particular, with the increased proportion of VGF, the design of mechanisms such as subsidy methods and subsidy ratios will increase the workload and difficulty of PPP cooperation. To develop a reasonable method of performance appraisal and government subsidy has become an important challenge for public cultural PPP projects and puts forward higher requirements for the governance capacity of the government. How to build a performance appraisal mechanism is a major bottleneck in developing public cultural PPP projects. It is necessary to attract social capital through reasonable returns and meet market demand without causing financial pressure on the government at the same time.

6.4.2 Insufficient Operating Experience and Enthusiasm of Social Capital Choosing a mature social capital partner is critical to the successful operation of a PPP project, and also the key to improving efficiency and reducing costs. There are not many professional operators in public cultural field. The leading party of social capital in projects that have already been signed and implemented are mostly construction engineering enterprises or enterprises providing cultural and sports facilities. The lack of experience in operating cultural and sports venues by construction engineering enterprises has increased the financing cost of the projects and left hidden dangers to the future operation and maintenance of the facilities.

6.4.3 Excessively Large Proportion of BOT and Insufficient Motivation for Innovation At this stage, the major mode of public cultural PPP projects is still BOT. Despite its advantages, it also reflects that government at all levels adopts PPP mainly to

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reduce financial pressure and leverage social capital to increase the supply of public cultural products. However, the advantage of PPP to enhance quality and efficiency is neglected. Moreover, construction occupies an important part in BOT, leading to excessive attention to the construction and financing capacity of the social capital during the bidding process, while ignoring the operational ability. At the same time, the social capital pays attention to the profits during the construction period and lacks the motivation for operation innovation. As a result, although hardware facilities have constantly been improved, software facilities such as the number and quality of talents in operation cannot keep up, which severely limits the efficiency of cultural venues.

6.5 Prospects and Suggestions The level of public cultural facilities reflects the level of public cultural development in a region to a certain extent. The construction of high-standard cultural centers, libraries, gyms, museums, and cultural activities centers is a crucial task of China now and an important way to satisfy the spiritual and cultural needs of people. As an important supply method, PPP has its unique advantages. Based on the above quantitative analysis and practical experience, we hereby propose the following suggestions to serve the standardized and sustainable development of public cultural PPP projects.

6.5.1 Carefully Choose the Applicable Industries and Regions Compared with traditional PPP projects in areas like transportation and energy, public cultural PPP projects are distinct with unstable source of revenue and market demand. Therefore, we should try to choose operational public cultural projects. On the one hand, government should be able to make some profits. By utilizing the advantages of social capital in management and technology, it can reduce the cost of public cultural products and services and increase supply and enhance governance. On the other hand, social capital should be able to make profits, not only in construction, but also in operation. At the same time, we should try to choose projects that are easy to evaluate so as to facilitate performance appraisal.

6.5.2 Cultivate Qualified Social Forces Qualified social capital is the key to the success of a PPP project. The design level in the early stage will affect the operation and maintenance in the later stage. For example, the location selection of the venue, fire protection, scale and other designs

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will directly influence the ability of public cultural facilities to serve the public and hold large-scale events. The quality of the facilities is even more vital. For public cultural PPP projects, social capital should focus on fostering operation capacity, especially the ability to apply the Internet and big data platforms. In recent years, cloud technology and big data platforms have developed rapidly. Social capital parties should know how to build resource, project and talent databases based on big data platforms to integrate various resources. On the one hand, the introduction of “Internet+” can improve the transparency, participation, accuracy, satisfaction and coverage of public cultural services, provide technical support for understanding consumer needs, and reduce operational risks. On the other hand, the application of technologies such as big data and artificial intelligence can accurately identify the cultural needs of citizens and point out the direction of subsequent precise services.

6.5.3 Diversify PPP Operation Mode To improve the efficiency of services and explore diversified PPP operation mode, participants should shift their focus from building to operating and revitalize public cultural stock assets with modes like TOT, ROT and O&M. In the initial stage of construction, the government can take the lead to make full use of its advantages of concentrating human, financial and material resources for major undertakings. However, when the focus is changed from hardware construction to software construction, social forces can be involved to stimulate the market vitality of public cultural services. Diverse market entities should be involved to strengthen market competition, so the quality and operation efficiency of public cultural services can be improved in the competition.

6.5.4 Improve Pricing Ability and Reduce Operational Risks The introduction of PPP in public cultural services puts forward new requirements for the government and social capital to enhance the pricing ability. From the perspective of project management, public cultural PPP projects are mainly in non-monopoly industries, so the more mature the market is, the more choices consumers have. With the fluctuation of market demand, social capital participating in public cultural facilities under the PPP mode will face greater operational risks, and meanwhile there will be a higher demand for the diversity and quality of products supplied. For public cultural products, reducing charges or even free of charge can help to achieve of goal of serving the public, but it will also cause excessive demand, increase financial burdens and operating pressure on social capital, which is also not sustainable. However, we also cannot blindly adopt user-pays mechanism, so we must fully consider the actual situation of the projects and the possibility of actual practice, and carry out in-depth market testing.

Chapter 7

Application and Development of PPP Mode in Sports Industry Rong Cao

Abstract As an important carrier for urban and rural residents to participate in physical exercise, sports infrastructure plays an increasingly important role in guaranteeing the rights and interests of the public to do physical exercises and meeting the needs of the public to build their body. Since the No. 42 document was released, the application of PPP mode in the field of venue construction has gradually been carried out. This paper analyzes the existing problems of PPP mode in the field of sports facilities and proposes countermeasures and suggestions partly based on the prospect of sports industry to promote the healthy development of PPP mode in sport facility construction. Keywords Sports industry · PPP mode · Government-pays · Operation With the deepening of the supply-side structural reform and the gradual implementation of the “healthy China” strategy, the low-level and single demand of the public for sports is changing rapidly to high-level and diversified demands. Therefore, the sports consumption mode is changing rapidly from substantial consumption to participatory and ornamental consumption. In January 8th , 2019, The General Administration of Sport of China and the National Bureau of Statistics jointly released the “Announcement on Total Scale and Value-added Data of National Sports Industry in 2017”, which points out that “after checking, the total scale (total output) of the national sports industry in 2017 was 2.2 trillion yuan, and the value added was 781.1 billion yuan, which means that the total output grew by 15.7% over 2016, and the added value increased by 20.6%. Among them, the construction of sports venues, fitness trails, sports parks and other national fitness facilities has been frequently carried out, with a growth rate of 94.7%, reflecting the rapid and vigorous development momentum of the construction of sports venues and facilities in China. Sports industry and sports consumption have become important driving forces for economic growth (Hui 2017).

R. Cao (B) Expert of PPP Expert Database of the National Development and Reform Commission, Shenyang, China e-mail: [email protected] © Social Sciences Academic Press and Springer Nature Singapore Pte Ltd. 2020 T. Wang et al. (eds.): Annual Report on The Development of PPP in China, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-15-5724-8_7

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The CPC Central Committee and the State Council have always attached great importance to the construction of sports facilities. In the government work report of 2019, Premier Li Keqiang mentioned sports industry three times. He advocates vigorously strengthening the construction of public sports facilities, introducing the PPP mode into the construction of sports facilities, and providing operation services through professional teams to increase the supply of sports services based on the advantages of the capital, technology, human resources, experience and other aspects of the social capital, thus meeting the growing public demand for public sports services.

7.1 Current Situation of PPP Projects in Sports Industry According to the statistics by China Public Private Partnerships Center of the Ministry of Finance, as for the total volume of the project database, there were 246 sports PPP projects in the project database by the end of 2017. As a result of the project database cleanup, by the end of 2018, the number of sports PPP projects was 182 (decreased by 122 in 2017 and increased by 58 in 2018), wherein the number in the management database is 111, and the number in the pre-pipeline database is 71, with a total investment of 156.8 billion yuan.

7.1.1 Regional Distribution

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The regional distribution of sports PPP projects in 2018 is shown in Fig. 7.1. Compared with other industries, there are three sports PPP projects at central level, all of which are directly implemented by the General Administration of Sport of China. The other 179 projects are distributed in 26 provinces in China, with Guizhou province leading the way by the number of 29.

Fig. 7.1 Regional distribution of Sports PPP projects in 2018 Resources: China Public Private Partnerships Center, Ministry of Finance

Fig. 7.2 Distribution of project in different phases Resources: China Public Private Partnerships Center, Ministry of Finance

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7.1.2 Project Phases The distribution of sports PPP projects in different phases in 2018 is shown in Fig. 7.2. The largest number of projects is in the identification phase, accounting for 39%, and the second largest number of projects are in the implementation phase, accounting for 31%.

7.1.3 Return Mechanism The majority of sports PPP projects are quasi-operational projects, and the proportion of each return mechanism is shown in Fig. 7.3. The number of projects adopting Viability Gap Funding (VGF) is 117, accounting for 64.29%, the number of userpays projects is 44, accounting for 24.18%, and the number of government-pays projects is 21, accounting for 11,54%. Fig. 7.3 Return mechanism of the projects Resources: China Public Private Partnerships Center, Ministry of Finance

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Viability Gap Funding(VGF) User-pays Government-pays

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7.1.3.1

Government-Pays Projects

There are 21 government-pays projects, of which 11 are in the implementation phase. All these 11 projects were launched in 2015 and 2016. There are 10 projects in the identification phase or preparation stage.

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(1) Regional distribution of government-pays projects The regional distribution of government-pays projects is shown in Fig. 7.4. Among all the 29 projects in Guizhou province, there are three governmentpays projects, one in the Buyi and Miao autonomous prefecture in the south of Guizhou province, and two in the Buyi and Miao autonomous prefecture in the Southwest of Guizhou province, which were all launched in 2016 and are currently in the identification phase. The three projects in Jilin province are all from Changchun city. (2) Annual distribution of government-pays projects Annual distribution of government-pays projects is shown in Fig. 7.5. As is shown in Fig. 7.5, affected by the “Notice of the Ministry of Finance on resolutely curbing local illegal financing in the name of government purchase service (No. 87 [2017], MOF)” released on May 28th , 2017, and the “Notice on Regulating Project Database Management of Integrated Information Platform on Public Private Partnerships(PPP) (No. 92 [2017], MOF)”, the PPP projects were mainly launched before 2017. No. 87 document stopped the illegal financing for engineering constructions in the name of government purchase services, which is essentially different from government-pays projects. But they can easily cause confusion. And No. 92 document clearly put forward that “give priority to supporting stock projects, prudently carry out government-pays projects, and 3.5 3

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Fig. 7.4 Regional distribution of government-pays projects Resources: China Public Private Partnerships Center, Ministry of Finance

Fig. 7.5 Annual distribution of government-pays projects being launched

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Fig. 7.6 Distribution of venue types of government-pays projects Resources: China Public Private Partnerships Center, Ministry of Finance

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ensure the quality of project entries in project database.” which has provided the basis for some local governments to stop government-pays projects. (3) Distribution of types of government-pays projects Sports venues are classified into seven categories: sports center, national fitness center, training base, sports park, single sports venue and single sports stadium. PPP projects with pure sports functions that can hold sports event at or above provincial or municipal level and can be operated externally with more than “one venue and one stadium” can be classified into sports center. In this case, the type preference of government-pays sports projects is shown in Fig. 7.6. (4) Distribution of scales of government-pays projects As is shown in Fig. 7.7, projects with total amount of investment between 100 million and 500 million yuan account for the majority among all the governmentpays projects. 12 10 8 6 4 2 0

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Fig. 7.7 Distribution of investment volume of government-pays projects Resources: China Public Private Partnerships Center, Ministry of Finance

7.1.3.2

User-Pays Projects

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The number of user-pays projects is 44, among which the number of projects in the procurement and implementation phase is only nine. The regional distribution of user-pays projects is shown in Fig. 7.8: 16

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Fig. 7.8 Regional distribution of user-pays projects Resources: China Public Private Partnerships Center, Ministry of Finance

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The advantage of user-pays projects is that local governments have a small financial burden and the projects rely entirely on social forces to provide public sports facilities. However, such kind of projects have a close relation with the development of local economy, the location of sports venues and stadiums, and the level of consumption and sports consumption tendency of local people. Therefore, the uncertainty in the future cash flow of user-pays projects leads to the cautious attitude of the majority social capital.

7.1.3.3

VGF Projects

VGF is the main return mechanism of sports venue PPP projects, and regional distribution of VGF projects and sports PPP projects is positively correlated, which is shown in Fig. 7.9.

7.1.4 Operation Mode

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In the project database in 2018, among the 71 projects in identification phase, there are 44 whose operation mode is not clear. This section just calculates the 138 projects with definite operation mode. As is shown in Fig. 7.10, of the 138 PPP projects, 110 adopted BOT mode, which accounts for the largest proportion of 79.71%. 14 12 12

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Fig. 7.10 Project operation mode Resources: China Public Private Partnerships Center, Ministry of Finance

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Fig. 7.11 Investment volume of sports PPP projects in 2018

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7.1.5 Project Investment Volume Figure 7.11 shows that among the 182 PPP projects in the sports industry in 2018, the investment volume between 100 million and 500 million amounts to the largest proportion, which is 42.31%. The sports venue projects in this section are mainly national fitness centers, which also reflects the principle of people-orientedness and adjustment to local conditions that the sports departments at provincial or municipal level follow when applying for projects.

7.1.6 Term of Cooperation of Projects In the project database in 2018, among the 71 projects in identification phase, there are 45 whose term of cooperation is not clear. This section just calculates the 137 projects with clear cooperation term. Judging from Fig. 7.12, the investment horizon is mostly in the range of 11–15 years and 16–20 years, accounting for 31.39% and 27.74% respectively.

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Fig. 7.12 Investment horizon of sports PPP projects in 2018 Resources: China Public Private Partnerships Center, Ministry of Finance

7.1.6.1

Analysis of the Bid-Winning Social Capital

On the integrated information platform of PPP center of the Ministry of Finance, there are 85 projects in the procurement or implementation phase in 2018. Among them, the selection of social capital of 19 projects has not been made, or the result has not been announced. This section will only analyses 66 projects which have bid-winning information. (1) Combinations of bid-winning enterprises There are 36 bid-winning enterprises in the form of single enterprise, and 30 bid-winning enterprises in the combined form, which is shown in Fig. 7.13. (2) Analysis on types of bid-winning enterprises Considering that one company may win the bid for more than two times, the analysis in this section is based on the number of successful bids. The proportion of types of successful enterprise bidders is shown in Fig. 7.14. Financial investment enterprises have won 14 times, construction enterprises have won 64 times, operating enterprises have won 23 times, equipment supply enterprises Fig. 7.13 Combinations of bid-winning enterprises Resources: China Public Private Partnerships Center, Ministry of Finance

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have won 3 times, real estate development enterprises have won 8 times, exploration and design institutes have won 3 times, local urban investment enterprises have won twice, electronic technology enterprises have won twice, and clothing retail enterprises have won once. (3) Types of enterprises in the form of single enterprise in bid-winning projects Figure 7.15 shows the distribution of various types of enterprises in the 36 projects won by enterprises in the form of single enterprise. Construction enterprises have won 24 times, operation enterprises have won 5 times, real estate development enterprises have won 4 times, electronic technology enterprises have won twice and clothing retail enterprises have won once. The number of bid-winning of construction enterprises is the largest, accounting for 66.67%. Fig. 7.15 Types of enterprises in the form of single enterprise in bid-winning projects

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Fig. 7.16 Distribution of equity participation proportion of construction enterprises in bid-winning projects Resources: China Public Private Partnerships Center, Ministry of Finance

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Participation of Construction Enterprises in Bid-Winning Projects

Of the 36 projects won by single enterprise, construction enterprises have won 24, accounting for 66.7%; while of the 30 projects won by enterprises in combined form, 29 were participated by construction enterprises, accounting for 96.7%. Up to December 31th , 2018, among the 64 bid-winning projects by construction enterprises, the proportion of equity in 40 projects was confirmed, and the distribution of equity section is shown in Fig. 7.16. The distribution of equity in construction companies is polarizing: Either to be small shareholders who have less than 20% of the share and appropriately invest the share to avoid “second bidding”, or to be the biggest shareholder with the largest investment in the project to raise the speaking right.

7.1.6.3

Participation of Operation Enterprises in Bid-Winning Projects

Up to December 31th , 2018, among the 23 bid-winning projects by operation enterprises, the proportion of equity in 14 projects was confirmed, and the distribution of equity section is shown in Fig. 7.17: The equity proportion of operation enterprises is mainly between 0 and 20%, among which the operation enterprises account for less than 5% of the share in five projects. This is inseparable from the fact that operation enterprises have long been engaged in asset-light operation services and lack in investment strength.

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Fig. 7.17 Distribution of equity participation proportion of operation enterprises in bid-winning projects Resources: China Public Private Partnerships Center, Ministry of Finance

7.2 Major Problems of PPP Projects in Sports Industry 7.2.1 The Number of PPP Project Entries in the Project Database Dropped Dramatically, and the Stock Venue Resources Need to Be Developed Under the guidance of No. 92 document, the phenomenon of blindly launching largescale venue facilities in the past has been curbed, and the policy initiative to regulate PPP market plays an effective role. But meanwhile, it leads to the tight supply of the PPP market. The number of PPP projects newly entering the project database in 2018 is 58, yet up to the end of 2018, the number of projects under implementation is 12. While the number of newly-built venues and stadiums is reduced, there is still a gap between the supply of project stock market and daily demands of the public. According to the data of the sixth national sports venues census, up to December 31th , 2013, the opening status of large-scale sports venues in China is shown in Table 7.1: Table 7.1 Opening status of venues based on the sixth national sports venues census Not open

Open within limited time

Open all day

Total 1093

Number of venues

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483

475

Proportion

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44.2%

43.46%

Resources Report on the Sixth National Sports Venues Census

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The number of sports venues that don’t open to the public or open within limited time accounts for 56.55% of the total number, and there are mainly two reasons: one is that “the venues are only for internal use and not open to the public”; the other is that “the income can’t make up for the cost, so it is better to save money by closing down”. According to the traditional sports venue construction mode, sports venues are affiliated to the local sports department, most of which are directly operated by public institutions set up by the local sports departments, and a few of which will be entrusted to social capital to operate. The working hours of the staff of the venues are usually from 9 o’clock in the morning to 5 o’clock in the afternoon, but the public mainly choose after work time and weekends to use the venues. Affected by this working system, it is difficult to arouse the enthusiasm of the staff in the venues, thus affecting the venues’ openness to the public. In addition, based on the analysis of venue operation costs, the energy and maintenance costs account for the largest proportion, and there are also human costs, management costs, etc. If income can’t be effectively increased, it will be difficult for operation income to make up for operation costs. People have nowhere to go to build their body and there exists a structural idle waste of large sports venues. These have always been major contradictions in the development of national fitness in China. How to fully use stock assets to promote the “function reform and mechanism reform” project of existing venues, guide sports contest performance enterprises to participate in sports venue operations, and revitalize sports venue resources will become one of the wayouts for future sports venues to expand their supply.

7.2.2 Each Has Its Own Position, and Operation Is Still a Difficult Subject PPP projects of sports venue are defined as quasi-operation projects, that is, this kind of projects has a certain user payment basis, but the user-pays amount is often insufficient to support the investment payback of social capital. The return mechanism of sports PPP projects is still dominated by the VGF. In 2018, many local governments’ PPP project expenditures have exceeded the ceiling of 10% of general public budget expenditure. Under the influence of local government debt problems and No. 92 document, government spending has been tightened. On the one hand, no matter it is for the purpose of cutting down expenditures by governments, or giving play to social capital’s initiative and tap the potential of social capital, VGF will be used as a condition for bidding. This is beyond reproach, but some social capital will give a very optimistic expectation in order to win the bid, however, after winning the bid, they fail to keep the promise and the subsidy for the successful bid was insufficient to support the project operation costs. On the other hand, the governments’ expectation over their own project conditions is too high, so they formulate strict performance evaluation standards. Some will blindly raise the expected amount of user’s payment to reduce the amount of subsidies.

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Take a football town project as an example. During the World Cup in 2018, the local government required the town to open its football field to the public free of charge. From June 14th to July 15th in 2018, the football town received 30,000 people per day, and only the non-staple food retail business charged the public. According to the operator, boosted by headline events, the net profit of the football town during the World Cup was about 3,000 yuan. This is the case during the World Cup, let alone in other periods. If this “free of charge” policy continues, social capital will definitely face losses. While protecting the public interest, the local government seems to push too hard on social capital to surrender part of the profits. Therefore, no matter it is government or social capital, it is necessary for them to proceed from reality and correctly locate the scale and usage of sports venues according to the positioning and consumption characteristics of sports facilities in each city, and reasonably compile the operation plan.

7.2.3 The Positioning Is not Clear, and Projects Fail to Be Built Based on Needs Through the analysis of the number of projects, of the 29 projects in Guizhou province, there are 14 projects from one autonomous prefecture, accounting for 48%. However, at the end of 2017, the number of permanent residents in that autonomous prefecture was 3.28 million, the per capita disposable income in urban area was 28,565 yuan, and the per capita net income of rural permanent residents is 9746 yuan. Such a construction scale will lead to a serious homogeneity of construction and fierce competition during the operation period, so it is hard to ensure the operation profits. There are many such cases in other parts of China and the phenomenon of “too big” and “too much” is serious. Therefore, it is urgent to issue relevant guiding documents to regulate the scale and number of new venue construction based on the information of local population, economic income, and industry needs, as well as development expectations.

7.3 Suggestions for the Development of PPP Applications in Sports Industry 7.3.1 Pay Close Attention to the Implementation of Projects and Break Through the Bottleneck of Policy Implementation Up to 2018, sports departments has issued 94 policies (including planning) related to PPP. Among them, 15 policies (including planning) at state level mentioned

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PPP. Of the 31 provinces in China except Hong Kong, Macao and Taiwan, local sports departments of 30 provinces have released local policies (excluding planning) containing PPP. At the same time, PPP is mentioned in the local plannings released by sports departments of 24 places. These policies or planning all use the wording “popularize/promote/drive/pursue/facilitate/introduce PPP mode, support/guide/attract/encourage the participation of social capital”. Among them, the “‘13th Five-Year Plan’ for the Reform and Development of Sports in Heilongjiang Province”, the “‘13th Five-Year Plan’ for the Development of Sports in Shaanxi Province”, the “‘13th Five-Year Plan’ for the Development of Sports in Sichuan Province”, and the “‘13th Five-Year Plan’ for the Development of Sports in Jiangxi Province” mentioned “the establishment and improvement of the public private partnerships mechanism.” In terms of the degree of support, the “Guiding Opinions of the General Office of the State Council on Accelerating the Development of the Fitness and Leisure Industry (No. 77 [2016], General Office, SC), the “Action Plan for Public Sports Popularization Project in the ‘13th Five-year Plan’ of Jiangxi Province”, the “Implementation Plan for National Fitness in Fujian Province (2016–2020)”, the “Implementation Opinions of the General Office of the People’s Government of Jilin Province on Accelerating the Development of the Fitness and Leisure Industry “(No. 7 [2019], Jilin Provincial Government),” “Several Opinions on Accelerating the Innovative Development of Shanghai Sports Industry by Shanghai Municipal People’s Government (No. 31 [2018], Shanghai Municipal Government)” and the “Implementation Opinions on Accelerating the Fitness and Leisure Industry by the General Office of Yunnan Provincial Government (No. 46 [2018], Yunnan Provincial Government) mentioned that special subsidies/fund support/rewards will be given to PPP projects. PPP policies in the sports industry are still inadequate in terms of the refinement and implementation of PPP projects. During the implementation of projects, the ability of the sports department to communicate and coordinate with other departments is limited. If there are inconsistences in policies among different departments, the implementation will be more difficult. All relevant departments should have the courage to make breakthroughs and innovations in system and mechanism. On the premise of following the relevant laws and regulations, they have to implement the policies at the micro level to effectively break through the “last obstacle.”

7.3.2 Innovate the Subsidy Mechanism and Strengthen the Public’s Option by “Subsidizing the Demand Part” to Promote Healthy Competition Between Sports Venues After all, PPP projects are infrastructures and public services that should be provided by the government to the public, and that are actually provided by the introduction

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of social capital. Government and social capital should share risks and make a winwin cooperation. Government must shoulder its responsibility and compensate the nonprofit usage of the venues. The “Notice of the Ministry of Finance and the General Administration of Sport of China on Issuing and Distributing the ‘Administrative Measures for Subsidizing the Free Open and Low-Charge Open of Large-scale Venues’ (No. 54 [2014], MOF)” and other regulations and regulatory documents require that, based on the check of the materials submitted by the sports departments and finance departments at the provincial or municipal level, the General Administration of Sport of China in conjunction with the Ministry of Finance will subsidize 1,277 large venues that meet the free and low-charge open standards in 2018,1 mainly by “subsidizing the suppliers”. However, it should also be noted that since the implementation of the policy of using financial subsidies to promote the opening of large-scale venues for free or with low charges, there have been some unsatisfactory results. For example, the range of funding subsidies is strictly limited to large-scale sports venues which are attached to sports departments. However, because of the limitations on the number of seats, a large number of small and medium-sized public venues and marketoperated sports venues that can provide public sports services are not covered by the subsidy. Since the promotion of the PPP mode, most of these subsidies have gone to the local sports department. It is difficult to calculate whether the local sports department can send the subsidy down to the project company responsible for the operation. Benefiting everyone is the original intention of supportive policies. Therefore, it is recommended to innovate subsidy and support mechanisms, explore the “subsidizing the demand part” mode, and directly compensate the ordinary people participating in the sports activities to offer the public the right to choose services and promote healthy competition between sports venues. Meanwhile, by subsidizing individuals, if government let individuals pay the charge of venues and let the venues pay dividends to the government, a virtuous circle can be formed.

7.3.3 Promote the Optimization and Upgrading of the Sports Industry Structure by the “Sports +” Mode In the government work report in 2018, the word “reform” appeared for 97 times, which means that the focus in 2018 will be on reform, and the huge development potential of the society will be fully released through reforms. No matter in the statistics calculated worldwide or in China, sports industry is defined as the “prosperously rising industry”. However, the sports industry itself still faces problems like low-level profitability, less profitable projects, and high investment, low returns. The concept of “Studying sports industry just within the sports field” has been left behind by 1 Announcement

of the General Office of the General Administration of Sport of China on the Release of the List of Large-scale Venues Subsidized by the Financial Funds of the Central Government in 2018. [2018].

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the development of the times and can’t keep up with the changes in consumption patterns. In addition, the economic situation domestic and abroad in 2018 makes it urgent to promote the integrated development of sports industry and the related industries as a whole, and fully explore the consumption potential in order to form a larger ecosystem and consumption pattern. The overall technological upgrading of the sports industry, the inter-industry integration, and the bundling of the sports industry with other operation projects have become the general trend. The integration of different industries such as sports+tourism, sports+culture, sports+medical care, sports+living life out in retirement, sports+science and technology, and the bundling of the sports industry with other industries are mutually beneficial and symbiotic, thus stimulating the domestic demand to achieve the effect of revitalizing the real economy industry. In May 2017, the General Administration of Sport of China issued the “Notice on Promoting the Construction of Sports and Leisure Towns”, which clearly stated that “By 2020, the General Administration of Sport of China will support the construction of a number of sports and leisure towns with distinctive sports characteristics, strong cultural atmosphere, industrial agglomeration, and good ecological environment, which can benefit people’s health. At present, 96 pilot sports towns have been selected as pilot projects nationwide.”2 The development of sports towns in China is in its initial stage. There are only two PPP projects in the integrated information platform of the Ministry of Finance: one is the sports town in Yizheng City (county level) in Yangzhou City of Jiangsu Province, and the other is the Taoqinghu sports town in Changzhi City of Shanxi Province. However, there are abundant cases for reference in foreign countries. For example, the outdoor sports resort in Queenstown, New Zealand, the sports town of Wimbledon in the United Kingdom, and the sports town of Chamonix in France, etc. The key point is that measures should be adjusted to local conditions. The local production, ecology, and life that are related to the local sports characteristics can be integrated into sports towns, and meanwhile based on the population in the surroundings, the consumption potential can be fully explored. Under the demonstration of the “Bird’s Nest” project, the sports+culture PPP mode has been launched in many places. According to the statistics in the integrated information platform of the Ministry of Finance, up to December 2018, there were 33 PPP projects of culture and sports centers, and the culture and sports centers in communities at primary level have increasingly become a new base for enriching the fitness and culture of ordinary people. In this way, the general public can enjoy high-level venue facilities at a low price near their home, which is really beneficial to them. The “sports+medical care/living life out in retirement” integration mode is an innovation system mainly containing medical monitoring, supervision, risk control, and non-medical intervention, and integrating national sports, scientific fitness, physical fitness monitoring, data collection, sports rehabilitation, chronic disease management, and elderly care, which is forged through the introduction of well-known

2 Notice

on Promoting the Construction of Sports and Leisure Towns [2018].

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foreign health management institutions, the combination with sports and rehabilitation technologies of high-quality domestic resources, and the support from local medical departments. The PPP integrated information platform of the Ministry of Finance doesn’t contain such projects, but many sports centers under construction have incorporated the concept of “sports+medical care/living life out in retirement” into the future operation plan, such as the PPP project of Hangzhou Olympic Sports Center, the PPP project of the community culture and sports center of Bozhou and the like. The introduction of this mode will promote the integration of sports into life and improve the general health level. On December 24, 2018, the Ministry of Science and Technology of PRC and the General Administration of Sport of China signed the “Agreement on the Establishment of a ‘Coordinating Work Mechanism’ by the Ministry of Science and Technology of PRC and the General Administration of Sport of China”. As the only newly-constructed venue in Beijing for the 2022 Winter Olympics, the PPP project of the National Speed Skating Hall is a pathfinder for integrating technology into sports. With the support of the internet of things and big data technology, and by integrating the green energy management system based on intelligent monitoring, the audience service navigation system based on indoor positioning, the smart security system based on image recognition, the intelligent equipment operation and maintenance system based on big data analysis, the comprehensive three-dimensional modeling of the venue, and the precise temperature control of each floor and region, the “Ice Ribbon (National Speed Skating Hall)” will become a green and environmentally-friendly smart venue.

7.3.4 Increase Resource Supply to Solve Operation Problems in the PPP Era For a long time, problems such as low marketization, low level of event management, inadequate information of sports consumption demand of the public and the sports market, and few personalized sports consumption projects have been common in the field of sports venue operations. Sports competition performance enterprises have always been outside the identity of the operator of sports venue PPP projects, and rarely participate in bidding for sports venue PPP projects. This is due to their own business characteristics. Sports competition performance enterprises operate horizontal businesses, and they can hold the sports activities in venues in Beijing or Shanghai. While the operators of sports venue PPP projects are rooted in their own venues to undertake various events and performances, which is similar to vertical business. They are of two different dimensions. The services of these two different dimensions should be connected to fully activate and combine resources. According to the “Annual Report of China Marathon in 2018” issued by the Athletics Association, in 2018, there were 1,581 marathons and related events with

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the scale of over 800 people held nationwide, with a total of 5.83 million participants in the national marathon. And 285 prefecture-level cities held marathon events, increased by 44% compared with that in the same period in 2017, and the total annual industrial scale reached 74.6 billion.3 At the Asian Games held in Jakarta in August 2018, the e-sports project was included in the competition for the first time as a performance item. The Chinese team ranked first in the medal list of the e-sports with two gold medals and one silver medal. The International Olympic Committee has also certified e-sports as a formal sports event, and the public’s understanding of e-sports is constantly deepening. The “Survey Report on Sports Industry in 2018” released by PricewaterhouseCoopers shows that in this year’s survey, e-sports is regarded as having replaced the top-ranking football in 2017 to be the most promising sports event that can bring benefits by people in the global sports industry.4 The 2019 FIBA Basketball World Cup will come to China for the first time, and the 2022 Hangzhou Asian Games and the 2022 Winter Olympics will become China’s grand international sports events in the next few years. As to how to take advantage of the upcoming sports events to achieve positive economic and social benefits, operation is still an important player. Operators should clarify the operation philosophy, enhance the brand connotation, and diversify the development of the operation mode to build sports competition brands and establish a sports culture with distinctive local feature, thus arousing the enthusiasm of the general public.

7.4 Conclusion No. 46 document released by the State Council in 2014 clearly stated that the total volume of sports industry should reach 5 trillion by 2025, which kicked off the golden decade of China’s sports industry development. Making good use of the PPP mode, increasing the supply of sports events and mass activities, increasing the supply of facilities, revitalizing the stock resources, optimizing the industrial structure, and promoting industrial integrations are the inevitable trends for the development of PPP projects in the sports industry in the future. It is hoped that with the combination of policy stimulus, demand release and capital influx, the Chinese sports industry will have an opportunity to be upgraded to meet the people’s growing demand for sports culture. It is also hoped that with the increase in industrial supply and the increasing degree of PPP legalization, PPP projects in the sports industry will embark on the road of the sustainable development with high quality.

3 Over 1,500 marathons were held in China in 2018, and the consumption reached 17.8 billion yuan.

http://sports.people.com.cn/. 4 PricewaterhouseCoopers:Survey

Report on Sports Industry in 2018. http://www.sohu.com/.

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Reference Hui W.: Data Report on the Overall Scale and Value Added of the Sports Industry in China in 2017, China Sports Daily [2019/01/09].

Chapter 8

The Application and Development of PPP Mode in Hospital, Medical and Elderly Care Service Industries Mei Tong

Abstract There is an obvious shortage of supply in the medical and elderly care service sector. Since 2012, the Chinese government has issued various policies to guide private investment in the PPP projects in this field, which has gained remarkable result with more PPP projects in medical and elderly care service sector, diversified sources of social capital, and innovated project profitability model. PPP will become one of the important modes in the construction and operation of medical and elderly care facilities. With more projects in operation, the benefit of improving operation efficiency with the involvement of private businesses will gradually show up. Keywords Medical · Elderly care · PPP

8.1 Industrial Characteristics 8.1.1 Obvious Shortage of Supply in China’s Medical and Elderly Care Service Sector China is a large country with 1.3 billion populations with a gradually aging demographic structure and obvious shortage of supply in medical and elderly care facilities. According to Statistical Report on the Development of Social Services in 2015, as of 2015 end, there were 222 million people above 60 years-old in China, accounting for 16.1% of the total population, of which 143.86 million was above 65 years-old, accounting for 10.5% of the total population. In July 2016, City Development Report of China (2015) jointly published by China Association of Mayors and the China Science Center of International Eurasian Academy of Sciences predicted that by 2050, people above 60 years-old would account for 34.1% of the total population in China. The exacerbating aging issue further increases the demand for medical and elderly care in the next 30 years. M. Tong (B) Beijing Ktrue Consulting Co., Ltd., Beijing, China e-mail: [email protected] © Social Sciences Academic Press and Springer Nature Singapore Pte Ltd. 2020 T. Wang et al. (eds.): Annual Report on The Development of PPP in China, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-15-5724-8_8

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The Outline for the Planning of the National Medical and Health Service System (2015–2020) issued by the State Council in 2015 pointed out the target of 6 beds in medical and health facilities per thousand permanent residents in China by 2020, including 4.8 hospital beds and 1.2 beds from primary medical and health facilities. However, as of 2013 end, there were only 4.55 beds in medical and health facilities per thousand permanent residents, which was 25% fewer than the 2020 target. The “13th Five-Year Plan” sets clear target for elderly care, which is that “day care should cover all communities in cities and 50% in rural areas, and there should be 35–45 beds for elderly care per thousand elderly people”, which means that there should be over 8 million elderly care beds in China by 2020. However, now there are about 26 elderly care beds per thousand elderly people in China with the coverage rate of day care in cities at 70% and 37% in rural areas, a shortage of over 2 million beds in total.

8.1.2 Traditional Mode of Construction in Urgent Need of Improvement The construction of medical and elderly care system in China is dominated by public entities. The construction of medical and elderly care facilities is traditionally funded by public finance and managed by administrative institutions (hospitals or nursing homes) as project owners. This traditional mode has relatively obvious disadvantages. On the one hand, project construction is subject to government finance. Since projects are fully funded by the government, therefore, the success of projects lies in the financial affordability instead of market demand, which cannot effectively address the increasingly urgent medical and elderly care demand of an aging society in China. On the other hand, project construction and management efficiency is unsatisfactory. Project owners, as the first liability subject of engineering management, has limited experience in engineering construction, therefore difficult to make the optimal decisions on design proposal and the selection of equipment etc. Construction agents have rich engineering management experience, but difficult to make decisions from the perspective of managers (users).

8.1.3 Mismatch Between Supply and Market Demand in Elderly Care There is a mismatch on the elderly care market. On the one hand, a huge shortage of beds compared with the aging population; on the other hand, unsatisfactory operations of the elderly care service industry now. According to the Elderly Care Facilities Development Research Report published by China Research Center on Aging (CRCA), the average vacancy rate of elder care facilities in China is 48%, about

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40% of elderly care facilities are at loss and only 9% are making profit, of which 78% of the profitable facilities only have a profitability rate of 5%. The major reason behind this is that now most of the elderly care facilities are public nursing homes which are positioned to only provide food and accommodation services with a lack of primary care personnel, and the level of service is not acceptable for most of the elderly population. On the other hand, private elderly care institutions have relatively complete facilities and services but no government subsidy; therefore they are too expensive for most elderly people. Considering the future demand, it is in urgent need to combine medical resources with elderly care resources via “combination of medical and health care” and “publicprivate partnership” etc. in order to provide integrated services covering “medical, health care and entertainment services” at a proper price to satisfy the demand of an aging society.

8.2 Policy Evolvement of Promoting PPP in Medical and Elderly Care Sector 8.2.1 Macro-Industrial Policy On 23 September, 2014, the Ministry of Finance issued the Notice on Several Issues concerning the Promotion and Application of the Public-Private Partnership Mode, which mentioned that PPP mode is proper for medical and elderly care service facilities with relatively flexible pricing adjustment mechanism, relatively high market orientation, relatively large investment scale and stable long-term demand etc. On 17 April, 2014, the Ministry of Land and Resources issued the Guiding Opinions on Land Usage for Elderly Care Service Facilities (No. 11 [2014], MLR), which clarified that different types of elderly care service facilities can adopt different mode of land usage, and encouraged the supply of land for elderly care service facilities by ways of leasing to reduce the construction cost for profit-oriented elderly care service facilities. It also required prioritized arrangement in the annual plan of land usage for new elderly care service projects which involve new land for construction and are in line with overall land usage plan. On 14 April, 2015, the Implementing Opinions on Supporting Social Elderly Care Service System Construction with Development Finance issued by the Ministry of Civil Affairs and China Development Bank: the source of capital for elderly care projects include government subsidy, borrowers’ proprietary fund and borrowers’ non-monetary assets that are part of the project investment etc. The proportion of capital fund should be no lower than 20% of the total investment where loans are available for the gap in capital; the project capital fund and loans should be in place at the same proportion. On 19 May, 2015, the General Office of the State Council forwarded the Guiding Opinions on Popularizing the Public-Private-Partnership Mode in the Public Service

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Fields (No. 42 [2015], SC) by the Ministry of Finance, the National Development and Reform Commission and the People’s Bank of China, which once again lift PPP mode to the level of national strategic deployment on public service sector where elderly care is one of the 13 key areas. On 28 October, 2016, the Ministry of Land and Resources issued the Guideline for the Implementation of Industrial Land Policies (No. 38 [2016], MLR), which provided policy basis for ways of land supply for medical or elderly care service facilities and relevant favorable policies.

8.2.2 Medical and Health Policies On 18 November, 2015, the Notice on Guiding Opinions on Advancing the Combining of Medical and Health Services and Elderly Care Services (No. 84 [2015], SC) issued by the Health and Family Planning Commission etc. forwarded by the General Office of the State Council: expand market-based financing channel, explore PPP investment and financing mode. The government selects qualified representative areas for pilot of combining medical and health care, plan to build a batch of pilot projects with distinctive characteristics and role of demonstration. Different regions should actively explore effective ways to promote the combination between medical and health care that is aligned with local conditions, and every province (district, city) should set up at least 1 provincial-level pilot area to accumulate experience for gradual promotion. On 8 August, 2017, the Notice on Stimulating the Dynamism of Investment in Medical Sector with Deeper Reforms on “Simplifying Procedures, Decentralizing Powers, Combining Decentralization with Appropriate Control, and Optimizing Services” (No. 43 [2017], HFPC) issued by the Health and Family Planning Commission further provided policy facilitation for elderly care institutions to establish medical clinics and the participation of social capital in the medical sector. On 15 June, 2018, the National Health Commission and the National Administration of Traditional Chinese Medicine issued the Notice on Further Reform and Improve the Review and Approval of Medical Institutions and Physicians (No. 19 [2018], NHC), which further clarified that “on the premise of ensuring medical quality and safety, medical institutions can entrust independent medical laboratory, pathological diagnosis center, medical imaging diagnosis center, medical disinfection supply center or other qualified medical institutions to provide services such as medical examination, pathological diagnosis, medical imaging, and medical disinfection supply, etc.” This policy further broadened the scope of business in medical projects that are open to social capital, and therefore more conducive to mobilizing social capital in medical projects. On June 21, 2018, 11 ministries and commissions including the National Health Commission and the National Development and Reform Commission jointly issued the Guiding Opinions on Promoting the Reform and Development of Nursing Service Industry (No. 20 [2018], NHC). In accordance with the principle of “government

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guidance, diversified investment”, the government has created a good market environment for the elderly care service industry by improving support policies, strengthening industry supervision and other measures, guided and encouraged social investment in nursing service industry in various forms, expanded the supply of nursing service, and effectively improved the service quality and efficiency.

8.2.3 Policies on Elderly Care On July 24, 2012, the Ministry of Civil Affairs issued the Implementing Opinions on Encouraging and Guiding Private Capital to Elderly Care Services (No. 129 [2012], MCA). The elderly care institutions run by private capital can be divided into forprofit and non-profit, namely two types of legal person registration of private nonenterprise entities and enterprises. If the land use needs of elderly care institutions run by private capital meet relevant requirements, land shall be allocated according to the land allocation catalogue and the law. Non-profit elderly care institutions run by private capital can enjoy certain construction subsidies or operation subsidies. Business tax is exempted for the nursing services provided by the elderly care institutions or service facilities run by private capital. The price of elderly care services provided by non-profit institutions or service facilities run by private capital shall be guided by the government. For-profit elderly care institutions can set their own prices according to the quality of services provided. On November 12, 2012, the Ministry of Civil Affairs and the Ministry of Finance issued the Guiding Opinions on the Government Purchase of Social Work Services (No. 196 [2012], MCA) to implement the social care plan for the elderly and the disabled, providing the elderly and the disabled with life care, spiritual comfort, social participation, intergenerational communication and other services, and building a systematic, humanized and professional service mechanism for the elderly and the disabled. Purchase procedure: plan budget, organize purchase, sign contract and guide implementation. On September 6, 2013, the State Council issued Several Opinions on Strengthening the Development of Elderly Care Service Industry (No. 35 [2013], SC), giving full play to the basic role of the market in resource allocation, gradually making social forces the main body of developing elderly care service industry, and creating a market environment of equal participation and fair competition. Support social forces to run elderly care institutions, further reduce the threshold for social forces to run elderly care institutions in terms of capital, venue and personnel, simplify and standardize procedures and disclose information, and the administrative licensing and registration authorities shall verify the scope of their business and activities so as to provide convenient services for social forces to run elderly care institutions. The management of elderly care beds invested by the government should gradually adopt the mode of public construction and private operation in order to encourage the operation of public elderly care service facilities by private capital through entrusted management and other means.

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On January 16, 2014, the Ministry of Civil Affairs, the Standardization Administration, the Ministry of Commerce, the General Administration of Quality Supervision, Inspection and Quarantine and the Office of the National Working Commission on Aging issued the Guiding Opinions on Strengthening the Standardization of Elderly Care Services. In terms of basic general standards, it is necessary to accelerate the formulation of standards such as classification and naming of elderly care institutions, basic terms and graphical symbols of elderly care services etc. In terms of management of elderly care institutions, it is necessary to step up the formulation of standards for the allocation of facilities and equipment, and the quality control of services provided by medical institutions in elderly care facilities. Continue to strengthen the publicity and implementation of published standards, and implement the standards such as the Basic Specifications for Elderly Care Institutions, and the Ability Assessment of the Elderly, as well as the national vocational skills standards such as elderly care nurses. On August 26, 2014, the Ministry of Finance, the National Development and Reform Commission, the Ministry of Civil Affairs and the Office of the National Working Commission on Aging issued the Notice on Improving Government Purchase of Social Work Services. In terms of the purchase of institutional elderly care services, mainly purchase institutional support and nursing services for the special elderly (the elderly without ability to work, source of livelihood, supporter or the supporter has no ability to support), the low-income elderly, the disabled and semi disabled elderly with financial difficulties. On September 12, 2014, the Notice on Accelerating the Construction of Health and Elderly Care Service Projects (No. 2091 [2014], NDRC) advocated that in areas with rich public resources, social capital should be encouraged in the construction of medical and elderly care facilities and the reform of public institutions through sole proprietorship, joint venture, cooperation, joint operation, joint equity, and leasing etc. by means of PPP etc. The electricity, water, gas and heat consumption of elderly care institutions shall be charged according to residential rates. The elderly care institutions may enjoy relevant preferential tax policies in accordance with tax laws and regulations. The construction of non-profit medical and elderly care institutions shall be exempt from relevant administrative fees, and that for the construction of for-profit medical and elderly care institutions shall be reduced by half. It is necessary to reduce and remit administrative fees properly for providing elderly care services for elderly care institutions. On January 19, 2015, the Guiding Opinions on Regulating the Administration of Service Charges of Elderly Care Institutions to Promote the Healthy Development of the Elderly Care Service Industry issued by the National Development and Reform Commission and the Ministry of Civil Affairs. The service charge items and standards of private for-profit elderly care institutions were independently determined by the operators, and the relevant government authorities were not allowed to intervene improperly; the service charge standards of private non-profit elderly care institutions were reasonably determined by the operators, and the relevant government authorities may, considering the need of supervision over non-profit organizations, exercise

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necessary supervision over financial revenue and expenditure, charging items and frequency of price adjustment. In February 2015, ten ministries and commissions including the Ministry of Civil Affairs, the National Development and Reform Commission and the Ministry of Education jointly issued the Implementing Opinions on Encouraging Private Capital to Participate in the Development of the Elderly Care Service Industry, and supported the construction or development of elderly care institutions in the mode of shareholding, joint-stock cooperation and PPP etc. As for communities and apartments projects for the elderly following construction standards such as Urban Residential Code of Planning and Design, and Code of Planning and Design of Residential Buildings for the Elderly etc., their supporting elderly care institutions that meet the conditions of independent registration shall enjoy the corresponding support policies according to regulations. On April 22, 2015, the General Office of the Ministry of Civil Affairs and the General Department of the Office of the National Working Commission on Aging issued the Notice on Further Improving the Development of the Elderly Care Service Industry (No. 992 [2016], MCA), which pointed out that all regions should optimize the investment structure and further increase the government investment to support the construction of elderly care service system. More than 50% of the lottery public welfare funds used by the government for social welfare undertakings should go to elderly care service industry. Meanwhile, the guiding role of government investment should be given full play to actively support social capital investment in this field. On December 7, 2016, the General Office of the State Council issued Several Opinions on Fully Opening the Elderly Care Service Market and Improving the Quality of Elderly Care Services (No. 91 [2016], SC). By 2020, the elderly care service market will be fully opened, the effective supply of elderly care services and products will be greatly improved, the supply structure will be more reasonable, and the elderly care service policy, regulatory system and industry quality standard system will be improved, the credit system will be basically established with effective market supervision mechanism, better service quality and public satisfaction. The elderly care service industry will become a new driving force for economic and social development. On August 14, 2017, the Ministry of Civil Affairs, the Ministry of Human Resources and Social Security, the Ministry of Finance jointly issued the Implementing Opinions on Using PPP Mode to Support the Development of the Elderly Care Service Industry (No. 86 [2017], MOF), which put forward clear requirements for the promotion and use of PPP mode in the elderly care industry, encouraged the government to transfer the existing public elderly care institutions to social capital owners for operation and management, and encouraged the government and social capital to build and operate home-based elderly care service outlets and comprehensive community service facilities in urban and rural communities, set up or operate various elderly care services such as elderly meal, community day care, elderly spiritual and cultural life etc. Support the government to package the community elderly care services within its jurisdiction and entrust social capital to invest, construct

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or operate through PPP mode, so as to realize unified standard and operation of community elderly care services within the region.

8.3 Application of PPP Mode in Medical and Elderly Care Sector 8.3.1 Overview of Medical and Elderly Care PPP Projects In recent years, under the positive guidance of national macroeconomic policies, medical and health, and other industry development policies of the Ministry of Civil Affairs, the application of PPP mode in the field of medical care and elderly care has been developing continuously. According to PPP project database of the Ministry of Finance, the number and implementation rate of PPP projects in medical and elderly care both show a steady upward trend. As of December 31, 2018, there were 595 medical and elderly care PPP projects in China, including 237 projects in the reserve and 358 projects under management. The total investment of 358 projects in the management database is about RMB 273.855 billion yuan, out of which there are 251 medical and health projects with a total investment of about RMB 175.436 billion yuan, 107 elderly care projects with a total investment of about RMB 98.419 billion yuan. As shown in Fig. 8.1, there are 70 projects in the preparation stage (about 19.5%) in the project management database; 88 projects in the procurement stage (about 24.6%); and 200 projects in the execution stage (55.9%). 160 140 120 100 80 60 40 20 0 # of projects in preparation

# of projects in purchase

# of projects in execution stage

Elderly Care

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66

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Medical & Health

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Fig. 8.1 Stages of medical and elderly care PPP projects. Data source PPP Project database, Ministry of Finance

In terms of project implementation mode, BOT is the main mode among implementation projects where 270 projects adopt BOT mode, accounting for 75.4%; and

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47 projects adopt BOO mode, accounting for 13.1%. In terms of project return mode, viability gap funding mode is the main mode, which is adopted by 240 projects, accounting for 67%; 36 government-paid projects, accounting for 10%; 76 user-paid projects, accounting for 21%; and the rest are other types of projects. In terms of the mix of social capital, different from the municipal transportation and other fields which are dominated by state-owned enterprises, the social capital in medical and elderly care industry is mostly private capital. Among the projects that have entered the execution stage, 164 projects have disclosed their social capital sources, of which three quarters (123 projects) have involved private capital.

8.3.2 Characteristics of PPP Application in Medical and Elderly Care Sector 8.3.2.1

Increasing Number of Projects

During 2018, 87 new medical and health PPP projects and 26 elderly care PPP projects were added with a total investment of more than RMB 98.419 billion yuan, accounting for 36.69% of the total investment of new PPP projects in the same period (2018) (about RMB 268.265 billion yuan), and 30% of the total number of projects. The proportion of both the number of projects and the volume of investment in the current year is significantly higher than the historical data.

8.3.2.2

Diversified Investors

The investment volume of medical and elderly care projects is not large, but it has high requirements for the professional capability and operation management experience of the implementers, and it is not attractive to most large state-owned enterprises whose main business is project contracting, so local state-owned enterprises or private enterprises have more opportunities to participate. In the PPP project database of the Ministry of Finance, out of the 199 medical, health and elderly care projects in the execution stage, 164 projects have announced the names of social capital investors. An analysis of the social capital mix shows that there are 123 projects with the participation of private enterprises (a few of them are private non-profit enterprises), accounting for up to three-quarters. Medical and elderly care projects have relatively high demand on operation and management, and most of the projects have industrial investors involved. Further analysis of the main businesses of the social capital parties of the 164 projects reveals that 93 projects are invested by industrial investors solely or jointly, 60 projects involve engineering construction enterprises, and 8 projects involve pure financial investors as shown in Fig. 8.2.

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Fig. 8.2 Mix of social investors of medical and elderly care projects

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60 93

Industrial Investors

8.3.2.3

Construction Enterprises

Financial Investors

Innovative Development of Project Business Model

An analysis of the PPP projects implemented in recent two years has shown many attempts in business model innovation. The comprehensive elderly care service PPP project of Changchun is no longer to build a single elderly care service facility, but to build a “1990” comprehensive elderly care service system, which includes one large centralized elderly care center, nine regional elderly care service centers and 90 community home-based elderly care service centers. The projects under this kind of business model have a longer vision, starting from the needs of users, taking into account the needs of institutional elderly care, home-based elderly care and community elderly care, so as to provide consumers with all-round and high-quality services. The project explores the potential value-added benefits brought by big data application and community-based arrangement by building an elderly care information service platform. This business model is conducive to the sustainable and virtuous development of project, which is of great value for promotion. Shangrao City Elderly Service Center project, in addition to the regular income such as rent of elderly apartments, has also considered a variety of income sources such as health service center, reception center, restaurant, supermarket, parking lot, etc. The PPP project of Wuhan social welfare complex building adopts the mode of ROT. The project company carries out the renovation, installation, engineering transformation, intelligent system upgrading, medical equipment and purchase of office furniture on the original basis. The project company obtains reasonable return by collecting the service fee for elderly care, medicine, physical examination, homebased elderly care, supermarket income, and e-commerce platform income, etc. Through exploring diversified project revenue sources, such projects can basically recover project investment by fully relying on the payment of users. In addition to enjoying the uniform subsidy policies by civil affairs departments such as bed subsidy, there is no need for additional viability gap funding. Projects such as Yaojiayu ecological elderly care project in Boshan District, Zibo City, Shandong Province, “Sunshine New City” project of Huai’an Elderly Care and Health Care Industrial Park, and Henan Ziyungu New Elderly Care Demonstration

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Base (phase I) etc. all involve the construction and development of elderly housing or home-based elderly care apartment. The income from housing development can be used for the elderly care sector to reduce the need for government’s viability gap funding. However, with the change of external conditions such as the increasingly standardized national land use policy and the more rational real estate market, it remains to be further observed whether such projects can achieve the expected return smoothly. Whether this mode can be promoted in the future or not also depends on the trend of land policy.

8.4 Outlook on the Application of PPP Mode in Medical and Elderly Care Sector 8.4.1 PPP Will Remain as an Important Mode in the Construction of Medical and Elderly Care Facilities China has a large population while the total volume of medical, health and elderly care facilities has been at a low level. According to China Statistical Yearbook on Health 2018, by the end of 2017, there were 7.94 million beds in medical and health institutions across the country, 530,000 more beds than the previous year. The number of beds in medical and health institutions per thousand people increased from 5.37 in 2016 to 5.72 in 2017, which still fails to meet the “13th Five-Year Plan” target: 6 beds in medical and health institutions per thousand people by 2020. According to the 2017 Statistical Report on Social Service Development issued by the Ministry of Civil Affairs in 2018, by the end of 2017, there were 30.9 beds per thousand elderly people in China, which is quite far from the target of “35 to 45 beds per thousand elderly people” set in the 13th Five-Year Plan, and the construction of elderly care facilities is also very arduous. Under the policy background of strictly controlling local government debt, it can be predicted that more PPP projects for health and elderly care will be launched in 2019.

8.4.2 More Private Enterprises Will Participate in Medical and Elderly Care PPP Projects In the first few years of promoting PPP mode, compared with projects in municipal infrastructure and other fields, the initial investment of medical and elderly care projects is not large, usually within RMB 100–500 million, but these projects have high requirements for professional operation, high proportion of user payment, and huge market risk, so it has little attraction to social capital. In 2018, with the

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improvement of PPP project management policy, it is more emphasized that the social investors of PPP projects should participate in the operation and get more benefits through improving quality and efficiency during the operation period, rather than simply relying on the government to pay. With such requirements, large state-owned construction enterprises which have no advantages in operation and management find it not easy to get involved in medical and elderly care projects, therefore leaving room for small and medium-sized private enterprises.

8.4.3 The Role of Improving the Quality and Efficiency of PPP Projects Will Gradually Be Revealed The essence of PPP project is to do professional things with professionals. Take public hospital project as an example, most of the hospital management have the background as doctors who usually specialize in the medical business, but running a hospital is a systematic effort which requires the support of equipment maintenance, consumables management, property management, security and cleaning, washing and disinfection and catering services etc. besides the core medical business. Handling the implementation of non-core business of public hospitals to investors can improve service quality with more professional operation and management on the one hand and improve the economy through large-scale operation and management on the other hand. It can be predicted that in the future, with a large number of PPP projects put into operation, with appropriate performance incentive mechanism, the project company led by the social capital will be able to provide better service quality at a lower cost compared with the traditional mode through its professional management and large-scale operation.

Chapter 9

The Development of PPP in Environmental Protection in the New Stage Tao Xue and Hui Guo

Abstract Since the pilot in 1995, PPP has gone through a large-scale development of franchise, and now it has developed to the expansion of content. Now, PPP has been greatly expanded in both scale and scope, forming a new pattern. It is worth noting that China’s PPP is deeply influenced by “three major relationships”. Based on the classification of PPP for municipal and environmental protection, this report introduces the development as well as the problems and risks of each sub-field under water-related affairs and solid waste sectors so as to provide reference for better understanding the development of PPP in environmental protection. Keywords PPP development stage · Four classification theory of PPP · Water-related affairs · Solid waste

9.1 The History of PPP Development in Environmental Protection In recent years, with ecological civilization raised as a national strategy, pollution prevention and control has become one of the three tough campaigns. Environmental protection has been regarded as a “front”, while environmental PPP resonates with the new round of PPP boom as a key area in 2014. In fact, since the 1990s, China has started the exploration and practice of PPP. For decades, the development and pattern of China’s environmental protection industry has been highly affected by PPP. According to the time sequence of PPP development and the characteristics of each period, the development of PPP can be divided into three stages.

T. Xue (B) E20 Environment Platform, Shanghai, China e-mail: [email protected] T. Xue · H. Guo E20 Research Institute, Shanghai, China e-mail: [email protected] © Social Sciences Academic Press and Springer Nature Singapore Pte Ltd. 2020 T. Wang et al. (eds.): Annual Report on The Development of PPP in China, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-15-5724-8_9

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9.1.1 Pilot Stage (1995–2001) At this stage, China had an urgent demand of infrastructure. In order to meet development needs, the Chinese government actively encouraged and guided foreign investment. Central government organizations headed by the former National Planning Commission (predecessor of the current National Development and Reform Commission) launched several pilot projects of standardized BOT investment from 1996, such as “Guangxi Laibin B Power Plant Project” and “Chengdu No. 6 Water Plant Project”, opening the door of China’s PPP movement. Among them, the central government gave strong support to “Guangxi Laibin B Power Plant Project”, making it a reference for BOT infrastructure projects later; and the handover of “Chengdu No. 6 Water Plant Project” also marked the successful completion of China’s first water-related BOT project.

9.1.2 Franchise Stage (PPP 1.0, 2002–2012) This stage was later called the era of franchise or PPP1.0. In municipal infrastructure, the former Ministry of Construction issued the Notice on Issuing the Opinions on Accelerating the Marketization of Municipal Public Utilities (No. 272 MOC) and the Measures for the Administration on the Franchise of Municipal Public Utilities (No. 126 [2002], MOHURD) issued in 2002 opened a new era of large-scale implementation of PPP in China, profoundly affecting the industrial pattern of municipal public utilities. A relatively mature single franchise project has been formed, which is mainly applied in six municipal infrastructure fields under the Urban Construction Department: sewage treatment, garbage treatment, water supply, gas supply, heating and public transportation. In the market practice, franchise was promoted through BOT and TOT modes of sewage plants and garbage plants, and equity restructuring of tap water. As for water affairs, since the approval of the first BOT project (Chengdu No. 6 Water Plant) and the issuance of Urban Water Supply Price Management Measures in 1998, China’s water market reform has gone through more than 20 years.

9.1.3 Content Expansion of PPP (PPP 2.0, 2013–Now) Compared with the overall effect achieved in the second franchise stage, the current PPP development still has a gap from ideal in terms of maturity, the improvement of public service efficiency and industrial upgrading. The executive meeting of the State Council in 2013 proposed the market-based resource allocation. However, until the issuance of No. 43 [2014] NDRC document and local debt management policies, the development of PPP entered the stage of massive expansion. In this stage, environmental protection PPP projects break through the limitation of single

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project, and large-scale government service purchase PFI project of comprehensive water environment treatment (black and odorous water) emerges, and attempts in environmental sanitation and kitchen waste treatment in the field of solid waste also begin. It is worth noting that China’s PPP grows from a special soil. Due to the influence of the three major relationships, namely, the relationship between the central government and the local government, between ministries and commissions and the ownership relationship, on PPP and the overall political and economic reform, China’s PPP will eventually be concentrated within the scope of government finance. PPP is given a special responsibility from the perspective of the relationship between the central government and the local government: the starting point of the central government’s support of PPP reform is to control local debt, to deeply transform the investment and financing mode of the local government, and to transform the local government from development-oriented to service-oriented. The Environmental Protection Law issued by the central government at the same period was to clarify the environmental protection responsibilities of local governments through legislation. The three “Ten Rules” on gas, water and soil are actually the “menu” given by the central government to local governments for environmental governance, and the local governments are the main ones to pay the bill. In addition to the relationship between the central government and the local government, the development and implementation of PPP in China are also affected by the relationship between ministries and enterprise ownership. It can be seen that almost all industrial authorities have participated in the promotion of PPP to varying degrees, and relevant documents are often issued jointly with more than 20 relevant ministries and commissions; finally, due to the reasons mentioned above, the application scope of PPP has been greatly expanded, and a large number of pure public welfare and non-operation projects under government service purchase mode, such as municipal roads, underground pipelines and black and odorous water governance have also been included in PPP. However, this also brings controversy because this kind of projects have obvious financing purpose with huge work volume and unclear operation attribute, which is questioned by some people to be similar to a kind of elongated version of BT mode that has already been stopped.

9.2 Four Classifications of PPP in Municipal Environmental Protection In order to better clarify the internal logic of PPP, help enterprises better understand the essence of each sub-field, and identify the risks faced in the process of participation, E20 puts forward the four classification theory of PPP in the field of municipal environmental protection.1

1 XUE

Tao: Annual Review of Environmental Protection PPP, Top Thinking and Industrial Change after Classification.

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9.2.1 Class A: Franchise Under Government Supervision It includes water supply PPP (mainly equity cooperation, very similar to gas supply and heating PPP in nature) and underground pipelines which do not rely on government repurchase, etc. This kind of project belongs to the franchise project in a narrow sense. It has the fundamental feature of demand risk faced by social capital providers due to uncertain number of users and another basic feature of monopoly. It usually has a price hearing mechanism, which charges directly to the non-governmental end-users, such as water supply and gas supply etc. It’s under strong supervision for public interest based on the core nature of public service and guarantee of public interest after gaining monopoly, which is totally different from the regulation of class B, C and D projects that are in essence based on the equal relationship of direct purchase between government and enterprise. Other innovative mixed projects bundled with commercial factors, such as park development, elderly care and real tourism which do not rely on government repurchase, are similar to class A projects in logic to certain extent.

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9.2.2 Class B: Franchise Under Government Purchase of Services It includes sewage plant BOT, waste incineration plant BOT, landfill plant BOT, food waste treatment plant BOT, sludge treatment plant BOT, etc. (these items may be bundled with front-end collection and transportation). The business model also includes TOT, BOT for new construction, and TOT for the transfer of existing projects. Here, the concept of BOT/TOT is defined in a narrow sense. The narrow definition is for the generalized application of BOT, which refers to a government payment mode of BOT/TOT in a narrow sense. This kind of project is paid by the government. Despite the potential payers, the government pays directly to the social capital providers in actual transactions, such as sewage treatment and garbage treatment etc. The basic characteristics of such projects are: first, the government is the user of services; second, the risk of demand is not borne by social capital but by the government instead. From this point, there is a huge difference in essence between class A and class B projects under the traditional franchise. It can be said that only class A projects fit into the most accurate definition of the core concepts of “franchise” and “operation” in franchise.

9.2.3 Class C: Non-franchise Under Government Purchase of Services It includes financing and build of pipeline network, treatment of black and odorous water excluding sewage plant, sponge city, soil restoration, rural sewage or garbage treatment, etc. Most of the government paid service purchase projects now are only for maintenance with weak operation, such as pipeline network, black and odorous water treatment excluding sewage etc. This kind of project no longer adopts the mode of unit price bidding and quantity-based pricing, but availability payment, which leads to “engineering orientation” (deviates from the purpose of long-term service) and “hidden liability issue”, which is the “disaster area” of current PPP dispute and rectification. Now, the requirement of No. 92 Document on bundling performance with construction and investment is obviously to try to optimize some mechanism defects in the early stage of such projects.

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9.2.4 Class D: PPP-Oriented Government Purchase of Services Excluding Financing or Infrastructure It includes garbage cleaning or collection and transportation (excluding the financing and build of collection and transportation station), urban water maintenance, environmental monitoring services, commissioned operation services of infrastructure. In essence, such projects are more suitable for government purchase of services and they have also existed in this way for a long time, which are short-term light asset modes (such as environmental monitoring and sanitation). PPP mode can apply here when they become long-term or are bundled with some infrastructure. The comprehensive reform of PPP must be standardized in order to make progress while exploring in the long-term. After the exploration in the previous stage, it is gradually agreed that the standardized PPP should not only be able to effectively control local debts, but also continuously improve the quality and efficiency of the supply of public services. Class A, B and D are typically operation-oriented, not the disaster area of preventing “engineering-orientation” in theory. However, if the operation-oriented projects are designed as the availability payment or based on the guaranteed minimum quantity which deviates severely from the actual usage, the operation attribute may vary (such as category B sewage treatment). Preventing overemphasis on engineering than operation involves two sides of a coin. One side is local hidden debt and the other side is the decline of infrastructure investment efficiency which is in causal relationship with the former. The main focus should be optimizing type of government service purchase.

9.3 Development of PPP in Environmental Protection 9.3.1 PPP Development in Water Sector Water sector is the most popular field of environmental protection, which covers water supply, drainage and sewage treatment, integration of urban and rural water supply and drainage, comprehensive treatment of water environment and other subdivisions. With the saturation of urban water supply and drainage market, the marketization of water services is more reflected in the comprehensive treatment of water environment, treatment of sewage from villages, towns, and parks etc. Different sub-areas have unique characteristics in terms of cooperation boundary, risk distribution and benefit sharing etc. For example, class B sewage treatment PPP project is defined as user payment (actually “polluter”), but it is paid by government finance in practice. With the expansion of business in different fields, including the “access” of nonenvironmental protection players in this field, PPP in water affairs has become more comprehensive and diversified, and its risks and potential problems are becoming more and more complex.

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9.3.2 PPP in Major Sub-fields Under Water Sector 9.3.2.1

Key Features of Sewage Treatment PPP

The sewage treatment PPP has clear boundaries and comprehensive performance evaluation, which in fact exceed the 30% performance evaluation requirement. Sewage treatment plant BOT belongs to franchise under government purchase of services, which is a class B project with strong operation-orientation. However, the 30% performance evaluation requirement is a revision proposed in No. 92 Document to fix the expenditure responsibility of government service purchase projects, which is for the loophole of annual project payment in the availability payment mode. The performance evaluation indicators of sewage treatment are professional, quantitative and operable centering on the quantity, price, and quality of water etc., rather than project acceptance and other areas with weak performance constraints. Sewage treatment PPP strictly implements the efficiency-based payment mechanism. In essence, it is government payment, or is classified as viability gap funding in some places. In terms of “financial affordability”, the expenditure of such projects is rigid expenditure, which needs to be implemented even without PPP. It is suggested to focus on feasibility study to determine whether the scale and grade are reasonable, and the adoption of PPP should not be restricted by “financial affordability”. In addition, attention should be paid to the guaranteed minimum volume, which is the institutional arrangement of the minimum demand risk allocation in the sewage treatment PPP projects. Pipeline network design also affects PPP design. Due to historical issues and the problem of right and responsibility in actual operation, the unqualified water inflow beyond the control of social capital will affect the standard assessment of sewage plant outflow, which is more prominent in the current environmental supervision. For example, the contradiction between the water quality assurance before water flows into sewage treatment plant and the supervision of the drainage outlet cannot be solved even with the plant-pipeline integration. In addition, for single plant project, government-authorized subjects are not recommended to participate in joint ventures or equity so as to avoid the fuzzy boundary of construction and operation cooperation and the difficult coordination of supervision.

9.3.2.2

Main Issues Faced by Plant-Pipeline Integration PPP

The attention paid to pipeline network in China is far from that of sewage treatment plant. As a result, low efficiency of the existing sewage collection system and low influent concentration. It is the key direction in the future to improve the quality and efficiency of sewage collection system from plant to pipeline network. For this purpose, there is high expectation for the market-oriented integration of plant and pipeline network, but now the mode is still far from expectation and needs more time to explore.

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First, the most prominent feature of the plant-pipeline integration project should be the systematic effect-oriented assessment, rather than the traditional assessment of the effluent standard based on minimum water quantity and minimum water quality. Social capital is faced with problems in management, operation and maintenance in both new and existing network. The quality of existing pipeline network is generally poor, which leads to incomplete delivery of sewage to the sewage plant or low concentration of water inflow and low efficiency of pollutant reduction, and the difficulty of making up the funding gap in market-oriented operation. In terms of new pipeline network, the investment of pipeline network is much higher than that of sewage plant in reality, and the low construction standard leaves potential risks. Other problems are similar to the existing pipeline network. Second, social capital has no administrative law enforcement power over the pollutant discharge units accessing the pipeline network, which leads to the risk of unqualified effluent water because of the inconformity between inflow water quality and agreement when the government’s supervision is insufficient. In fact, the government is more capable than social capital in bearing the risks of pipeline network operation, as well as the administrative law enforcement power and coordination ability, which cannot be transferred to social capital. Therefore, under the principle of “matching risk and return”, the social capital will require a higher return from PPP project of integrated plant and pipeline network, which is likely to increase the government’s financial expenditure compared with the public build and operation, and the final implementation effect may not meet the expectation.

9.3.2.3

Main Risks of PPP in Comprehensive Treatment of Water Environment

The market of PPP in comprehensive treatment of water environment is huge, and it is a key area of PPP expansion. However, due to the huge fund requirement, the constraints of the new asset management regulations and other documents, as well as the three-year water treatment actions in the early stage, the development of this industry has slowed down compared with the early stage of the “13th Five-Year Plan” period. It is estimated that during the post- “13th Five-Year Plan” period, the potential market of comprehensive water environment treatment is about RMB 1 trillion yuan. Considering that some of the black and odorous water under treatment are temporary, the total scale of treatment in the later stage will be RMB 1.5 trillion yuan. An analysis of current PPP projects of comprehensive water environment treatment found that such projects actually are called by various names such as water environment treatment, river treatment and water environment restoration etc., but they can be classified into three types (performance pressure decreases one by one). First is the black and odorous water as the core, which is under the supervision of the Ministry of Housing and Urban-Rural Development and the Ministry of Ecology and Environment mainly based on the requirements of the “Action Plan for Prevention and Control of Water Pollution”. Its construction and operation focus on black

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and odorous water and has strict performance assessment requirements on the water quality, such as phase-II of the comprehensive water environmental treatment project of Nanming River in Guiyang city. The second type is PPP mainly based on urban water system transformation and ecological restoration with river restoration as the core, including sponge city. Its construction and operation focus on water system and ecological restoration, and its performance can be assessed through water quality or quantity and other ecological indicators, such as the flood control and water system treatment project in the central city of Chifeng, Inner Mongolia. The third type is more like garden projects featuring ecological landscape in essence, which is called comprehensive water environment management. The construction and operation focus on landscaping and has relatively weak performance constraints, such as the water ecological comprehensive treatment project of Jilin Wende River wetland. Comprehensive water environment treatment project belongs to class C government purchase of services which can’t be priced on quantity as class A and B, and its performance evaluation is not as standardized as class A and B, therefore more likely to cause problems such as “over-emphasis on construction rather than operation”, so it has become the focus area of PPP standardization. From the perspective of performance orientation, water environment treatment should promote projects with high performance pressure so as to achieve value for money. In terms of fiscal expenditure, comprehensive water environment treatment projects require large investment, but have no source of operation income, usually depending on government payment or viability gap funding, which is most affected by financial affordability study. Under the new PPP policy, the content of project may be “reduced”. Now, under the pressure of “Action Plan for Prevention and Control of Water Pollution”, the number of projects will not decline, but the content of such projects may be reduced due to the financial red line of “10%” and bundling 30% of construction cost with performance evaluation. In addition, No. 92 Document made great efforts to promote the transformation of PPP project from focusing on construction to focusing on operation, set up performance payment mechanism, and specifically put forward “four preventions” to standardize such projects, which increased the risk of social capital to recover investment. Under the requirement of “prudent development of government-paid projects”, it’ll be more difficult to launch comprehensive water environment treatment projects in the future. It is expected that comprehensive water environment treatment projects will be mixed B + C (franchise under government purchase of services + government purchase of services) projects, namely, operational content such as sewage treatment plant will be bundled into the project as much as possible on the basis of the original government purchase of services to reflect operation performance and performancebased payment. Project financing may become more difficult. The development of PPP is more standardized with progress from pure government-paid purchase of services projects,

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to class B + C projects with viability gap funding, the emphasis on performancebased payment and the requirement that no less than 30% of construction cost should be bundled with performance evaluation. However, from the perspective of PPP financing, financial institutions will make stricter assessment on such projects, and the loan amount may be reduced. In addition, with the issuance of the new asset management regulations, the financing channels for PPP projects may also be narrower. With higher requirements for the operation capability of social capital, PPP has entered the stage of standardized development, emphasizing more on operation as the core and performance-orientation. Enterprises need not only general engineering construction capacity, but also professional sewage treatment capacity. Comprehensive enterprises with strong investment capacity, leading technology and mature investment, design, construction, operation and management teams have obvious advantages in water environment treatment PPP projects. Small and medium-sized enterprises with technology accumulation may be a feasible option for such enterprises to rapidly build a diversified business and better participate in comprehensive water environment PPP projects.

9.3.2.4

Main Features of PPP in Village and Town Sewage Treatment

PPP in village and town sewage treatment are mostly new projects since now environmental enterprises are in the stage of “expanding scales to take market”. It’s difficult to simply adopt BOT minimum quantity mode because of the issue on water quantity and payment mode, which often become class C project with weak operation. The adoption of availability payment and operation and maintenance service payment makes rural sewage project more like “water environment” project from this perspective. The PPP projects of sewage in villages and towns in the PPP project database of the Ministry of Finance are all packaged projects. While the volume of a single village or town is limited, packaging similar or related projects in several villages and towns or even in the whole city or county is beneficial to the government and social capital. The government can choose social capital for investment, construction and operation once and for all for easier supervision, and social capital involved can obtain a large number of projects to obtain economy of scale and synergy. However, it is necessary to consider the sufficiency of market suppliers. When the market supplier is unable to provide complex packaged projects, single project biding and procurement is needed. In addition, packaging projects should consider relevance rather than simply adding projects, especially be aware of large-scale projects for the sake of simplifying biding. These projects are mainly for operation and maintenance. The market-oriented projects of sewage treatment in villages and towns include commissioned operation, and BOT etc., mostly are market-oriented operation and maintenance. Many village and town sewage treatment projects rely on special funds or pilot projects for

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payment, and no service-based price mechanism has been formed yet. The industrialization foundation for PPP service of village and town sewage treatment is relatively weak, and the phenomenon of low PPP marketization rate will last for a long time. In rural sewage projects, environmental enterprises should pay special attention to risk prevention and control. Great importance should be attached to rural sewage collection, pipeline network, operation and maintenance costs, and performance evaluation etc.

9.3.3 Development Status of PPP in Solid Waste China’s solid waste treatment industry has gone from the solid waste 1.0 era with landfill as a single way of disposal to the solid waste 2.0 era with the dual disposal of incineration and landfill, and now it has entered the solid waste 3.0 era led by the new era of ecological civilization. With the rapid growth of urban waste year by year, and people’s higher requirements for urban environment and health, concepts of garbage resource utilization, circular economy, and garbage classification etc. are gradually recognized and accepted by the public, and the classification of solid waste is also more sophisticated, thus developing various subdivisions of solid waste industry. The PPP of solid waste originated from the marketization (franchise) of domestic waste treatment. Now it has been extended to PPP projects of industrial parks that integrate the design and operation of multiple links and subdivisions. There are more and more subdivisions covered by solid waste PPP, which gradually releases the market opportunities and promotes the rapid and healthy development of solid waste industry in recent years. Meanwhile, it has also revealed many potential problems and rooms for improvement in solid waste PPP.

9.3.4 Introduction of PPP in Main Subdivisions of Solid Waste 9.3.4.1

Major Issues Faced by PPP in Domestic Waste Treatment

Similar to sewage treatment, the marketization degree of solid waste treatment has reached a relatively high level. Waste incineration was developed when the franchise mode was mature, so the proportion of franchise is relatively high. In recent years, with the promotion of various policies, waste incineration has developed rapidly. The franchise project of waste disposal belongs to class B PPP mode, and has “guaranteed minimum volume” in the allocation of demand risk with BOT mode in the narrow sense. It is worth noting that now the PPP projects of domestic waste treatment are mainly waste-to-electricity (WTE) projects, and the market is gradually extended to counties and cities with the following problems.

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Site selection is difficult because of the “nimbyism (not in my back yard) effect”. Although the PPP WTE projects generally go through the preliminary procedures such as environmental assessment, stability assessment, and project approval etc., with stronger public environmental awareness, the site selection of WTE project is delayed and hard to be determined under the “nimbyism effect”, so it’s quite common that the project construction is often half a year or even longer behind the schedule. Waste supply is insufficient. This risk is more prominent in prefecture level cities, districts and counties with lower urbanization and economic development level. It is closely related to the small economy and population in the county, as well as the front-end sanitation collection and transportation system and reasonable coordination of transportation distance. Therefore, it is necessary to focus on the government’s description of the guaranteed minimum volume of waste, namely, such risks are usually borne by the government in agreement by setting up the basic garbage disposal volume (“guaranteed minimum volume”), but in reality, when the volume is lower than the basic garbage disposal volume in only a few years, the government can usually pay the garbage disposal fee according to the agreement; but if this situation lasts in a longer term, the government will not be so willing to pay per agreement, and will renegotiate with enterprises on adjusting the basic garbage disposal volume or the unit price of garbage disposal service fee. Environmental risk (re-pollution risk) and the risk of losing tax preference. If the environmental indicators fail to meet the standards in the process of WTE, the operating enterprises will be subject to the deduction of fees from the garbage treatment service fees by government regulators and the relevant penalties by the environmental protection authorities. In particular, a penalty record may cause enterprises huge losses in tax preferences. According to the Notice of the Ministry of Finance and State Administration of Taxation on the Catalogue of Value-Added Tax Preferences for Products and Labor Services Involving the Comprehensive Utilization of Resources (No. 78 [2015], MOF), “taxpayers who have enjoyed the immediate levy and refund policy of value added tax stipulated in this notice, in cases of punishment for violating the laws and regulations of tax and environmental protection (excluding warning or a single fine of less than RMB 10000 yuan), shall not enjoy the immediate levy and refund policy of value added tax stipulated in this notice within 36 months from the next month of punishment”. Therefore, enterprises may lose the qualification for enjoying immediate levy and refund policy of value added tax for a single fine of more than RMB 10000 yuan, which may lead to a loss of over RMB 10 million yuan. Under the “new normal” of economy, there are some uncertainties in the financial resources of local governments and their willingness to fulfill agreements. Especially in some regions with obvious slowing economic growth, the fiscal revenue and expenditure are also impacted to some extent. However, the large scale of local rigid expenditure may affect the timely payment for WTE PPP project.

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Major Risks of PPP in Urban and Rural Environmental Sanitation

With the deepening of the marketization in environmental sanitation and the organic integration of the front-end environmental sanitation industry with the solid waste disposal industry by waste classification, the content of environmental sanitation project is gradually transforming from simple cleaning to packaging of multiple links and regions. The traditional transaction mode of government purchase of services can no longer meet the market-oriented demand of environmental sanitation. Since integrated environmental sanitation projects are packaged with equipment procurement as well as the construction and operation of facilities, the marketization of the environmental sanitation industry in some regions has been upgraded from government purchase of services to PPP, which has been expanded to larger regions such as from partial coverage to full coverage of all urban and rural areas, and the service content has changed from simple cleaning to packaging of multiple links. PPP of urban and rural environmental sanitation is forming a new hot market in solid waste industry. Compliance is an important factor driving the marketization of environmental sanitation from government purchase of services to PPP. Environmental sanitation projects usually have requirements for environmental sanitation equipment, and some integrated environmental sanitation PPP projects also include the investment, build, operation and management of waste transfer stations or public toilets. However, the Notice on Resolutely Curbing the Illegal Financing of the Local Governments in the Name of Government Procurement of Services (No. 87 [2017], MOF) clearly stipulates that: “the government shall purchase services in strict accordance with the scope of services determined in the Government Procurement Law of the People’s Republic of China, and shall not include the purchase of raw materials, fuel, equipment, products and other goods, and the build, reconstruction, expansion of new buildings and structures as well as the relevant decoration, demolition, and repair etc. in the service items purchased by the government”. Considering that equipment replacement and upgrading are common in the government purchase of services of environmental sanitation currently, and the infrastructure projects involve the feasibility study approval, PPP should be adopted to avoid conflicts with No. 87 Document at least in the environmental sanitation projects involving infrastructure engineering construction. PPP are avoided in some places due to its complex procedures and restriction by financial capacity and the implicit liabilities caused by pure government payment. The stability and long-term advantages cannot be matched by government purchase of services. Under PPP mode, it’s convenient to arrange more equipment upgrading, facility expansion and even process reengineering, which increases investment and cash flow. The stable contract relationship makes the environmental sanitation PPP similar to the BOT (class B) of sewage and garbage plant under franchise, which is more favored by the capital market. In terms of government purchase of services, according to the requirements of No. 87 Document, “the period of government

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purchase of services shall be strictly limited to the annual budget and the mediumterm financial planning period”, i.e. three years, which is much shorter than the 10-year (long-term) cooperation of PPP mode. The advantage of this mode lies in that it’s easier for the government to replace social capital according to the actual operation efficiency of the project at the end of the period, while the disadvantage lies in the lack of stability and long-term guarantee for social capital, therefore difficult to meet the needs of comprehensive upgrading of environmental sanitation services. In the current situation, government purchase of services or PPP has its own merits. With policy under change, the choice depends entirely on the local conditions and the consideration of enterprises. However, some basic principles need to be noted, especially the requirement that projects carried out in the form of government purchase of services are not allowed to include the financing and build of infrastructure (as stipulated in No. 87 [2017] Document). If there is a large proportion of infrastructure, it is recommended to adopt the form of PPP, whether the infrastructure is newly built or transferred. We have found the following obvious features based on the analysis of implemented environmental sanitation PPP projects. (1) The investment scale of environmental sanitation PPP is larger than that of government purchase of services. Small-scale projects tend to choose government purchase of services over PPP because PPP has a more complex procedure. Usually, the volume of environmental sanitation PPP projects is generally over RMB 30 million yuan, which is significantly larger than government purchase of services projects. Among them, the volume of project on urban domestic waste cleaning is generally less than RMB 150 million yuan, while the volume of integrated project with waste cleaning, waste transfer station construction and even waste treatment in cities, villages and township is very large. (2) Different advantages of different participants Now, environmental sanitation PPP has promoted the upgrading and differentiation of the whole industry, similar to the sewage and garbage sector over ten years ago. Now investment and operation groups exist in four tiers of traditional ABCD2 . By analyzing the source of participants in investment and operation from the number of environmental sanitation projects awarded, tier C investors and operators are in a dominating position. In terms of volume of awarded projects, tier A and B investors and operators have relatively huge advantages. In the environmental sanitation PPP projects that have been implemented, the social capital parties who win the bidding include Tus Sound and Beijing Enterprises Water Group Limited (BEWG) etc. from tier A, Beijing Environmental Sanitation Engineering Group Limited which has upgraded from traditional environmental sanitation company in the marketization of tier B to a company for investment and operation, tier C companies of investment and operation such as Jinglv Environment, Changyi Kangjie Environmental 2 Tier A: heavy-asset environment group; tier B: regional integrated environmental service provider;

tier C: system solution provider; tier D: equipment and material manufacturer.

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Sanitation, EIT-SZ which have upgraded from traditional greening, cleaning and property cleaning services, as well as tier D companies such as Fulongma, LOEP Environmental Protection, Zoomlion, and Aolande etc. (3) Venous Industrial Park With the continuous progress of urbanization and industrialization and the gradual improvement of people’s living standards, there are more and more solid wastes such as municipal domestic waste, industrial solid waste, hazardous waste and electronic waste etc. Constructing various types of centralized treatment and disposal facilities has become an important measure to handle solid waste, and the park-based management is also accepted by more and more city managers, which have given birth to the demand for building China’s venous industrial park, and some venous industrial park PPP projects have emerged gradually. Following the philosophy of “resource sharing, facility co-construction, material circulation and tiered utilization of energy”, waste can be utilized while reducing time and land use. Now, there are three modes for venous industrial park: 1. Venous industrial park concentrating on a single type of waste. This kind of venous industrial park mainly deals with a certain kind of waste, domestic waste or industrial solid waste. 2. Venous industrial park for the centralized disposal of small-scale mixed waste. Such venous industrial park projects are usually for concentrated treatment of domestic waste and a small amount of other types of waste (such as medical waste or kitchen waste). 3. Comprehensive venous industrial park for centralized treatment. Such projects are for the centralized treatment of almost all solid wastes such as domestic waste incineration, kitchen waste treatment, sludge treatment, hazardous waste and construction waste. Now, the urban environmental sanitation system and renewable resource recovery system have not been fully integrated in China, so it is difficult to cover the commercial part of the recovery system with public services. Restricted by the poor integration, there is still no PPP in venous industrial park for urban mine since the government cannot provide guarantee for urban mine solid waste despite its obvious commercial significance. The recyclable waste from the environmental sanitation system can adopt PPP mode due to its strong public service attribute. According to incomplete statistics, up to now, many environmental protection enterprises have participated in the project of venous industrial parks, such as Everbright International, Jinjiang Environment, Capital Environment, China National Environmental Protection Group, Grandblue, Dynagreen, Tus Sound, SUS Environment, BGE, Sanfeng Environment, and Shanghai Environment etc. In the future, there will be opportunities for venous industrial park projects in different places. Compared with waste incineration and kitchen waste treatment projects, there are not so many PPP projects in venous industrial parks, but the investment volume of a single project in the venous industrial park is large with rich construction content, so social capital can gain the economy of scale and synergy

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effect. However, under the influence of factors such as “nimbyism effect”, it is inevitable that solid waste treatment such as the treatment of domestic waste, sludge, hazardous waste and construction waste will be centralized in site selection. Setting the cooperation boundary of venous industrial park needs to consider such factors as department ownership, technical synergy, resource coordination etc. in the subdivisions of solid waste, as well as the risks, performance and payment of different types of projects. For example, urban mines and the dismantling of waste electrical appliances are completely commercial that can generate operating income, and the government does not bear the demand risk. Most of the PPP projects in venous industrial parks are won by two or more social capital parties jointly. Therefore, the responsibility boundary and cooperation among different parties are of great importance, particularly for the common practice of shared facilities and the upstream-downstream links of resource utilization.

Chapter 10

Application and Development of PPP in Urban Rail Transit Industry (2017–2018) Hongneng Chen and Qingliang Xiao

Abstract In the development of urban rail transit in China, PPP mode has drawn prominent attention from all parties in recent years. This report reviews the development of PPP and policy background in China’s urban rail transit from 2017 to 2018, summarizes the application characteristics of PPP mode, and introduces the application practice of PPP mode in some cities. Keywords Urban rail transit · PPP policy · Application

10.1 Development of Urban Rail Transit PPP in China from 2017 to 2018 Since the construction of the first urban rail transit project, Beijing Metro Line 1, China’s urban rail transit has gone through the start, initial development and rapid development stages, and has made remarkable achievements in the past decades. By the end of December 2018, the urban rail transit construction plans of 46 cities have been approved with a planned mileage of over 10,000 km, of which 33 cities have opened urban rail transit lines for operation with a total mileage under operation of over 5000 km (see Table 10.1). According to preliminary statistics, by the end of December 2018, there were 47 urban rail transit PPP projects implemented in China (including metro, light rail and tram) with an investment of over RMB 650 billion yuan. In 2017 and 2018, there were 27 and 10 newly implemented rail transit PPP projects respectively with a total investment of over RMB 500 billion yuan, accounting for about 63% of the total investment of newly started urban rail transit projects (about RMB 800 billion yuan) in the same period (2017–2018), and about 75% of the total number of projects.

H. Chen (B) · Q. Xiao Ktrue Consulting Co., Ltd., Shanghai, China e-mail: [email protected] Q. Xiao e-mail: [email protected] © Social Sciences Academic Press and Springer Nature Singapore Pte Ltd. 2020 T. Wang et al. (eds.): Annual Report on The Development of PPP in China, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-15-5724-8_10

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Table 10.1 Operation mileage and planed mileage of urban rail transit in mainland China No.

City

Operation mileage (km) 679.00

Planed mileage (km) 1154.00

Plan deadline

1

Shanghai

By 2023

2

Beijng

625.40

998.50

By 2021

3

Guangzhou

429.85

792.00

By 2023

4

Nanjing

377.57

373.00

By 2021

5

Chongqing

319.20

480.75

By 2022

6

Wuhan

304.70

400.00

By 2021

7

Shenzhen

285.04

570.00

By 2022

8

Tianjin

231.20

513.00

By 2020

9

Chengdu

226.70

508.00

By 2020

10

Dalian

200.15

298.60

By 2020

11

Qingdao

174.74

159.10

By 2018

12

Xi’an

155.86

243.20

By 2021

13

Suzhou

121.06

353.40

By 2023

14

Hangzhou

117.60

456.10

By 2022

15

Changchun

100.27

235.00

By 2024

16

Shenyang

96.88

267.00

By 2024

17

Zhengzhou

95.40

166.90

By 2020

18

Kunming

88.76

187.60

By 2019

19

Changsha

83.63

264.00

By 2022

20

Ningbo

74.50

172.20

By 2020

21

Wuxi

56.11

112.60

By 2018

22

Nanning

53.30

128.20

By 2021

23

Hefei

52.38

166.40

By 2020

24

Nanchang

48.47

134.90

By 2021

25

Dongguan

37.80

164.60

By 2019

26

Guiyang

34.30

176.00

By 2022

27

Xiamen

30.30

224.00

By 2022

28

Shijiazhuang

30.27

80.40

By 2021

29

Urumchi

27.60

88.80

By 2021

30

Lanzhou

26.80

36.00

By 2020

31

Fuzhou

24.89

147.50

By 2021

32

Harbin

23.07

89.58

By 2018

33

Foshan

21.47

116.99

By 2018

34

Wenzhou

0.00

156.50

By 2018

35

Jinhua

0.00

89.20

By 2021

36

Taizhou

0.00

67.60

By 2021 (continued)

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Table 10.1 (continued) No.

City

37

Jinan

38

Xuzhou

0.00

67.00

By 2020

39

Shaoxing

0.00

41.10

By 2021

40

Nantong

0.00

59.55

By 2020

41

Changzhou

0.00

53.88

By 2018

42

Taiyuan

0.00

49.20

By 2018

43

Hohhot

0.00

51.40

By 2020

44

Wuhu

0.00

46.90

By 2020

45

Baotou

0.00

42.10

By 2022

46

Luoyang

0.00

41.30

By 2020

5254.27

11105.85

Total

Operation mileage (km) 0.00

Planed mileage (km) 81.80

Plan deadline By 2019

Note the data in this table is the statistics as of the end of December 2018 Source CAMET

There were another 50+ projects in the preliminary preparation, planning or research for applying PPP mode based on preliminary knowledge. It can be seen that PPP mode has drawn more and more attention in recent years in the urban rail transit development in China. It has a prominent position in rail transit investment and financing, enjoying a large share that cannot be ignored, which reflects the important achievements of continuous investment and financing innovation in China’s rail transit.

10.2 Policy Background of Rail Transit PPP Development in 2017–2018 The development of rail transit and PPP in this field in 2017–2018 shows that it is obviously affected by two macro policies, namely national prevention and control of local debt risk and efforts of improving infrastructure. On the other hand, the fundamental and important position of rail transit as a major national infrastructure has laid the foundation for long-term steady progress of urban rail transit. In general, rail transit has gone through a “fall-rise” process.

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10.2.1 The Government’s Reflection on the Sustainable Development of Urban Rail Transit Under the Requirement of Risk Prevention In the second half of 2017, China successively issued policies to prevent and control the debt risk of local governments and regulate the implementation of PPP, which had a significant impact on infrastructure investment and financing including rail transit and PPP development. Governance and rectification, and development under regulation had become a feature since the second half of 2017 and throughout 2018 in infrastructure. During this period, the government and relevant departments mainly issued the following regulatory policy documents. In May 2017, six ministries and commissions including the Ministry of Finance jointly issued the Notice on Further Regulating Local Government’s Debt Financing (No. 50 [2017], MOF). In June 2017, the Ministry of Finance issued the Notice on Resolutely Curbing the Illegal Financing of the Local Governments in the Name of Government Procurement of Services (No. 87 [2017], MOF). In November 2017, the State-owned Assets Supervision and Administration Commission of the State Council issued the Notice on Enhancing the PPP Risk Management and Control of Central Enterprises (No. 192 [2017], SASAC). In March 2018, the Ministry of Finance issued the Notice on Issues concerning Regulating the Investment and Financing Behaviors of Financial Enterprises for Local Governments and State-owned Enterprises (No. 23 [2018], MOF) In April 2018, the Ministry of Finance issued the Notice on Further Strengthening the Standardized Administration of Demonstration Public-Private-Partnership (PPP) Projects (No. 54 [2018], MOF). In April 2018, the People’s Bank of China, China Banking and Insurance Regulatory Commission, China Securities Regulatory Commission and the State Administration of Foreign Exchange issued the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions (No. 106 [2018], CBRC) As an important urban infrastructure and livelihood project, urban rail transit has a huge capital demand for construction, operation and maintenance, with significant public welfare characteristics and poor financial sustainability. While meeting the actual demand for rail transit, it needs to be supported by city government finance. In the process of urban rail development, some cities are in a rush for success without considering their own strength; as a result, there is a mismatch between development scale and actual demand, between the pace of construction and the supporting capacity. At the beginning of 2018, the central government stopped the Baotou metro project with a total investment of over RMB 30 billion yuan because the huge capital demand of the metro project did not match the city’s financial revenue scale; meanwhile, some local governments suspended part of the rail transit PPP projects proactively during this period. It can be seen that under the overall requirements of risk prevention, both the national level and local government level made positive reflection on the sustainable development of urban rail transit and PPP mode.

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10.2.2 Significant Impact of “No. 52 Document” on the Development of Rail Transit and the Application of PPP Mode In 2003, the General Office of the State Council’s Notice on Strengthening the Management of Urban Rapid Rail Transit Construction ([2003] No. 81 Document) put forward the basic principle of “developing according to ability and in an orderly way”. Under this guidance, China’s urban rail transit industry has developed rapidly and made great progress in over ten years. Now, China’s urban rail transit is facing higher requirements of high-quality development. While focusing on strengthening the structural reform of the supply side of urban rail transit, city governments are faced with practical problems in developing urban rail transit and making decisions on the investment and financing mechanism such as how to match the development scale with the actual demand, match the pace of construction with affordability, and effective prevention and resolution of the debt risk of local governments. In July 2018, the State Council issued the Opinions on Further Strengthening the Management of Urban Rail Transit Planning and Construction (No. 52 [2018], SC) (hereinafter referred to as “No. 52 Document”) to guide and regulate the whole process of urban rail transit planning, construction and operation, especially the prevention and resolution of debt risks. This document raised the threshold of subway construction, increasing the general public financial budget revenue and regional GDP requirements of cities applying for subway construction from RMB 10 billion yuan and 100 billion yuan to RMB 30 billion yuan and 300 billion yuan respectively; the review (approval) of new projects was suspended for cities listed in the early warning of local government debt risk. In terms of financing and investment of rail transit, the document required that “the city government establish a long-term mechanism for transparent and standardized capital and fund investment for operation and maintenance to ensure that the construction funds are in place in time and in full amount. Except for the projects which explicitly adopt the concession mode in the urban rail transit construction plan, the fiscal investment in the total project shall not be less than 40%, and it is strictly prohibited to use various debt funds as project capital. Strengthen the responsibility of the city government for the whole life cycle expenditure of urban rail transit project, and guarantee the necessary funds for operation and maintenance. Support all regions to deepen the reform of investment and financing system in accordance with laws and regulations, actively attract private investment to urban rail transit projects, encourage diversified operation, and increase the comprehensive development of stations. Standardize PPP in urban rail transit, and activate the existing assets in various ways. “The No. 52 Document put forward “concession mode”, “PPP” and “activating existing assets”, which further points out the scientific direction for strengthening the fund guarantee for constructing and operating urban rail transit projects, preventing and resolving the debt risk of local governments. The publication of No. 52 Document will have a profound impact on the application of PPP mode in urban rail transit in China.

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10.2.3 Infrastructure Improvement Policies Drive Rail Transit to the New Development Stage In response to the decision and deployment of the CPC Central Committee and the State Council on deepening the supply side structural reform, and further enhancing the role of infrastructure in promoting urban-rural coordinated development and improving people’s livelihood etc. since 2018, in October 2018, the General Office of the State Council issued the Guiding Opinions of the General Office of the State Council on Maintaining Efforts to Remedy Shortcomings in Infrastructure Field (No. 101 [2018], SC) ( Hereinafter referred to as “No. 101 Document”). No. 101 Document requires that “efforts should be made to remedy the shortcomings in railway, highway, water transport, airport, water conservancy, energy, agriculture and rural areas, ecological and environmental protection, public services, urban and rural infrastructure, and shantytown reconstruction etc., and speed up major projects already included in the plan”. With the issuance of No. 52 Document and the implementation of relevant requirements, coupled with the policy guidance of No. 101 Document, urban rail transit is expected to usher in a new development stage after a short transition period, so is the application of rail transit PPP mode. From late November 2018 to the end of December 2018, the National Development and Reform Commission approved the rail transit plans or adjustment plans of Chongqing, Jinan, Shanghai, Hangzhou, Changchun, Shenyang and other cities in succession within one month.

10.3 Characteristics of PPP Application in Urban Rail Transit in 2017–2018 The application of PPP mode in China’s rail transit in 2017–2018 continued the characteristics and trends in and before 2016. First of all, project financing is still the main goal and core appeal of applying PPP mode in rail transit. It’s expected that the goal of relieving the huge pressure of investment through PPP mode will not change substantially in the near future. Secondly, some “normal problems” in rail transit PPP still exist. There is still no substantive breakthrough despite the knowledge, experience and ideas obtained from the implementation of some PPP projects. For example, new rail transit PPP projects are still dominated by central and local stateowned enterprises, the reasonable positioning and management boundaries of local state-owned rail transit enterprises participating in the rail transit PPP projects still need to be further defined clearly, a lack of professional operators in rail transit, and the integration of rail transit PPP and TOD development mode is still under exploration and research. However, from 2017 to 2018, there are some new situations and features in the application of PPP mode in rail transit, as well as some new highlights, which are worth summarizing for reference. It mainly includes:

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10.3.1 Cities with Large-Scale Tail Transit Planning Continue to Attach Importance to PPP Application It can be observed from this round of PPP that cities with experience in implementing rail transit PPP also tend to continue with PPP mode in subsequent projects. For example, Chengdu continues to apply PPP mode in subsequent phase I of line 9 and line 17 after implementing PPP in line 18, as well as line 6 and line 11, which are under preparation. Xi’an applies PPP mode in phase I of line 5 and Phase I–II of line 6 after implementing PPP in line 9, and will adopt PPP mode in many lines in the future; Hangzhou adopts PPP mode for line 1 and line 5, and plan to adopt PPP mode for new lines in the future. Beijing, after implementing PPP for metro line 4, continues PPP mode for line 14, line 16 and new airport line, and modern tram line in the western suburbs, etc. There are three main reasons for this phenomenon: first, city government needs to introduce social capital to rail transit construction through PPP mode, which will last for a long time before the relevant national policies make substantive breakthrough; second, improve the service of urban rail transit by promoting competition between traditional modes and PPP modes and among PPP modes on different lines by introducing multiple sources of social capital on different lines; thirdly, some cities can obtain the economy of scale since they can enjoy relatively low cost and high efficiency thanks to the complete mechanisms and rich experience and capability in applying and implementing PPP. In terms of the financing of rail transit projects, No. 52 Document puts forward higher requirements for the financing of rail transit and the application of PPP mode, which needs to be studied and clarified earlier in the planning stage.

10.3.2 PPP Application of Existing Rail Transit Projects In July 2017, the National Development and Reform Commission issued the Notice on Accelerating the Use of PPP Mode to Activate Existing Infrastructure Assets (No. 1266 [2017], NDRC), which clearly stated: “Actively promote PPP mode, strengthen the activation of existing infrastructure and form a virtuous investment cycle, which is conducive to broaden the funding sources for infrastructure construction and reduce the debt burden of local governments”. In 2018, No. 52 Document pointed out that “standardize PPP in urban rail transit, and activate existing assets in various ways”. The introduction of a series of policies and documents provides policy support for using PPP mode to activate the existing projects in urban rail transit. Now, a few projects like this have been implemented, such as Dalian rapid rail transit line 3 project which is included as the typical case of existing PPP project of National Development and Reform Commission. The government and the company signed contract in May 2017, and realized the transfer and operation of existing assets by adopting the PPP mode (TOT mode). Now some cities are actively planning to use

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PPP mode to activate the existing assets and support incremental growth, such as Tianjin rail transit line 1, line 2 and line 3 projects, etc. With national policy support, it is a new idea and initiative for PPP application in rail transit in 2016–2018 to actively activate the existing rail transit projects and support the incremental growth of urban rail transit on the basis of optimizing and adjusting the existing mode of line operation. It is also a new challenge and a series of new problems need to be properly handled. First of all, core needs of all stakeholders in the PPP transformation of existing projects need to be properly coordinated. Now, the core demand of the government is to quickly activate existing assets through PPP mode, introduce funds into the construction of new lines, and improve the overall operation and management of existing rail transit projects. As for the social capital, the existing projects usually do not have the conditions to obtain “construction profits” since the engineering construction and equipment procurement have already or basically completed, therefore it is necessary to build a reasonable project profitability model to effectively attract social capital. In addition, applying PPP to existing assets will also involve the restructuring of debt and creditor’s rights of exiting projects, which needs to take into account the interests of creditors. Secondly, applying PPP to existing projects needs to effectively improve the operation and management of existing projects. In addition to considering the capital strength, more attention should be focused on the professional operation and management capability of social capital parties in rail transit. Now, there are not so many social capital focusing on rail transit operation in China, which is an industrial challenge faced by the application of PPP to existing projects. Thirdly, the implementation of PPP for existing projects takes a relatively long time. In activating existing PPP projects, asset evaluation is an inevitable preliminary procedure when the government adopts equity transfer or asset ownership transfer. However, the possible complex historical legacy and debt problems of existing assets under the government lead to a longer time for asset evaluation; meanwhile, the tax issues involved in the transfer of existing assets are also relatively complex, and tax consultation and planning are often time-consuming. Considering the government’s demand for project operational efficiency, the implementation of PPP mode on existing projects is often daunting, requiring high-quality and efficient assistance from professional institutions.

10.3.3 All Parties Pay Close Attention to Performance Evaluation of Rail Transit PPP According to the requirements of the Notice on Popularizing the Public-PrivatePartnership Mode in the Public Service Fields (No. 42 [2015], SC), under PPP mode, “the government takes operation subsidies as the consideration of public services provided by social capital, and the payment of consideration is based on performance

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evaluation results”, and “establish a comprehensive evaluation system involving the government and the public, establish a full life cycle performance management mechanism including setting performance objectives in advance, tracking performance in the process and conducting performance evaluation afterwards, link government payment and user payment with performance evaluation, and use performance evaluation results as an important basis for price adjustment to ensure maximizing public interests.” A series of PPP policy documents of the Ministry of Finance made strict regulations on the performance evaluation of PPP projects, such as the Notice by the Ministry of Finance on Several Issues concerning the Generalization and Application of the Mode of the Cooperation between the Government and the Social Capital (No. 76 [2014], MOF), the Notice on Issuing the Operation Guideline for PPP (Trial) (No. 113 [2014], MOF), and the Circular on Regulating Project Database of the National PPP Integrated Information Platform (No. 92 [2017], MOF) etc. Considering the requirements of a series of documents at the national level and the responsibilities of rail transit service, the performance evaluation of PPP in this round of PPP application on rail transit has drawn the attention from all parties. Effective project evaluation on the basis of considering the interests of all parties is needed to promote the implementation of PPP contracts and regulation, and ensure that rail transit projects achieve the expected services goals.

10.4 Brief Introduction to the Application of PPP on Chengdu Rail Transit 10.4.1 Development Status of Tail Transit in Chengdu Chengdu has been focusing on promoting the construction of urban rail transit, building a complete and accessible urban rail transit system, and accelerating the development of rail transit network. By 2018, 6 lines have been completed and operated, totaling 196 km; 11 lines are under construction, totaling 351 km, with huge construction and operation volume. According to the phase IV (2019–2025) construction plan of Chengdu urban rail transit, by the end of the planning period, the operation mileage of Chengdu urban rail transit will reach 714.12 km. With the development of rail transit network in acceleration, more and more people in Chengdu will choose this green means of transportation, which will further alleviate traffic congestion in the city.

10.4.2 Practice of PPP Under the background of deepening the reform of investment and financing system and PPP development, Chengdu started to explore the PPP mode in urban rail transit

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from line 18 at the end of 2015. By the end of 2018, three new lines, namely line 18, phase I of line 9 and phase I of line 17 have successively adopted PPP mode and completed social capital procurement and contract signing, with a total project investment of over RMB 60 billion yuan. There are three other lines in the project preparation stage. A number of rail transit projects have successfully implemented PPP mode and introduced professional social capital. While broadening financing channels and increasing supply, the efficiency of investment, construction and operation of urban rail transit projects in Chengdu have improved as a whole, promoting the transformation of operation mechanism and the improvement of overall service level in this industry, and meeting the requirements of sustainable and healthy development of urban rail transit construction and operation.

10.4.3 Take the Lead in Performance Evaluation Chengdu takes the lead in the performance evaluation management of urban rail transit PPP project in China. It develops a package of performance evaluation management measures and implementation rules, follows the principle of full life cycle, operability and dynamic adjustment, highlights the applicability, scientificity and feasibility of the performance evaluation implementation system, fully reflects the achievement of the performance targets of the evaluated project, maximizes the safety of project investment, construction, operation and handover, improves the service quality and efficiency of the whole life cycle, and ensures the maximization of public interests, which will play a positive role in comprehensively promoting the sustainable and healthy development of Chengdu urban rail transit, and also provide reference for the performance management of other urban rail transit PPP projects in China.

Chapter 11

Practice and Development Outlook of Financial Institutions Participating in PPP—Comparative Analysis of PPP Financing Modes at Home and Abroad Yun Zhang and Xinbo Zhao Abstract This paper analyses the current situation of PPP financing in China by reviewing the life cycle of PPP financing arrangements and the latest relevant regulations and policies in the financial market. In addition, the paper summarizes financing modes in several mature PPP markets and then compares it with those in China. This study identifies the future development prospects of China’s PPP financing and provides decision-making references for the Chinese financial institutions and private investors. Keywords PPP financing · Financing policy · Domestic and international comparison · Developing prospect

11.1 Introduction 2014, as the first year for PPP policies, has opened a new round of PPP boom in China. By the end of December 2018, there were 8654 projects on the PPP integrated information platform of the Ministry of Finance, with a total amount of RMB 13.2 trillion yuan (2018). The implementation rate by definition of establishing project companies reaches 76%. After the central ministries and commissions’ rectification of the PPP market at the end of 2017, despite slower inclusion of PPP projects in the project database year on year, the project implementation rate increased compared with last year. In terms of financing, before the rectification, despite the explosive growth in the past four years with over RMB 100 billion yuan of PPP projects in the database, the Y. Zhang (B) China Everbright Group, Tokyo, Japan e-mail: [email protected] X. Zhao Civil Engineering Department, Tsinghua University, Beijing, China e-mail: [email protected] PPP Business Center of Institutional Business Department, China Everbright Bank„ Beijing, China © Social Sciences Academic Press and Springer Nature Singapore Pte Ltd. 2020 T. Wang et al. (eds.): Annual Report on The Development of PPP in China, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-15-5724-8_11

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proportion of PPP projects with successful financing in the project pool is relatively low, less than 10% in 2017, and the data in 2018 is not high either according to incomplete statistics. Financial institutions are not fully involved in the PPP boom on market. Meanwhile, from the end of 2017, the issuance of [2017] No. 92 Document (2017), [2017] No. 192 Document (2017) and [2018] No. 23 Document (2018) prompted local governments and social capital to re-clarify and correctly understand the core concept of PPP mode, and the policy governance at the upper level laid a legal and compliant policy foundation for financial institutions to effectively participate in PPP projects. To promote the standardized development of PPP, a stable and sound policy and financial guarantee complementing each other is needed. Based on the latest policy guidance, this paper analyzes the investment and financing of domestic and foreign financial institutions participating in PPP from the perspective of PPP practice of financial institutions in the whole lifecycle of PPP, and provides reference for China’s financial institutions participating in PPP in the future.

11.2 Current Situation of Domestic PPP Investment and Financing Market According to the construction cycle of PPP, PPP financing can be divided into three stages: initial capital financing, debt financing during construction and refinancing during operation. Each stage of the project faces different risks and policy requirements, and has different demands for the term and price of funds.

11.2.1 Policy Basis and Financing Status of Initial Capital Financing According to the requirements of No. 92 Document in 2017, it is strictly forbidden to use debt capital as capital funds for PPP projects. However, for commercial banks, Article 43 of the Law of the People’s Republic of China on Commercial Banks stipulates that “commercial banks shall not engage in trust investment and securities business within the territory of the People’s Republic of China, and shall not invest in non-proprietary real estate or non-banking financial institutions and enterprises, unless otherwise specified by the state”, commercial banks with a large amount of capital in China’s financial market are unable to directly make equity investment, often debt investment in the form of equity, which is mainly investing banks’ offbalance -sheet fund into the project in the form of capital increase/expansion for SPV

11 Practice and Development Outlook of Financial Institutions …

Capital financing mode 1

Capital financing mode 2

Bank wealth management fund pool

Bank wealth management fund pool

185

Trust/asset management plan Entrusted debt/debt financing plan Fund (LPGA priority)

PPP projects PPP projects

Fig. 11.1 PPP capital arrangement of commercial banks before the implementation of No. 92 Document

via fund or structured financing channels (see Fig. 11.1). However, No. 92 Document and the new wealth management regulations terminated such financing channels. The real equity financing of commercial banks in PPP can be divided into two categories: direct real equity investment, and investment in PPP projects in the name of social capital (Zhao and Wang 2018), but it has no policy basis now. In terms of real equity investment, in September 2016, the CBRC intended to allow commercial banks to carry out equity investment business to certain extent, but the policy focused on high-tech industries and national strategic emerging industries, and equity investment in the real economy was still on hold. As for PPP investment in the name of social capital, the Operation Guideline for PPP Mode (No. 113 [2014], MOF) issued by the Ministry of Finance does not clearly stipulate whether financial institutions can be regarded as qualified social capital, but the Notice on Further Strengthening the Standardized Administration of Demonstration Public-Private-Partnership (PPP) Projects issued by the Ministry of Finance (No. 54 [2018], MOF) points out that “the investment, construction and operation responsibility of social capital shall not be weakened or exempted… It shall not be agreed that the project operation responsibility be returned to the investment representative of the government, or be designated to a third party other than the social capital party.” This restriction on social capital’s construction and operation capability has confined the feasibility of financial institutions’ investment in PPP as a single subject. Take Wuhan metro line 8 as an example, the Ministry of Finance ordered the inspection because of “improper risk allocation”. According to the policies mentioned above, financial institutions have limited channels to directly participate in the early stage investment of PPP projects. In 2018, social capital parties with more PPP projects had the highest demand for fund, but they could not obtain financing because of policy constraints. Without financing, there is risk that the government will cancel the bidding qualification. Some enterprises with high capital pressure, such as China Fortune Land Development Co.,

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Ltd. and Oriental Landscape etc. began to seek investment from other enterprises in the market and obtained capital financing by introducing strategic investors. Some commercial fund companies in the market began PPP capital investment, but mainly in the advantageous regions. Overall speaking, PPP capital financing was relatively scarce.

11.2.2 Policy Basis and Status of Financing in the Construction Period After the proprietary capital of the project is in place, project debt financing of social capital generally accounts for 70–80% of the total project investment. The scope of PPP project is mainly concentrated in infrastructure and public services, which has a certain public welfare nature with low return and long investment recovery cycle, which determines that the project financing in this stage needs fund with low interest rate and long term. Therefore, PPP financing is mainly concentrated in policy banks before 2014. After 2014, PPP market expanded rapidly. Besides policy banks, some jointstock commercial banks began to enter the PPP field, firstly major commercial banks represented by the four big banks, and then some insurance funds and joint-stock commercial banks. Meanwhile, in May 2017, the National Development and Reform Commission launched PPP special bonds, which opened channels for PPP direct financing.

11.2.2.1

Financing Channels of Insurance Fund

In recent years, CIRC has introduced a series of policy measures on the participation of insurance funds in PPP. In August 2016, the revised the Measures for the Administration of the Indirect Investment of Insurance Funds in Infrastructure Projects made it clear that insurance funds can invest in infrastructure projects via PPP mode, which opened up the policy for insurance funds to participate in PPP projects. However, there are three requirements for PPP projects: “projects with transparent pricing mechanism, expected stable cash flow or clear exit arrangements”. Before No. 92 Document, there were two main modes for insurance funds to participate in PPP: one is fund, for example, China Life Insurance Co., Ltd. participated in the investment, financing, construction and operation of Qingdao metro line 4 PPP project through fund; second, equity plan, for example, China Bond Assets invested in Beijing metro line 16 through equity investment plan. The issuance of No. 92 Document has restricted the equity investment of insurance funds in PPP, but generally speaking, PPP project has relatively stable cash flow, which meets the allocation demand of insurance funds, and can also provide high-quality assets for the

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insurance industry. In the long run, insurance funds have great potential to participate in the development of PPP mode.

11.2.2.2

Financing Channels of Commercial Banks

Now, banks are still the main force in PPP financial market, which are divided into two funding channels—on and off the balance sheet. The on-balance-sheet credit is the traditional project financing, while the off-balance-sheet credit relies on the wealth management fund pool, which is invested in the project through channels. In April 2018, the implementation of new asset management regulations made it clear that besides mainly investing in standardized creditor’s assets and listed stocks, public asset management products can also properly invest in non-standardized creditor’s assets, which should comply with the regulations on maturity, limit and information disclosure etc. of non-standard investment. That is, investing in PPP asset is allowed but maturity mismatch is not allowed. PPP project cycle is generally over 10 years and there are few investors investing in over 10-year-long financial products. Therefore, it’s not very practical for wealth management funds to invest in PPP projects, and the funds on the balance sheet are needed as the main support. From the perspective of credit underwriting and approval, there is a big difference between PPP project and traditional credit. Under the traditional mindset on credit, commercial banks pay more attention to credit qualification and comprehensive strength of credit applicants, and prefer projects with guarantee from the government, central enterprises and state-owned enterprises. With the deepening of the supply side reform, there is a lack of high-quality assets in the market; therefore PPP has aroused great interest of commercial banks, but frequent issuance of policies and some chaos of PPP market before rectification result in limited participation by commercial banks. Last year, after the issuance of No. 92 and No. 192 documents, there was news that commercial banks suspended PPP credit. After the rectification, some commercial banks began to pay attention to the development of this business sector again.

11.2.2.3

PPP Special Bond

On May 3, 2017, the National Development and Reform Commission issued the Guideline for Issuance of the Special Bonds of Public-Private Partnership (PPP) Projects (No. 730 [2017], NDRC). It made clear that PPP project companies or social capital parties could issue enterprise bonds to raise funds for the construction and operation of PPP projects such as concession or government purchase of services. It can be general “enterprise bonds” or project revenue bond, focusing on supporting high-quality PPP projects in NDRC’s project database with standardized operation, stable project income, as well as legal and compliant contract system. Since the PPP special bond policy has issued for only a short period of time, there are few projects in implementation.

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11.2.3 Policy Basis and Financing Status of Refinancing in Operation Stage After the completion of the construction and trial operation period, the project company will actively refinance during the operation period in order to optimize the capital structure of the project, reduce funding cost and improve the return for investors. On July 5, 2016, the CPC Central Committee and the State Council issued the Opinions on Deepening the Reform of the Investment and Financing System (No. 18 [2016], CPCCC) (hereinafter referred to as “No. 18 Document”) which pointed out that “support the asset securitization supported by real economic activities, and activate existing assets”. PPP project has a long construction period and many changing factors. With the project cash flow gradually becoming stable in the operation period, refinancing is the need in reality. Now, there are three refinancing channels in the market: equity refinancing (issuing shares to investors), debt refinancing (changing financing conditions or replacing financing instruments), and asset securitization (including asset securitization of the right to charge/earnings, equity asset securitization, etc.), see Table 11.1. Among them, asset securitization has aroused the interest in the market after the joint issuance of [2016] No. 2698 Document (2016) by National Development and Reform Commission and China Securities Regulatory Commission. In April 2017, 21 PPP asset securitization projects were reported in the first batch, and finally 4 projects were approved of which the underlying assets involved the right to charge of sewage and road etc. Subsequently, in June 2017, the Ministry of Finance, the National Development and Reform Commission, the People’s Bank of China and the China Securities Regulatory Commission jointly issued [2017] No. 55 Document (2017), which continued to expand the scope of sponsors and underlying assets of PPP project asset securitization, aiming to activate the PPP existing market and broaden financing channels. As of the end of December 2018, there were 16 PPP asset securitization cases on the market with a total issuance of RMB 13.073 billion yuan. Now, there is only one PPPABN case, which is CFLD Gu’an New Urbanization PPPABN. Now, the scale of PPP asset securitization is relatively small. On the one hand, the whole asset securitization market in China has just started in 2014 after the subprime mortgage Table 11.1 Main types of refinancing (Liu 2012) Types of refinancing Forms of refinancing Equity refinancing

• Issue shares to investors

Debt refinancing

• Change financing conditions (loan amount, duration, repayment arrangement, and guarantee etc.) • Change financing instruments (bond issuance etc.)

Asset securitization

• Asset securitization of the right to charge/earnings • Equity asset securitization

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crisis, and the market scale needs to be further improved. On the other hand, the securitization has high requirements for information disclosure. In the selection process of the first batch of PPP asset securitization, although some projects in the first batch of PPP asset securitization have good cash flow, the project review and approval procedures are not fully compliant. According to the financing policy trend in domestic PPP market, it can be seen that in recent two years, the innovation of investment and financing mechanism in China’s PPP field is actively drawing lessons from the western infrastructure investment and financing mechanism, extending from indirect financing to direct financing channels, and developing standardized financing instruments to activate the existing market.

11.3 The Current Situation of Foreign PPP Investment and Financing Market Infrastructure and financial fields have already formed a relatively mature system consistent with their own development history in the west. In infrastructure, besides traditional indirect financing, there are great differences in the infrastructure project financing in the capital market in different countries. Here are a few more mature countries for analysis to provide reference for the future development of PPP project financing in China.

11.3.1 The United States In the 1920s, the U.S. needed a lot of funds for municipal construction, which laid the foundation for the rise of municipal bonds (Zhang 2010). In 1812, the New York City Government issued the first municipal bond with official record for canal construction in the history of the U.S., which opened the way for municipal bonds to play a role in the construction of urban public utilities by the U.S. government. Municipal bond is a kind of bond issued for urban construction financing, mostly tax-free bond. The Securities And Exchange Commission (SEC) defines municipal bonds as bonds issued by states, cities, towns and other government agencies that can be used to raise funds from the public to build schools, highways, hospitals, sewer systems and other special projects. Under the U.S. Bankruptcy Code, municipal bond issuers can easily seek protection from bondholders by filing for bankruptcy. In 2015, the U.S. issued USD 403.1 billion of municipal bonds, accounting for 2.25% of the GDP of that year, of which revenue bonds accounted for 55.6% of the municipal bonds. According to the different repayment subjects, it can be divided into general obligation bonds and revenue bonds. General obligation bonds are guaranteed by the issuer’s unlimited taxation rights. Revenue bonds are specially issued for a project,

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and the project is usually operated by a project company established by a certain enterprise (private or public-private joint-venture of public utility). The municipal government, as the issuing subject, only plays an intermediary role of collecting and transmitting funds, not providing guarantee for the project (especially not providing guarantee with its fiscal revenue). Revenue bonds only provide repayment guarantee for the project based on the future cash flow of the project. Revenue bonds are not guaranteed by government credit with a higher issuance than general obligation bonds in the United States. Municipal bonds in the United States have corresponding primary market, secondary market, bond issuance mechanism, regulatory mechanism and information disclosure mechanism. It has developed for nearly 200 years since it appeared in the 19th century. The system is relatively complete with stabilizing bond issuance and circulation, and public or private placement can be selected at issuance. In the United States, the issuers and underwriters of municipal bonds are jointly supervised by the SEC, Municipal Security Rule Board and other self-regulatory organizations, investing in public utilities such as medical, health, education, infrastructure, transportation, etc. The U.S. municipal bonds have the characteristics of long duration (generally over 10 years), high proportion of individual holding and bonds at AA grade and A-grade, and balanced investment in public affairs. Although asset securitization originated and developed in the United States, it is rarely used in infrastructure and public services in the United States.

11.3.2 The United Kingdom Due to its relatively active capital market and similar legal system with the United States, the UK started the attempt of infrastructure project bond earlier than other European countries. The project bond issued for the Severn Bridge phase II project at the junction of England and Wales in 1989 was considered the first public infrastructure project bond in the UK. After a relatively quiet period, since 1997, the UK’s project bond market has entered an active period. Projects financed by bonds involve roads, bridges, subways, power, and even defense. Meanwhile, the varieties of project bonds are also constantly innovating. In 2004, the GBP 2.1 billion unwrapped project bond issued for London metro maintenance project is the first unwrapped project bond in the UK. According to statistics from the European PPP Expert Center (EPEC), out of the 663 PPP projects between 1996 and 2006: 48 projects had a scale of over 200 million yuan, 25 of which were financed by bonds; 11 projects had a scale of over 500 million yuan, 8 of which were financed by bonds (Lin et al. 2016). After the financial crisis in 2008, PPP projects in the UK were faced with financing difficulty. The UK government has set up a series of financial instruments to make up for the investment gap brought by the lack of private capital in time to ensure the smooth progress of the project.

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In November 2018, the UK announced to terminate the implementation of PF2 due to efficiency and other factors, which has aroused certain responses in the Chinese academic circle. Considering the inconsistency between national conditions and motivations of implementing PPP in China and the UK, the impact of this termination by the UK on China’s PPP needs to be discussed separately, but the UK’s PPP investment and financing mode provides a reference for China’s operation in the capital market.

11.3.3 Canada PPP in Canada has developed steadily after the economic crisis in 2008, and the number of PPP projects completing financing has increased by 10–15 per year (Wang and Yang 2018a). After the economic crisis, Basel III requires higher capital adequacy ratio of commercial banks, the supervision of financial institutions was strengthened, therefore the market transaction volume of PPP in many countries shrunk rapidly due to its lower attraction to financial institutions. However, Canada has made various innovations in the PPP market to alleviate the difficulty of project financing. Specifically, domestic and international banks continue their enthusiasm for financing infrastructure projects in Canada, debt capital continues to flow steadily to infrastructure projects, and long-term capital such as pension funds has increased their enthusiasm for infrastructure investment. As the PPP project in Canada has a unified bidding process and transparent information, which has been recognized by the government and social capital, domestic and international banks in Canada are willing to provide financing for PPP projects. The Municipal Finance Authority of British Columbia (MFABC), Alberta Capital Finance Authority (ACFA), and Ontario Financing Authority (OFA), etc. in Canada are all specialized institutions providing loans for infrastructure. About 90% of PPP projects are funded by long-term bond market (generally 30 years) and bank financing. After the economic crisis in 2008, bond market has increasingly become the main market for PPP financing. The scale of bonds issued by PPP infrastructure projects in Canada through the bond market is generally over CAD 150 million with a rating of at least BBB. The market has standardized the management of various documents and risk allocation principles of PPP infrastructure transactions, which is conducive to the standardized assessment of rating agencies. In addition, another feature of PPP financing market in Canada is the active participation of pension funds, which is divided into equity investment and debt investment. According to statistics, there are more than 5000 pension institutions in Canada. Since the economic crisis in 2008, the proportion of investment in infrastructure has increased steadily, mainly direct investment. As of 2014, the total investment of pension in infrastructure reached CAD 71.9 billion, accounting for 4.98% of the investment. In addition to banks, bonds and other funding support to PPP, the Canadian government has also established a variety of PPP support funds, such as the

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“Canada P3 fund” established in 2007 with a total amount of CAD 1.25 billion, providing no more than 25% of the project’s funding support, mainly to promote the PPP mode. In 2013, the Canadian government increased the fund’s capital when it announced its CAD 70 billion infrastructure investment plan for the next 10 years.

11.3.4 Japan The birth of PPP in Japan is closely related to easing the fiscal pressure of the government and diversifying the financing channels for infrastructure construction. PPP financing in Japan is supported by the government, banks, funds and other diversified financial institutions, forming a diversified financing market dominated by indirect financing (Wang and Yang 2018b). First of all, the launch and implementation of PPP in Japan are supported by a complete legal system, so the rights and interests of social capital are more clearly protected, and the market has official and non-official institutions that specifically support and guide the development of PPP projects. As an intangible guarantee, the government’s support is conducive to improving the project rating and enhancing the enthusiasm of banks, securities and financial institutions to participate in PPP financing. Private PPP organizations make use of their professional advantages to provide decision-making reference for PPP project implementation and financing. Japan’s PPP financing focuses more on direct long-term loans from financial institutions compared with direct financing commonly used in European and American capital markets. Most PPP projects are government purchase of services with government guarantee and low risk, which meet the banks’ requirements for high quality loans. The project duration varies from 7 to 20 years. Local banks, Shinkin banks and financial institutions under the central government are the main financing channels of PPP projects. The financial support of banks and other financial institutions for PPP projects includes interest-free loans and low-interest loans. Meanwhile, with more and more practical experience, Japan’s PPP financing market is also changing from single to diversified operation where entities providing funding support include not only the government, banks and other financial institutions, but also local funds and industrial funds etc. The operation of its industrial fund is similar to that of China’s government-guided fund or industrial fund, which is jointly initiated by the government and financial institutions for PPP projects in infrastructure and public services without jurisdiction restriction. In terms of operation mechanism, FOF or sub-fund can directly or indirectly participate in project financing, and provide credit enhancement guarantee for the project. In terms of project type selection, since traditional transportation and other infrastructure in Japan are already quite mature, industrial funds tend to invest in new energy. Faced with the trend of an aging society in Japan, some pension funds began to pay attention to PPP project investment in the field of elderly care.

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11.3.5 Singapore Since the introduction of PPP mode in 2004, Singapore has implemented over ten PPP projects, covering environmental protection, water, waste treatment, information technology, and sports, etc. Although there are not many projects, Singapore’s PPP projects are successful demonstration projects in each field. Unlike China’s motivation to promote PPP, Singapore has sufficient public fiscal resources, transparent and efficient public institutions, and top-ranking per capita GDP in the world. The government has a longer-term vision in promoting PPP mode and pays more attention to the “value for money” of the project (Wang and Yang 2018c). Therefore, Singapore’s PPP project financing has a better political environment, supported by sound laws and policies, as well as good government financial strength and public credibility; secondly, Singapore is the third largest financial center in the world with a mature and developed financial system. 60% of infrastructure projects in Southeast Asia are financed by banks located in Singapore. Meanwhile, in terms of PPP consulting, Singapore has high-quality service institutions and rich talent reserves, which jointly create a sound PPP financing ecological environment and make Singapore an infrastructure financing center in Asia. In terms of specific ways of project financing, PPP project financing in Singapore can be divided into loan financing, equity financing and capital market financing. Loan financing is the mainstream of PPP project financing in Singapore. Since Singapore’s PPP projects are generally over SGD 50 million, project financing loans usually are syndicated loan or club deal loan which provide PPP project companies with “limited-recourse financing” or “non-recourse financing”. The loan term is close to the project term, and the interest rate refers to Singapore interbank offered rate (SIBOR), floating up by a certain fixed range, but also considering the different stages of the project. Sponsors of equity financing can invest funds into the project through common equity, shareholder loans and bridge loans etc., among which shareholder loans have certain tax advantages compared with common equity. The equity-to-debt ratio of the project sponsor depends on the ratio set by the financial institution. Capital market financing is mainly divided into bond financing and securitization financing. For infrastructure projects, bond financing is rarely used in the planning and construction stage of the project. In Singapore, main investors of infrastructure creditor’s rights are long-term investors such as pension and insurance companies. In construction stage, PPP project sponsors are frequently seen as the main subject of bond financing on the capital market instead of SPV companies of PPP projects due to the relatively high risk in construction stage. PPP securitization financing in Singapore is mainly in business trust mode. Unlike China, PPP project business trust in Singapore is mainly based on the securitization of the company’s equity. Meanwhile, project sponsors retain over 25% of the project’s trust so that they can continue to have control over PPP project. It is the preferred securitization mode for PPP projects due to the clear regulatory system, flexible operation and preferential tax.

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11.4 Comparative Analysis Between Domestic and Foreign PPP Investment and Financing Markets 11.4.1 Comparison Between Domestic and Foreign Financing Modes of PPP Projects Comparing the timing of PPP introduction at home and abroad, it can be found that foreign countries with mature PPP practice have gone through the stage of full development of infrastructure before introducing PPP mode, so the goal for relieving financial pressure is inferior to the goal of improving infrastructure service efficiency. The government’s support for PPP is not only restricted to complete and systematic policies, but also includes financial guarantee and credit endorsement, which is more similar to government purchase of services. Even in Japan, despite the huge fiscal pressure, PPP was introduced after the Japanese economic bubble crisis which has already experienced the stage of large-scale infrastructure development. So the development of PPP is more rational, and the government has systematic support for promoting PPP including policy formulation, financing support, and project cultivation etc. Therefore, in terms of financing, foreign PPP project financing not only provides reference for China in terms of financing mode, but also provides experience for the long-term development of China’s PPP from the root. See Table 11.2 for the comparison of main financing modes at home and abroad. Table 11.2 Comparison of main financing modes of PPP projects at home and abroad Country

Bank loan

Canada Japan Singapore China

Asset securitization

√

The United States The United Kingdom

Bond financing

Investment fund (government investment fund, pension fund etc.)

√ √

√

√

√ √ √

√ √ √

Note ➀ Canada mainly relied on bank loans before 2008, and on bond financing after 2008 ➁ Japan’s PPP market is dominated by bank loans, and gradually supported by government-guided funds in the new energy sector ➂ Singapore’s PPP asset securitization is the asset securitization of equity, mainly in business trust model ➃ China’s PPP investment funds, due to the limitation of “debt investment in the name of equity”, are mainly Chinese government-enterprise cooperation funds. Despite few bond financing and asset securitization, China’s PPP project bond issuance and asset securitization is now at the initial stage with clear policy support only starting from 2016–2017

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Comparing PPP project financing in the United States, the United Kingdom and Canada, it can be found that PPP financing mainly focuses on the capital market after the economic crisis in 2008, and PPP debt financing increasingly adopts the mode of bond financing. On the one hand, it benefits from the mature bond market in developed countries, unimpeded direct financing channels for infrastructure and relatively low cost; on the other hand, it also benefits from the sound legal and policy system, open and transparent bidding and procurement process, and recognition from social investors and financial institutions in the promotion of PPP mode. Although that Japan and Singapore are all Asian countries, the starting social background of PPP is different, resulting in different financing modes in the financing market. After the upsurge of infrastructure construction, Japan was faced with high government debt and the need to improve the quality and efficiency of infrastructure in the 1990s. PPP mode is a way out to relieve the government’s financial pressure and improve the efficiency of infrastructure and public services. The PPP projects initiated mainly focus on government purchase of services with government credit endorsement, consulting services provided by professional institutions, and low project risk, therefore banks and other financial institutions have high recognition for PPP projects, and the interest rate is also low. Meanwhile, for the new energy industry, the support of the government-guided fund is conducive to developing PPP projects in new areas of infrastructure and attracting investors. Relying on the complete political and economic environment and the advantages of the Asian infrastructure investment and financing center, PPP practice in Singapore has formed a good financing ecological environment, paying more attention to the “value for money” of the project. Project financing including traditional bank financing and the capital market financing is relatively mature. The asset securitization mode of business trust has been applied in PPP’s financing mode, and the project financing market system is very sound. Compared with the above-mentioned countries where PPP development is mature, China’s direct financing channels for infrastructure are relatively limited now. Although relevant policies have been issued in succession, the business market has not been effectively opened. On the one hand, it is related to the incomplete policy system since the PPP mode was promoted in China, which leads to mechanical copying of PPP mode in some places and being used by local governments as a financing instrument. On the other hand, it is also related to the to-be-improved financial market system in China. For traditional bank loans, the promotion of PPP project has expanded the sources of social capital and funds in urban infrastructure and public services, breaking geographical boundaries, and the traditional mode of implicit government guarantee for commercial banks, which is a great challenge for China’s commercial banks. To cover project repayment solely by project income, banks need to have rich project financing experience, including but not limited to the industrial experience of social capital parties, project construction and operation experience, financial strength of local governments, government credit risk, familiarity with industry policies and

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regulations, force majeure and other factors. Commercial banks need to have a higher risk judgment on all participants of the project for project financing without recourse. As for bond financing, compared with corporate bonds and enterprise bonds, bond financing is rare in PPP project financing in China since project companies are not qualified bond issuers for a long time. The launch of PPP special bonds has opened a window for PPP in bond market. Now, successful cases in the market are all PPP special bonds in the nature of “enterprise bonds” with companies as the main body, and there is still no PPP special bond in the nature of “project bond”. As for PPP asset securitization, a comparison of different countries shows that there are few applications of asset securitization in infrastructure in the United States despite that the U.S is the birthplace of asset securitization. Bond issuance is mainly used in Europe and the United States. Only Singapore’s business trust has been deeply applied in infrastructure. Although all of them have mature financial markets, the ecological environment and historical background of infrastructure investment and financing determine the differences of financing modes. In China, the asset securitization market was restarted in 2012. In terms of PPP asset securitization, since 2016, the National Development and Reform Commission, the Ministry of Finance, the People’s Bank of China and the China Securities Regulatory Commission issued No. 2689 and No. 55 documents successively to provide policy support for activating existing PPP project market and expanding the financing channels of PPP projects. However, it was found later that most of the PPP projects promoted in the past few years were weak in compliance and feasibility study. It will take time for PPP asset securitization to be widely used.

11.4.2 The Outlook of PPP Project Financing in China Compared with the mature infrastructure investment and financing system in foreign countries, although China has been issuing various policies and documents to support infrastructure construction since the reform and opening up, with the change of economic situation, the policy changes rapidly, but the demand for infrastructure has been growing. In terms of the evolution of infrastructure investment and financing mode, in the past 40 years of reform and opening-up, China’s infrastructure investment and financing has gone from the direct investment of the central government, debt financing by the central finance, debt financing by local financing platforms to the promotion of today’s PPP mode. With the support of continuously-improving policy system, infrastructure investment and financing has been driven from governmentled to market-oriented reform with higher participation of social capital and more diversified funding sources. Although traditional credit has been dominating the financial market, direct financing is under active exploration and promotion, developing from government-issued bonds, enterprise bonds, project revenue bonds and asset securitization, to the forefront of the capital market.

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In terms of the development trend of PPP itself, China is still in the stage of high-speed development with strong investment demand for infrastructure and bright prospect. After 40 years of reform and opening-up, private capital has accumulated abundant professional resources and capital strength. In the four years of promoting PPP, China has become a large country of PPP in terms of the number of projects. There have been some problems in the development of PPP in recent two years, but the State Council and the central ministries and commissions have carried out timely rectification and regulation of PPP, which have shown initial effect, and the development trend of PPP is still firm. Now, PPP project financing has become the key point of PPP development in China’s PPP financing market. The financing completion rate of projects in the project database once was low under the influence of fluctuating policy. The problem seems to be related with factors such as penetrative capital review, investor’s asset -liability ratio, and net asset limitation etc. However, the key to the problem is on the nature of PPP, such as the financial strength, credibility and information transparency of local governments, value for money and reasonable risk sharing of projects etc., which determines the ecological environment of PPP financing. In the recent two years, the investment and financing of infrastructure in China has gradually extended to the capital market. Correspondingly, after the economic crisis in 2008, the number of financial institutions in the market and the scale of various financial asset transactions are also growing rapidly. Banks, insurance, securities, asset management, funds and other institutions have accumulated rich experience in capital operation in the development of recent 10 years, which provides PPP financing with wide channels of capital and the possibility of developing towards the capital market. In terms of long-term development, financial institutions should not only focus on the completion of single project financing, but also explore PPP financing mode. First of all, understanding of PPP policy needs to be strengthened. In recent two years, China has issued a series of policies related to PPP governance, including encouraging and restricting policies. The study and understanding of policies should return to the essence of PPP, and only focusing on specific terms will miss the overall trend and lead to misleading decisions. Secondly, the systematic improvement of project financing risk management is needed. The credit thinking of China’s financial institutions has long focused on corporate credit or government credit endorsement, leading to the lack of experience in non-recourse project financing or limited recourse project financing. With the wide application of PPP in infrastructure, the era of government credit endorsement will be gone, and the risk assessment of project financing will return to the risk of the project itself. For financial institutions, the transformation of credit thinking is not only about the development of risk underwriting team, but also the systematic development of risk underwriting system and project risk identification database. Finally, in terms of PPP financing market, with more and more PPP projects in China, PPP project operation in the whole lifecycle cannot be separated from equity transaction and refinancing, and the intervention of capital from financial institutions. For investors and financial institutions in infrastructure, there is a broad market

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space. In addition to traditional bank loans, bond financing, asset securitization, and equity investment funds will be an important part of PPP market, which deserves the attention of financial institutions and PPP participants.

References China PPP Center of the Ministry of Finance, Project Database of National PPP Integrated Information Platform. 2018 Annual Report, (in Chinese). Circular on Regulating Project Database of the National PPP Integrated Information Platform (No. 92 [2017], MOF), (in Chinese). Notice on Enhancing the PPP Risk Management and Control of Central Enterprises (No. 192 [2017], SASAC, hereinafter referred to as No. 192 Document), (in Chinese). Notice on Issues concerning Regulating the Investment and Financing Behaviors of Financial Enterprises for Local Governments and State-owned Enterprises (No. 23 [2018], MOF), (in Chinese). Zhao X.B., Wang Y.Y., Entry Point and Development Prospect of Commercial Banks Participating in PPP Project, PPP Decision Reference, TUPPP, No. 27, 2018, (in Chinese). Notice on Promoting the Work concerning the Asset Securitization of Public-Private-Partnership (PPP) Projects in the Traditional Infrastructure Field (No. 2698 [2016], NDRC), (in Chinese). Notice on Issues concerning Regulating the Asset Securitization of Public-Private-Partnership Projects (No. 55 [2017], MOF), (in Chinese). Liu Y.W., Research on the Optimal Capital Structure of PPP Project Refinancing [D]. Tsinghua University, 2012, (in Chinese). Zhang C., Research on Developing Municipal Infrastructure Project Bond in China [D]. Tsinghua University, 2010, (in Chinese). Lin H., Luo G.L., Zhang Z.J., PPP and Asset Securitization, CITIC Press Group, 2016, (in Chinese). Wang T.Y., Yang B., Research on PPP in Canada, Tsinghua University, 2018a, (in Chinese). Wang T.Y., Yang B., Research on PPP in Japan, Tsinghua University, 2018b, (in Chinese). Wang T.Y., Yang B., Research on PPP in Singapore, Tsinghua University, 2018c, (in Chinese).

Chapter 12

The Status-Quo and Problems of PPP Refinancing Jifeng Zhang

Abstract PPP refinancing is not only conducive to improving the asset liquidity of PPP projects, improving the attractiveness of PPP project to social capital investors, but also has a profound impact on the initial financing of PPP project. Based on the analysis of the purpose, characteristics, methods and instruments of PPP refinancing, this report attempts to make a preliminary discussion on three possible problems of PPP refinancing, stimulating the thinking and discussion of the industry. Keywords PPP refinancing · Asset securitization · PPP special bond Refinancing is not a new financial instrument. Refinancing first appeared in the capital market to refer to the refinancing of listed companies through allotment of shares, seasoned equity offering and issuance of convertible bonds etc. in the securities market after initial financing in the capital market through initial public offering (IPO). PPP refinancing usually refers to that during operation stage after completing construction of PPP project with preliminary financing, a new investment and financing arrangement initiated on the corporate credit of PPP project company, the project property or property right when all or part of the equity financing or debt financing matures or withdraws in advance according to the preliminary financing agreement or in case of emergency. The Guideline for PPP Project Contract (Trial) (No. 156 [2014], MOF) issued by the Ministry of Finance at the end of 2014 stipulates that “in order to mobilize the project companies and ensure the flexibility of financing, some PPP project contracts may include provisions that allow project companies to refinance under certain conditions”, and the conditions for refinancing are proposed. “The conditions of refinancing generally include: refinancing should increase the project return without affecting the implementation of the project, and it should be approved by the J. Zhang (B) Yunnan Yunling Engineering Cost Consulting Co., Ltd., Kunming, China e-mail: [email protected] Beijing Yuntian Xinfeng Investment Management Center (Limited Partnership), Beijing, China © Social Sciences Academic Press and Springer Nature Singapore Pte Ltd. 2020 T. Wang et al. (eds.): Annual Report on The Development of PPP in China, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-15-5724-8_12

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government before signing the refinancing agreement, etc.” Of course, these conditions are not sufficient and necessary. The specific conditions need to be negotiated in advance by private capital investors and the government, which should be clearly stipulated in the project cooperation agreement.

12.1 The Purpose and Characteristics of PPP Refinancing 12.1.1 Purpose and Role of PPP Refinancing One is the need for investors to withdraw from PPP project financing in the early stage. The investors in the early stage of financing include equity investors and debt investors, among which the equity investment may be the financial investment and financing in the form of equity financing but debt financing in essence. Due to the mismatch between the term of PPP project and the term of financing, the withdrawal of these two types of investors requires refinancing. Second, the need for investors to improve the efficiency of fund use. For real equity investors, if the future cash flow of the project is considerable, the investor can save financial expense by refinancing to reduce the financing cost under the high risk condition in the early stage; or “discount” the future cash flow of the project in advance for other investment, so as to improve the efficiency of fund use and obtain more benefits.

12.1.2 Characteristics of PPP Refinancing First, the project usually has entered the operation period. At this time, the construction risk at early stage, the credit risk of investors, the collaboration risk of government and social capital of PPP project have been reduced or eliminated, the public service capacity of the project company has been verified, the income level can be basically determined, and the project risk has been significantly reduced. Second, refinancing includes equity and debt financing. In some projects, the shareholders in the equity financing in the early stage of the project are financial investors who have agreed with the industrial capital to hold the shares on behalf of them for certain period and need to exit after entering the operation period. These shares can be repurchased by industrial capital, or by the government or other third parties, and the financing of repurchasing is equity refinancing. In addition, asset securitization, project revenue bond and other debt financing instruments can be launched in the refinancing stage to replace the funds invested in the early stage of shareholder loans and bank loans. Third, the financing scale is usually smaller than the initial financing. There are two reasons: some investors of the early stage financing may be strategic investors

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(such as industrial capital or pure working capital), which do not need to exit; the project has generated cash flow, and part of the debt financing may have been repaid according to the financing agreement arrangement before the refinancing. Fourth, the risk of refinancing is usually smaller than that of initial financing. The risks of PPP project are divided into two categories according to the stage of the project: one is the risks during the construction and running-in period of the project, which is high risk; the other is the risks after entering the operation period, which is low risk. Therefore, the refinancing risk in the operation period is smaller than the initial financing risk in the construction period. Fifthly, the issue of refinancing should be considered in the initial financing. Although refinancing starts at the operation period after the end of the project construction period, main shareholders and financial investors need to consider the feasibility and risk of future refinancing during the initial financing. For example, the holding period of financial investors needs to be clarified when social capital introduces financial investors to hold shares on its behalf, therefore social capital needs to consider who will be the repurchaser and credit lender.

12.2 Ways and Instruments of PPP Refinancing The ways and instruments of refinancing are not very different from initial financing, but due to some different financing conditions and purposes, the applicable financing methods and instruments are also different.

12.2.1 Ways of PPP Refinancing According to the ways of refinancing summarized by the National Audit Office in 2002, typical ways of refinancing are summarized below (see Table 12.1). These ways of refinancing can be summarized into four categories: change of financing party (fund provider), change of financing term, change of financing cost (interest) and discount of future cash flow. The first three categories are passive refinancing, and the last category is active refinancing. First, change of financing party: it mainly refers to the change of financing party by introducing new equity investors (usually financial investors) or debt investors when equity or debt financing in the early stage matures and the financing party needs to exit. For example, a limited partnership fund and a construction company form a joint venture to invest in a PPP project, with a term of 6 years. Upon due day, it will be repurchased by the construction company or its designated third party, and the fund will exit. At this time, if the repurchase fund is from other funds or other financing ways, it belongs to the refinancing by changing financing party. Second, change the financing term: in addition to replacing with new financial instruments at maturity of financial instruments, sometimes it is realized by changing

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Table 12.1 Typical ways of refinancing No. Ways A

Extend repayment period

B

Change fund provider

C

Reduce the interest margin that determines the interest payable

D

Define a fixed interest rate lower than the expected interest rate when signing the contract to reduce the borrowing cost

E

Repay all or part of the private sector’s shares or subordinated debt (usually by introducing new financing for the project from other sources)

F

Cancel or reduce restrictions on dividend payment

G

Change financing arrangements, reduce or cancel funds in reserve account

Source Li J.R and Wang S.Q.: the Application of Refinancing in Foreign PPP Projects and Insights for China, Proceedings of the 8th China Project Management Conference, Beijing, 2009, (in Chinese)

the financing subjects. For example, before the limited partnership fund matures, change partners (generally GP is not changed, only LP is changed), and the new partner subscribes the share held by the original partner. However, the partnership fund is still the shareholder of the project company, which means that the financing term of the partnership fund has been extended. Sometimes, the financing subject will also be changed, for example, by launching a new fund to subscribe all the equity of the project company held by the matured fund before the limited partnership fund matures. Third, change of financing cost: change of financing cost is generally the main purpose of PPP project refinancing. Generally, a new financing instrument is used to replace a certain financing instrument in the initial financing to reduce the financing cost that decreases with smaller risk. C, D and E in Table 12.1 are all ways to change the financing cost. Fourth, discount future cash flow: different from the three types of passive changes mentioned above, discounting future cash flow is active refinancing. For the three types of refinancing methods mentioned above, if there is no need to change the subject (for example, there is no financial investor who makes debt investment in the name of equity investment), no need to extend the term or no way to reduce the cost, refinancing will no longer be necessary. However, the discount of future cash flow can be carried out as long as the burden is not increased. The most common way to discount the future cash flow is to realize the future cash flow of PPP project in advance through asset securitization, project revenue bond and IPO etc. to obtain a fund for the project or other purposes (of course, it needs to comply with laws, regulations and contract agreements). There is a problem in discounting the future cash flow: the limitation on using discounted funds. Can it only be used to repay the initial financing of the project, or can it be used for other purposes, especially other than this project?

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The author believes that this issue should not only follow certain established rules, but also follow the principle of “autonomy of will” in civil law. In principle, the discounted funds of future cash flow refinancing can only be used to repay the matured and pre-payable debt financing first, but can be used for other purposes of the project if the original creditors agree the repayment is not needed temporarily; if the amount of funds is large, with the consent of the equity and debt investors, it can be used for items other than the project but consistent with the industry of the project. Of course, these usages should be agreed in advance in relevant agreements.

12.2.2 PPP Refinancing Instruments Refinancing instruments are mainly bank loans, wealth management, insurance, bonds, asset securitization and asset management plan etc. However, according to the characteristics of refinancing, the financing instruments applicable to the refinancing stage mainly include: First, asset securitization. For PPP projects with stable cash flow (including the cash flow under government payment responsibility), it is suitable to refinance with asset securitization. Second, the asset management plan of insurance funds. Insurance funds have low risk appetite, do not like the high-risk financing in construction period, but prefer the financing after entering the operation period. Insurance funds can provide refinance for PPP projects through various asset management plans and trust plans. In addition, the biggest difference from other funds is that insurance funds can directly invest in “property rights”. Article 10 of the Measures for the Administration of the Indirect Investment of Insurance Funds in Infrastructure Projects stipulates that “the investment plan may invest in infrastructure projects in feasible ways such as debt, equity, property rights and investments.” Directly acquire PPP project assets with stable cash flow. The author believes that investing in property right is also the main way for insurance funds to participate in the refinancing of PPP projects in the future, which deserves great attention. Third, replacement fund. Launch the equity replacement fund to replace the matured part of investment when the investment by early-stage equity (debt investment in the name of equity) investors matures. As the early-stage equity investment funds of many projects are also attached with debt funds (such as equity- debt link, or only a small part of the fund is equity investment while most are debt investment in the form of entrusted loans). Replacement funds can not only replace equity, but also replace debt. Fourth, project revenue bond and PPP special bond. Project revenue bond and PPP special bond are suitable financing instruments for the refinancing stage of PPP projects. The regulation of project revenue bond is stipulated in Interim Measures for the Management of Project Revenue Bond (No. 2010 [2015], NDRC) issued by the National Development and Reform Commission in July 2015; PPP special bond is a special bond set up under the Guideline for Issuance of the Special Bonds

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of Public-Private Partnership (PPP) Projects (No. 730 [2017], NDRC) issued by the National Development and Reform Commission in April 2017, which is the 7th special bond launched by NDRC after the six special bonds launched in 2015. The project revenue bond and PPP project special bond are very fit for the characteristics of PPP project financing, which mainly rely on the cash flow of the project itself, and the project cash flow is usually measured and predicted relatively accurately after the completion of the project, so they fit more for PPP project refinancing. Fifth, capital market IPO. It refers to that projects with stable cash flow can be refinanced through IPO on A-share market, Hong Kong Stock Exchange and other stock exchanges. Sixth, list at the asset and equity exchange for transfer. It refers to selling part or all of the equity of the project company to the infrastructure investors who prefer to hold long-term for stable returns through listing or auction transfer etc. on trading platforms such as the local asset exchange, equity exchange and financial asset exchange etc.

12.3 Problems and Thinking of PPP Refinancing PPP project has a long cycle and complex legal relationship. The following issues need to be considered before refinancing.

12.3.1 Risk if Refinancing Cannot Be Carried Out It refers to who bears the risk if refinancing cannot be carried out when the initial financing matures. Even if the refinancing can be carried out, which party will bear the risk of higher financing cost, increased investment and reduced income? The author believes that this risk seems to be in the late stage, but in fact, it exists in the early stage. This risk should be taken into consideration when the project sponsor designs the project implementation plan and the investor designs the investment plan, especially when the financing price is at a historical low point. Due to the poor flexibility of preliminary plan design, future refinancing difficulties, different costs and return with the change of capital cost, the government and social capital may have huge disagreement. Therefore, the risk-taking of refinancing is also an issue that needs to be taken into account in the preliminary plan design and negotiation. As for equity investors (excluding financial investors of debt investment in the name of equity), they usually bear the risk of refinancing failure and cost increase. This risk can be comprehensively analyzed according to the current economic trend, including CPI, inflation index, benchmark interest rate, changes in market capital cost, etc. Therefore, when signing the relevant agreements, each party should fully consider the risk brought by the change of future capital cost, and set aside sufficient

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space through the design of the terms of the agreement, so as to reduce and resolve the risk. In addition, the change of capital cost should be reflected in the quotation of social capital bidding. Now, what is concerning is that most of the project bidding prices are fixed “total return on investment” and “return on capital”. In the fierce market competition, these quotations basically do not have much flexibility for change. The cost of financing is rigid. If the price of funds rises sharply, many projects may have no profit, and even suffer huge losses. This requires high attention. The author’s suggestion is: government allows the bidder’s quotation to be “quotation + benchmark interest rate adjustment range (or use LIBOR to be more sensitive) when organizes the bidding”. In this way, it can eliminate the concerns of social capital for the risk of capital market change.

12.3.2 The Issue of Distributing the Income from the Decrease of Refinancing Cost This mainly refers to the issue as for how to share the saved financial expenses (i.e. the income of the project company) brought by lower refinancing cost because of good market trend, better-than-expected cash flow and lower project risk. In the life cycle of many PPP projects with a scale of over RMB 20 trillion yuan for 20 to 30 years, this situation may occur more frequently in the future. PPP related documents have mentioned this issue. The Guideline for PPP Project Contract (Trial) (No. 156 [2014], MOF) issued by the Ministry of Finance at the end of 2014 pointed out that “PPP project contracts may also stipulate that the government has the right to share an agreed proportion (e.g. 50%) of the financial costs saved from refinancing.” In other words, the government can share the saved financial expenses with social capital by certain (holding) proportion. The author holds a slightly different view. For PPP projects where social capital or the project company is the responsible party for financing, the government will not bear the risk of refinancing failure or financing cost increase, the refinancing risk is borne by the social capital or the project company. In the same way, the financial cost saved by refinancing is a kind of compensation, consideration and risk return for social capital to bear the risk of refinancing failure and cost increase, which may be positive income (saving financial expenses), or negative income (increasing financial cost or even refinancing failure). Therefore, it is suggested that social capital should enjoy the financial cost saved from refinancing, which is in line with the principle of equality. In addition, due to the large amount, long term and low income (operation and maintenance income) of PPP projects, many construction enterprises are only willing to cover the engineering part instead of operations. Such agreements can also improve the enthusiasm of social capital, especially construction enterprises in participating in PPP project operation.

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12.3.3 The Issue of Determining the Initiation Time of Refinancing As for the initiation time of refinancing, it is generally considered to be more appropriate after the end of the construction period and a period of time after entering the operation period. According to the case listed in the article “the Application of Refinancing in Foreign PPP Projects and Its Insights to China” written by Li Jiarong and Wang Shouqing, “7 out of 10 projects choose to refinance within 1–4 years after the completion of the construction period, and the construction period of these PPP projects is 2–3 years. For large-scale PPP projects and projects with a long construction period, the selection of financing time is not regular, which is mainly related to the complexity of the project”. There is another reason for initiating refinancing in a period of time (such as 2– 5 years) after the project enters the operation period. Refinancing can be regarded as a sign of dividing the risks of two stages before and after PPP project. The risks during the construction and operation periods of PPP projects are quite different. In my opinion, under the background of immature PPP system, unclear regulatory authorities, inadequate protection of the rights and interests of social capital, and generally too fast implementation of PPP projects, the risk in the early stage of the project is even close to the risk of PE equity investment (not considering government credit and government buyback). After entering the operation period, with the deepening of coordination between both parties, the elimination of risks in the construction period and the more measurable and controllable market risks (cash flow status) of the project itself, the risks at this time are significantly lower. Therefore, starting refinancing at the end of construction period and the beginning of operation period can effectively identify future risks. According to the risk-based pricing principle, a more reasonable financing cost can be determined.

12.4 Current Situations and Thinking Since 2017, some early PPP projects have gradually entered the operation stage, and PPP refinancing has gradually been put on the agenda. PPP refinancing is inseparable from PPP secondary market. China’s PPP secondary market has started. In 2017, Tianjin Financial Assets Exchange and Shanghai United Asset and Equity Rights Exchange set up “PPP asset trading center” respectively. However, it is undeniable that the development of PPP secondary market and refinancing is also constrained by many factors, such as the low cost of initial financing (primary market), the long term of investment, and the lack of attraction to investors in secondary market, the low degree of standardization of underlying assets, and the limited audience, and the strict performance evaluation (linked with 30% of the engineering cost), which have an impact on the cash flow of the project company, and investors are relatively cautious.

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In addition, the financial resources and integrity of local governments also have an impact on PPP refinancing. Now, most of the ways of return for PPP projects in China is government purchase of services or viability gap funding1 . The government financial resources and government integrity are very important for the future cash flow of project companies. On the one hand, at a time when China’s economic growth slows down and the red line of local government’s PPP financial expenditure (10% of the general public budget expenditure) is gradually closer, investors will pay special attention to the local governments’ payment capacity for PPP projects. On the other hand, unlike the financing of local government bonds and trusts, the government’s PPP payment responsibility is contingent liability, and the payment amount is determined by the assessment results. In the case of high government debt and implicit debt, the limited funds of local government must prioritize the repayment of explicit debt such as bonds and trust financing; otherwise it will leave bad credit in the credit system of the People’s Bank of China. The payment or viability gap funding of PPP project is not as “rigid” as the explicit debt repayment, which can be delayed without affecting the credit record. These realities are the risks that secondary market investors need to consider.

1 By

the end of December 2018, there were 8,654 projects worthy of RMB 13.2 trillion yuan of investment in the project management base of the national PPP information platform. Among them, there are 626 user-paid projects (RMB 1.1 trillion yuan of investment), 4,721 viability gap funding projects (RMB 8.7 trillion yuan of investment), and 3,307 government purchase of services projects (RMB 3.4 trillion yuan of investment). Take government purchase of services and the viability gap funding projects as the “government-guaranteed” payment, then the number and investment amount of the government-guaranteed projects account for 92.77% and 91.67% of the total project and investment amount respectively. Compare with the end of 2017, the two indicators increased by 11.31% points and 6.48% points respectively.

Chapter 13

Allocation of Major Risk of PPP Project Contract Fei Liu, Yifei Wu, Lv Han, and Xiang Yu

Abstract This paper introduces and explains the risk definition, risk allocation principle and risk identification of PPP project, and analyzes the method of risk allocation of general PPP project from the perspective of practice. The risk of a PPP project contract mainly comes from losses that cannot be attributed to the contracting parties of the PPP project. It is generally borne by the party that has control over the risk. The common PPP project contract risk is divided into government behavior risk, financial risk, construction risk, operation risk, and income risk, etc. Meanwhile, this paper also introduces and analyzes the main contract risks of PPP projects in 2018 in practice based on the changes of policy environment and market environment in 2018. Keywords PPP project · Contract risk · Risk allocation · Financial risk · Construction risk In order to achieve value for money, the government and social capital parties shall conduct a comprehensive risk analysis for all PPP projects, including a comprehensive risk identification, assessment, sharing and disposal strategy (Wang and Yang 2018). The reasonable allocation of PPP project contract risk is an important basis for long-term friendly cooperation between government and private capital, and also an important guarantee for the smooth implementation of PPP project1 .

F. Liu (B) · Y. Wu · L. Han · X. Yu ALLBRIGHT Law Offices, Shanghai, China e-mail: [email protected] Y. Wu e-mail: [email protected] L. Han e-mail: [email protected] X. Yu e-mail: [email protected] 1 Guideline

for PPP Project Contract (Trial) (No. 156 [2014], MOF).

© Social Sciences Academic Press and Springer Nature Singapore Pte Ltd. 2020 T. Wang et al. (eds.): Annual Report on The Development of PPP in China, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-15-5724-8_13

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13.1 Allocation of PPP Project Contract Risk Now, there is no clear definition of contract risk in China’s law. There are theories dividing risks into narrow and broad risks. Narrow definition of contract risk refers to the loss caused by reasons that cannot be attributed to the contracting parties. Broad definition also includes the loss caused by the events that can be attributed to one or all contracting parties, and this actually is the breach of contract (that is, the breach of contract by contracting parties). Professor Cui Jianyuan mentioned in his article The Improvement of Risk Allocation Rules that “allocation of risk, also known as burden of risk, refers to the system of deciding which party bears or how the two contracting parties should reasonably share the loss when the contract cannot be performed due to the reasons (or events) that cannot be attributed to both contracting parties”, and he believes that “the allocation of risk is different from the liability of breaching contracts in terms of starting point, focus, purpose and function, so they should belong to two legal systems”. The third edition of PPP Reference Guide defines “risk” as “risk is an unpredictable change of project value, which is caused by given potential risk factors. For example, demand risk is the risk that project value and project revenue are lower (or higher) than expected due to the demand for output being lower (or higher) than expected.” The PPP project risk discussed in this paper is the risk in a narrow sense.

13.2 Principles of Risk Allocation of PPP Projects Contract Contract risk and contract breach will lead to contract losses. In the case of contract breach, the breaching party shall bear the liability for breaching the contract according to the contract, but in the case of contract risk, who shall bear the loss caused by the risk? This often becomes the focus of dispute between contracting parties. As for the rule of risk allocation, the economics of law provides a new idea, namely, maximizing efficiency or social welfare (Ulen 2010), that is, reduce the overall social welfare loss by allocating risk to the cheapest cost avoider or the cheapest insurer (Yu 2016). The Notice of on Regulating the Management of PPP Contracts (No. 156 [2014], MOF) issued by the Ministry of Finance adheres to the following basic principles of risk allocation when setting up the contract terms of PPP projects: 1. The party bearing the risk shall have control over the risk; 2. The party bearing the risk can reasonably transfer the risk (for example, by purchasing corresponding insurance); 3. The party bearing the risk has greater economic benefits or motivation for controlling the risk; 4. It is most efficient for the party to bear the risk; 5. If the risk finally occurs, the party bearing the risk shall not transfer the expenses and losses arising therefrom to the other party of the contract.

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Professor Wang Shouqing also believes that the academic community has reached a consensus on the principle of risk allocation of PPP projects in his paper On the Principle and Framework of Risk Allocation of PPP Projects: the party with the most control over the risk should bear the corresponding risk. The fact that one party has the most control over a certain risk means that this party is in the most favorable position to reduce the probability of risk and the loss when the risk occurs so as to ensure that the cost spent to control the risk is the smallest, and the party having control over the risk will have the motivation to make efforts in managing the risk.

13.3 Identification of Major PPP Project Risks The first step in the design of PPP transaction structure is usually to consolidate all risks related to the project2 . Considering that PPP projects involve a wide range of industries, so different projects will have different risks, evaluation and discussion should be made according to each item when defining the way of risk allocation3 . Based on our working experience and the summary of the industry, there are several categories of common contract risks of PPP projects as follows: List of main risks of PPP project contract Government behavior risk

Uncontrollable government behavior

Policy risk

Tax adjustment Uncontrollable change of law Risk of imperfect legal and regulatory system

Financial risk

Risk of interest rate change Inflation Financing risk Risk of exercising the right to interfere

Construction risk

Land acquisition risk Climate/geological risks Risk of supporting infrastructure Design risk Engineering change Quality, safety and other risks Environmental risk Completion risk

Operational risk

Technology risk Risk of controlling operational risk (continued)

2 World 3 Wang

Bank Group, Public-Private Partnerships Reference Guide: Version 3. T.Y., Yang B.: Research on PPP in Japan, (in Chinese).

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(continued) List of main risks of PPP project contract Safety, environment and other risks Hand-over risk Income risk

Competitive risk

Other risks

Risk caused by third party

Risk of market demand change Force majeure Equity change of project company

13.4 Main Risk Allocation Practice of PPP Project Contract 13.4.1 Government Behavior Risk The government behavior refers to the behavior that the administrative organ exercises the administrative power. Generally, the “government behavior” in PPP project contracts is divided according to the level of the subject exercising the authority. If the subject carrying out the administrative act is level-I or its subordinate authorized by the government in the PPP project, it is generally called “controllable government behavior”. If the subject exercising the administrative act is the superior unit authorized by the government in the PPP project, it is generally called “uncontrollable administrative behavior”. In view of the controllable government behavior, the government has subjective control over the administrative behavior. Therefore, the controllable government behavior should generally be regarded as the behavior of the contracting parties (i.e. the government party). If it has an impact on the performance of the contract, it should be treated as breach of contract, which doesn’t belong to the government behavior risk in the PPP project contract. In PPP practice where the government is the contracting subject of PPP project, the government doesn’t directly carry out the uncontrollable administrative behavior, but it also has certain ability to influence while the social capital party cannot make an impact. Therefore, from a fair and reasonable point of view, it is more reasonable and common to allocate the risk of uncontrollable government behavior to the government.

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13.4.2 Policy Risk Policy risk mainly includes the risk of tax adjustment, change of law, and imperfect law and regulation system. 1. Tax adjustment PPP project cooperation has a wide range of content, involving very complex tax issues. In addition, PPP industry is an emerging industry in recent years, and relevant laws and regulations are not mature, as a result, relevant tax policies of PPP projects in China are scattered in different industrial tax regulations, and no special laws and regulations have been formulated to solve the tax issues of PPP projects. Tax adjustment risk refers to the project investment risk brought by the change of tax policy to the government or/and social capital. From May 1, 2016, the Measures for the Measures for the Implementation of the Pilot Program of Replacing Business Tax with Value-Added Tax took effect nationwide. Value added tax has a significant impact on the internal rate of return of social capital projects, resulting in disputes during the implementation of PPP projects. In practice, the government bears the project’s value-added tax, which is reimbursed based on cost; some PPP project contracts agree that the government only bears the risk of value-added tax rate change, and the value-added tax is included in the internal rate of return cash flow evaluation, which means that the government only covers the value-added tax rate, and the internal rate of return has considered the cash inflow and outflow of the value-added tax4 . 2. Change of law The risk of legal change refers to the substantial change of the rights and obligations of both parties in the PPP project contract or the significant adverse impact on their economic interests caused by the implementation, amendment, repeal of applicable laws or any change in their interpretation or implementation after the PPP project contract comes into force. The changes of applicable laws carried out by the people’s government or its subordinate departments or subordinate governments implementing the PPP project are not considered as change of laws, but it is regarded as a “government default”. However, the risk of uncontrollable change of law by the government is usually borne by the government. The risk of legal change may lead to changes in the legality of PPP project, market demand, product/service charges, effectiveness of contract agreement, etc., which will affect the normal construction and operation of the project, and even directly lead to project suspension and failure. 3. Risk of imperfect legal and regulatory system The risk of imperfect legal and regulatory system mainly refers to the incompleteness of the legal and regulatory system based on which PPP project contracts are 4 Zhang

T.: Analysis on VAT Tax Planning and Risk Allocation of PPP Projects, sohu.com, http:// www.sohu.com/a/220090938_480400, (in Chinese).

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signed. The main reason is that the regulations related to PPP now are all policy documents with low legal rank. Series of existing policy documents on PPP lack the guidance of superior laws, which cannot meet the stable policy and market expectations of PPP project implementation. There are many regulatory authorities for PPP projects, and each authority has issued various PPP policy documents. Policy documents issued by different authorities have different purposes and priorities, which results in different understanding of the documents during the PPP project implementation, and impact on the specific implementation of the project. Of course, in practice, the relevant legal and policy documents of PPP are gradually improving. In order to reduce the corresponding risks, it is recommended to select the applicable laws that are conducive to the compliant implementation of the project in PPP contracts according to the characteristics of the project.

13.4.3 Financial Risk Financial risk runs through the whole project period due to its own characteristics, which mainly includes four categories of risks: interest rate risk, foreign exchange risk, inflation risk and risk of exercising the right of intervention. 1. Risk of interest rate change The risk brought by the change of market interest rate to the financing of government/social capital. The uncertainty of market interest rate may lead to the increase or decrease of financing cost. In practice, most project contracts have agreements on interest rate change, for example, if the cumulative change of the benchmark interest rate is above a certain basis point (including), it shall be borne by the government; if the cumulative change of the benchmark interest rate is below certain basis point, no adjustment, and it shall be borne by the social capital; or the project contract interest rate changes with the benchmark interest rate. In addition, there are different regulations in different regions. For example, the Measures for Methods of Financial Affordability Assessment of Sichuan Provincial PPP Project (No. 91 [2017], SC-DOF) stipulates that the return of PPP project financing shall be calculated according to the interest rate of the financing agreement finally signed with financial institutions. 2. Inflation Inflation risk refers to the risk of lower market demand due to higher project construction and operation costs resulting from higher overall price level and lower purchasing power of currency. Inflation risk has a significant risk on the implementation of PPP projects. Generally, adjustment trigger mechanism can be stipulated in the PPP project contract. In case of inflation, the government will provide a certain amount of subsidies to the social capital. Meanwhile, in order to avoid the inflation risk, the social capital party

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should make assumptions for the inflation during the whole project period and leave certain room because the inflation risk is borne by social capital. 3. Financing risk Contract financing risks of PPP project include risks caused by unreasonable financing structure, immature financial market, accessibility of financing and other factors, which may affect the construction progress of the project and even lead to the termination of the project. The contract financing risk of PPP project shall be borne by the social capital. The PPP project contract generally stipulates that the project company shall be responsible for financing, for which the social capital shall be jointly liable. If the project company is unable to obtain all the financing required for the project within the agreed period, the social capital party is obliged to guarantee meeting the financing needs of project construction and operation through shareholder guarantee, shareholder loan, credit enhancement or other legal means. When implementing the PPP project, the social capital party shall fully consider the financing environment and financing policies, formulate a complete financing plan, pay attention to the compliance and completeness of the project, and meet the review requirements of financial institutions. The social capital party can guarantee timely financing by applying for national or provincial social security funds and other government-guided funds, trust bridge funds, financial leasing and other innovative ways of PPP financing. The social capital party shall give full play to the advantages of comprehensive financing coordination ability, provide financing support, assist the project company in applying for project loan, provide necessary support in reducing loan approval cycle and loan interest rate, striving for preferential conditions, etc., to ensure that the financing funds meet the needs of project construction and operation. 4. Exercise risk of intervention right The risk of exercising the right of intervention is the risk that the financial institutions exercise the right of intervention and take over all or part of the rights of the project in accordance with the financing agreement when the social capital party/project company is unable to fulfill the debt repayment obligations. In practice, financial institutions do not pay much attention to the exercise of the intervention right. Unless the financial institutions have special requirements, the government and social capital parties rarely draw up terms about intervention right in PPP project contracts. The exercise of intervention right by financial institutions may lead to the risk of increasing communication costs and decreasing operating efficiency, which is borne by the social capital party. The social capital party shall perform its obligations in strict accordance with the financial agreement signed with the financial institution, and avoid the financial institution from exercising the right of intervention as much as possible.

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13.4.4 Construction Risk The construction risks are mainly reflected in the uncertain risks faced during the construction period of PPP project, including the risks of land acquisition, climate/geology, supporting infrastructure, planning and design, project change, quality and safety, environmental protection and completion. 1. Land acquisition risk The risk of land acquisition mainly refers to the difficulty in obtaining the land use right, the cost and time of land acquisition exceeding expectation, which causes the increase of project cost or the delay of project, and may increase cost in the early stage or the delay of project start time. Land acquisition involves demolition. Factors such as the complex housing structure, the large number of people involved, the difficulty of land acquisition and demolition, and the failure of timely payment will lead to the failure of timely supply of land. 2. Climate/geological risks Climate/geological risk refers to the risk of delaying construction period or increase of construction cost due to the objective adverse natural conditions in the project location, such as climatic conditions, special geographical environment or adverse site conditions. This risk is mainly borne by the government. It shall be specified in the PPP project contract that the government bears the climate/geological risks, and the government shall understand the relevant risks of the project location as much as possible during the climate/geological exploration and inform the social capital party truthfully and comprehensively. 3. Risk of supporting infrastructure The risk of supporting infrastructure refers to the risk caused by inadequate infrastructure of the project, and the risk is mainly borne by the government. The government shall provide supporting infrastructure for the project to ensure that necessary conditions have been completed during the implementation of the project so as to ensure the smooth implementation of the project. These necessary conditions include the connection of municipal roads, rain water, sewage, tap water, natural gas, electricity, telecommunications, and cable television pipelines as well as natural and flat landform. 4. Design risk The design risks of the project are mainly risks such as improper selection of technical grade and quality defects of planning and design. First, the technical level should meet the needs. Too high or too low technical grade will cause inefficiency or inconvenience. Second, the design quality should meet the corresponding technical specifications. Defects in the design documents will affect the service life of the project, and even cause safety accidents endangering life and property. The main party responsible for the design of PPP project contract is generally agreed by the government and social capital parties in the PPP project contract, which can be

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either the government or the social capital party, following the basic principle that the responsible party bears the risk. 5. Engineering change risk Engineering change risk refers to the risk of changing project schedule, scope and standard in the PPP project contract during the construction process. Engineering changes usually lead to changes in the total cost of investment, affect the construction period and the stability of PPP projects, thus increasing the risk for social capital or project companies. The risk of engineering change usually includes the risk of delay in construction period, and changes in total investment, cost, and claim, etc. 6. Quality and safety risks Quality and safety risks mainly refer to that the project quality fails to meet the standards, or major safety accidents occur. The risk is mainly borne by social capital. The social capital party shall strengthen the safety and quality planning and control of PPP projects, and take various safety planning and control measures, including establishing a safety organization assurance system, implementing the “one post, two responsibilities” system, establishing and improving the safety management system, clarify the management of safety objectives, and enhancing safety production education and training. 7. Environmental risk Environmental risk refers to the risk of higher project cost and longer construction period due to more strict environmental protection requirements of the government or social groups. Environmental risk shall be borne by social capital. Social capital should pay attention to environmental protection during project construction, and take measures to prevent air pollution, water pollution, noise pollution, and take measures for solid waste treatment and civilized construction. 8. Completion risk The major completion risk is the delay of construction, which is caused by various reasons, including the delay of demolition by the government, the failure of the social capital party or the project company to properly arrange the project construction, to reasonably allocate production resources or to pay timely. It also includes the delay of construction caused by other risks such as force majeure. Except for breach of contract, the completion risk caused by force majeure is generally agreed to be borne by the government or shared by both parties.

13.4.5 Operational Risk Operation risk mainly refers to risks faced by the project company during the performance of operation and maintenance responsibilities after the project enters the operation period, mainly including: technical risk, operation cost control risk, safety, environment and other risks, as well as handover risk.

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1. Technical risk The technical risk can be divided into two types, one is the operational risk caused by the technical risk during the construction of the project, and the other is the technical risk during the operation. The operation risk caused by the technical risk during project construction refers to the risk of serious quality deterioration and increased operation cost after the project starts to operate due to the lack of detailed investigation on construction conditions such as unfavorable geology and bad weather, and the immaturity of the engineering technology, which leads to increased project difficulty; while the operation technical risk refers to the risk of the project company’s insufficient operation ability and the defects of adopted technologies, etc., which cannot meet contract requirements. To deal with the technical risk in operational, responsibility sharing mechanism of the preliminary work and technical standards used in design stage can be agreed in the project contract and mature engineering technical standards should be adopted. During project operation, relevant professional operation teams shall be employed to use reasonable technology to reduce the possibility of technical risks. Meanwhile, the relevant responsibility allocation and compensation mechanism should be set in the project contract. 2. Operational cost control risk The operational cost control risk is mainly due to the poor management of the project company, stricter industry standards, rising cost of raw materials and labor, which increases the operation cost of the project company, and affects the return on investment of the project company and the normal operation of the project. To prevent the internal cost control risk, the project company must improve the internal management system, management ability and efficiency. To prevent the external cost control risks, project contract can set ways to adjust return when the project operation cost increases due to higher industrial standards and raw material price etc.in order to maintain the return for the project company. 3. Safety, environment and other risks Safety, environment and other risks mainly include major safety accidents or largescale environmental pollution during the operation of environmental and safety sensitive projects such as sewage treatment, garbage cleaning and treatment. In addition to the increase of operation cost, there is also the risk of suspension for rectification and punishment by relevant authorities, and maybe the risk of early termination of contract. In response to safety and environmental risks, reasonable safety and environmental protection standards shall be stipulated in the project contract, and standardized emergency plan shall be formulated. If it involves project suspension and early termination, the way of responsibility sharing, profit distribution and early termination compensation shall also be stipulated in the project contract.

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4. Handover risk The handover risk mainly refers to the impact on normal operation after handover due to serous equipment depreciation that can no longer support continuous usage at asset handover because of over-consumption during project operation. As for the above situation, in practice, in projects such as roads and bridges, the frequency and scope of minor, medium and major repair should be stipulated in the project contract, and major restorative overhaul should be implemented before handover, so that project facilities can continue to be used normally after handover.

13.4.6 Income Risk Project income is one of the core elements of PPP project, which directly determines the success or failure of PPP project. Income risk mainly includes competition risk, market demand change risk, etc. 1. Competition risk Competition risk refers to more fierce commercial competition and lower market return due to the new or existing similar projects by the government or other investors around the project. In response to the competition risk, exclusivity clauses can be stipulated in the project contract, which can restrict the new construction of similar projects in a certain region and a certain period of time, or restrict the continuous operation of similar existing projects, and set up a reasonable compensation mechanism to ensure that the project company maintains a reasonable income and profit. Serious competition constitutes the government’s breach of contract, which can trigger the early termination clause in the project contract. 2. Risk of market demand change In the project with user payment as the main return mechanism, the risk of market demand change mainly comes from weakening market demand and lower return caused by economic situation, social environment change, population flow, policy adjustment and other factors. Generally, the return mode of government viability gap funding is adopted in response to the risk of market demand change. However, if the market demand risk is huge and the viability gap funding is beyond the government’s financial affordability, the corresponding early termination and compensation mechanism shall be agreed.

13.4.7 Other Risks In addition to the risks mentioned above, other risks that may be encountered in the whole life cycle of the project are included in the PPP project contract.

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1. Risk caused by third party As the third party is not the contracting party of the PPP project contract, there is no case to investigate the liability of the third party for breach of contract. Therefore, the losses caused by the third party can also be classified into other risks due to its unpredictability. For the risk caused by the third party, remedial measures shall be stipulated in the project contract. If the construction period is delayed for this reason, the project company shall be granted with extended construction period in exemption of liability. 2. Force majeure Article 117, paragraph 2 of the Contract Law states: “force majeure as mentioned in this Law refers to unforeseeable, unavoidable and insurmountable objective circumstances.” In practice, natural disasters such as typhoon and earthquake, as well as social emergency and archaeological excavation are generally defined as force majeure. Generally, force majeure will be specifically listed as a chapter of the project contract. In case of force majeure, both parties shall agree on reasonable loss assessment procedures and loss sharing. If the project cannot continue due to force majeure, both parties can terminate the project cooperation in advance according to the early termination clause. 3. Equity change of project company The change of shareholders of the project company due to the change of project financing needs or operation strategies, resulting in the change of project operation management mode, affecting the normal operation of the project company, and even leading to the suspension of project operation. From the government’s perspective, the social capital party is a partner selected through the procurement process and has the ability to perform the contract. If the social capital party has the right of equity transfer without restriction during the cooperation period, it may not be able to achieve the original intention of procurement. Therefore, in practice, PPP project contracts usually set a lock-in period for the equity transfer of the social capital party. During the lock-in period, the social capital party is not allowed to transfer the equity, but beyond the lock-in period, with the consent of the government, the social capital party can transfer the equity to a third party with the same performance ability.

13.5 Main Practical Risks of PPP Project Contract in 2018 PPP industry has been developing rapidly since its inception, but a series of nonstandard behaviors have also come into being. Therefore, with the issuance of a series of documents on the standardized management of PPP projects, such as the Circular on Regulating Project Database of the National PPP Integrated Information Platform

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(No. 92 [2017], MOF), meanwhile, under the background of strict control of financial risks, the financial environment has also changed. Based on the requirements of standardized management and changes in the financial environment, the PPP project in 2018 has the following practical risks:

13.5.1 Risks After Linking Construction Cost with Performance Evaluation Before the issuance of No. 92 Document, the construction cost of many PPP projects was not linked to performance evaluation, which led to the fixed government expenditure responsibility. However, according to No. 92 Document, at least 30% of the project construction cost should be linked to performance evaluation. Therefore, after this linkage, the direct risk is that the project construction cost may not lead to full return. It may be divided into two levels: 1. Risk of under-payment between government and the project company Because construction cost is linked with performance evaluation, the traditional payment mode with fixed investment and return no longer exists, which can push the social capital party to fulfill its operation responsibility, achieving the original intention of “professionals do professional work” in PPP project, but also lead to the financial risk that the pervious financial simulation before the participation of social capital deviates from the actual return. In this situation, there are several ways to reduce risk in practice. First, refine the content of performance evaluation and reduce the ambiguity in performance evaluation standards, so that evaluation results can be calculated easily. Secondly, it is not appropriate to set too strict performance evaluation standards so that the project company can meet performance evaluation requirements according to the general industry standard. In addition, lower the payment deduction standard in case of failing to meet evaluation requirements appropriately, and the project company shall be given a certain opportunity to correct so as to prevent the moral hazard of “leaving a mess behind” by the project company when failing the performance evaluation. 2. Responsibility sharing risk within the social capital party For example, in many operation-oriented projects (such as sewage treatment, waste treatment, industrial park development, etc.), social capital usually participates in government procurement jointly, namely, construction, investment and operation work are led by different members of social capital. If the social capital party in charge of operation fails to meet the performance evaluation standard, it will directly affect the project payment, and will reduce the reasonable return for other social capital shareholders in the project and even generate losses. In this case, before participating in government procurement, the joint social capital parties should agree on this in the form of joint agreement. The social capital party in charge of operation should make

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up for the reduced government payment due to failure in meeting the performance evaluation standard.

13.5.2 Financing Risks Caused by Changes in Financing Environment Since the end of 2017, under the background of strict control of financial risks, with the introduction of a series of financial policies such as the Guidance on Regulating the Asset Management Business of Financial Institutions, China’s financing environment has changed dramatically. On the one hand, equity financing and debt financing of PPP projects are facing obstacles, while the financing cost has increased correspondingly. The financing risks of PPP projects are prominent. Many PPP projects are suspended due to financing problems, and many projects need to be renegotiated due to financing problems. As mentioned before, the financing risk in PPP projects is usually borne by the social capital party. When the social capital cannot obtain financing or the financing cost is higher than the project return, the social capital usually needs to bear the corresponding losses. Therefore, before investing in PPP projects, social capital parties should fully consider their own financing ability, contact with financial institutions in advance to reach financing intention and design appropriate financing structure. In addition, in order to avoid greater risk caused by financing after construction starts, financing delivery can be considered as a prerequisite for contract performance according to the specific situation of the project, namely, no substantial performance of contractual obligations shall be made before delivery.

13.5.3 Withdraw Risk No. 92 Document emphasizes the “normalized management mechanism of dynamic adjustment” and requires the centralized cleaning of projects in the project database. Considering the guarantee of financial payment in PPP project, now, the inclusion of project in the PPP integrated information platform database is regarded by financial institutions as one of the criteria for financing. Therefore, the withdrawal of PPP project from the database has become one of the major risks for the successful implementation of PPP project. The reasons for the withdrawal of PPP projects can be divided into two categories: one is the unstandardized implementation of the government or social capital; the other is the change of PPP legal policy. For the first category, the standardized implementation of PPP projects should be clearly defined in the contract as the obligations of all contracting parties; for the second category, it should be included in the scope

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of legal change for risk sharing. As mentioned above, the risk of legal change should be mainly borne by the government.

13.6 Conclusion Considering the complexity of the types of PPP projects, the risk allocation of PPP project contract is also diverse and complex. Due to limited passage, the main contract risk allocation practices of PPP projects cannot be elaborated in detail in this paper. These are common risk allocation schemes in PPP projects, which do not reflect the individualized characteristics of PPP projects. Readers can take this article as a reference for the contract risk allocation of PPP projects in practice, and discuss the specific risk allocation issues considering the specific situation of PPP projects.

References Wang T.Y., Yang B.: Research on PPP in Australia, Tsinghua University Press, 2018, (in Chinese). [US] Thomas Ulen: Law and Economics (Fifth Edition), translated by Shi J.C., Dong X.B., etc., Shanghai People’s Publishing House, 2010 edition, page 292. Yu W.H.: On the System Construction of Risk Allocation System in Contract Law - Centering on the Rules of Risk Burden, published in Political Science and Law, No. 4, 2016, (in Chinese).

Chapter 14

Analysis of the Implementation and Application of PPP Project + Resource Compensation Bundling Hao Jin and Lin Tang

Abstract 2018 marks the fifth year since PPP mode was vigorously promoted in China from 2014. The implemented projects have increased the pressure of local financial subsidies year by year, while the “PPP project + resource compensation” bundling mode can generate income for the project and reduce the financial pressure to a certain extent. Based on theoretical analysis and case analysis, this report elaborates on the basic concept, background, compliance and practice of this mode. It can provide some guidance to promote this mode in subsequent PPP projects. Keywords PPP project · Resource compensation · Socialized investment · Feedback · Self-balance Now, in promoting PPP mode, local governments have taken the measures of binding PPP with non-PPP projects in specific cases, such as bundled bidding for underground parking garage PPP project and on-top commercial real estate projects, bundled bidding for transportation hub and overlying properties with property right available for sale, etc. On the one hand, this bundling is better at giving full play of the professional management capability of social capital so as to improve overall income and reduce the pressure on fiscal subsidy; on the other hand, it also puts forward higher requirements for compliance in the implementation. So it is necessary to summarize the study.

H. Jin (B) China State Construction Fund Management Limited, Beijing, China e-mail: [email protected] L. Tang The Second Construction Co. Ltd. of China Construction First Group, Beijing, China e-mail: [email protected] © Social Sciences Academic Press and Springer Nature Singapore Pte Ltd. 2020 T. Wang et al. (eds.): Annual Report on The Development of PPP in China, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-15-5724-8_14

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14.1 Basic Concepts “PPP project” refers to “infrastructure and public service project”. As mentioned in the Notice on Several Issues concerning the Generalization and Application of the Mode of the Cooperation between the Government and the Social Capital (No. 76 [2014], MOF): “PPP mode is a long-term cooperative relationship established in the field of infrastructure and public service”; Besides, the Notice on Issuing the Interim Measures for Financial Management of PPP Project (No. 92 [2016], MOF) clearly states: “the financial department shall strengthen project compliance audit, ensure that the project belongs to public service field, and perform the relevant preliminary demonstration and audit procedures in accordance with laws, regulations and relevant provisions together with relevant departments.” “Socialized investment projects” include residential and commercial development projects with land transfer (hereinafter referred to as “real estate development projects”) and industrial projects (hereinafter referred to as “industrial investment projects”). These projects are bundled with PPP projects in implementation and a part of the proceeds are used to feedback PPP projects, so they are also called resource compensation projects. In the specific operation, the real estate development project is easier to obtain income and feedback the PPP project than the industrial investment project, so this report will take the real estate development project as the main resource compensation mode for analysis.

14.2 Background Analysis of Bundled Implementation Mode First, it’s encouraged by policy to reduce the financial subsidy pressure, and it’s advantageous to increase the room for project implementation. In recent years, the government has issued a number of regulations to promote bundled implementation. For example, No. 2724 [2014] NDRC proposed to “allocate land, property, advertising and other operating resources to operating and non-operating projects according to laws and regulations, so as to create conditions for stable investment returns and attracting social investment.” According to the Opinions of the Ministry of Finance and the Ministry of Transport on Promoting the Application of PPP in Toll Roads (No. 111 [2015], MOF), if the toll is not enough to recover the cost and generate reasonable return for social capital or the project company, reasonable financial subsidies may be considered if supporting measures such as land development and use in a certain range along the project or financing support provided according to law still cannot fully cover the cost.” These policies intend to reduce the pressure of financial subsidies by generating income to compensate PPP projects through bundling. Meanwhile, with the promotion of PPP projects in recent years, the 10% general public budget expenditure is gradually used up, PPP projects + resource compensation can be bundled to relieve

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the pressure of the government budget and continue to implement new PPP projects at certain scale. Secondly, the needs of the overall implementation of the project, for example, for some squares containing office buildings, shops, shopping malls, etc., the underground architectural structure is connected, so separate construction increases costs and difficulty. Therefore, using bundling mode can achieve synchronous design and construction, greatly reducing the difficulty of construction and cost.

14.3 Differences Between PPP Project and Socialized Investment Project (Resource Compensation Project) 14.3.1 How to Distinguish “PPP Project” from “Socialized Investment Project” According to the No. 880 Notice on the Urban Land Classification and the Standard for Planned Construction Land issued by the Ministry of Housing and Urban-Rural Development of the People’s Republic of China implemented since January 1, 2012, it can be generally classified as follows: ➀ Projects planned to be built on four types of land, namely “land for public management and public service (A), land for road and transportation facilities (S), land for public facilities (U), land for green space and square (G)”, belong to PPP projects ➁ Projects planned to be built on four types of land, namely residential land (R), land for commercial service facility (B), industrial land (M) and land for logistics storage (W), are social investment projects. Therefore, specific resource compensation projects need to be analyzed according to the corresponding planning categories of construction land. For example, the commercial project is still part of the railway station square if this part of land is not transferred separately and the planned use is not for commercial purpose.

14.3.2 How to Understand Resource Bundling and “Projects not Suitable for PPP”? 14.3.2.1

Both Refer to Socialized Investment Projects

Circular on Regulating Project Database of the National PPP Integrated Information Platform (No. 92 [2017], MOF) points out: “(I) Not suitable for PPP mode. Including

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those that do not belong to public service and the government does not have the obligation to provide, such as commercial real estate development, investment projects, etc.” According to the analysis above, these types of projects may also be used as resource compensation projects.

14.3.2.2

Self-balance and Financial Subsidies Shall not Cover Real Estate Development – A Necessary Condition for Bundled Implementation

Can real estate development projects be bundled as resource compensation? Why does the No. 92 [2017] MOF Document propose that it is not suitable? Does this mean that the resource compensation mode is terminated? The author believes that No. 92 [2017] MOF Document prohibits “commercial real estate development and investment promotion projects” that need financial subsidies. Projects that have been sold with land planning purposes not as “infrastructure and public service”, such as residential, commercial and office, can balance themselves, and can also “transfuse blood” to PPP projects. It is not against this document, and it is compliant. ➀ Method to tell whether the bundling is compliant or not: ➁ Financial Funds should not Cover Real Estate Development Investment in bundling—Example

Compliant

Assign Compliant

Bundled projects

Land for public management and public service (A), land for road and transportation facilities (S), land for public facilities (U), land for green space and square (G)

Compliant

Transfer

Self-balance

Residential land (R), land for commercial service facility (B), industrial land (M) and land for logistics storage (W)

Not compliant

Financial subsidy

In 2015, a PPP project of airport terminal square transportation hub is expected to have a total investment of RMB 6 billion yuan, including 2 billion yuan for commercial development (business building, hotel, shopping mall) under land transfer (transfer under the name of Airport Group), 4 billion yuan for airport supporting

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(subway and other public transport hubs, underground parking lots, squares), with a planned construction period of 2 years and an operation period of 8 years. The return mechanism agreed in the initial implementation plan is: Annual viability gap funding = availability payment + operation and maintenance fee + tax + value adjusted for performance evaluation − income, of which i×(1+i) , Availability payment adopts annuity method, A = P (1+i) n −1 P is the investment amount of commercial development + airport support facilities confirmed by audit; i is the tender yield (or interest rate), which takes 7% in the implementation plan; n is the operation period, which takes 8 years in the implementation plan; Income refers to all income from commercial development (including sales and rents) and airport supporting facilities, which are recorded per actual. For the convenience of analysis, this only analyzes from the perspective of income of the project company, not considering operation and maintenance fees, taxes, performance appraisal, etc. temporarily. Under the above assumptions, if the RMB 6 billion yuan of investment is completed in the construction period, the annual income of the project company in the operation period is RMB 1.04 billion yuan. The initial implementation plan may have the issue of subsidy by financial funds for commercial development. From the previous simulation, it can be seen that the annual income of the project company is RMB 1.04 billion yuan from commercial development projects and airport supporting facilities. Since the investment ratio is 1:2 (2 billion yuan and 4 billion yuan), the contribution to the annual income should also be based on this ratio (see Table 14.1). The above-mentioned return mechanism contains financial viability gap funding, which is determined by the income from commercial development. According to the above data, if the annual income of commercial development is less than RMB 347 million yuan, then over RMB 693 million of financial subsidies is needed, that is to say, the financial fund bears the risk of commercial development income, which is obviously not compliant. To be compliant, the return mechanism needs to be adjusted as follows: Table 14.1 Annual income composition in operation period. Unit: RMB 100 million 1

2

3

4

5

6

7

8

9

10

Commercial development

3.47

3.47

3.47

3.47

3.47

3.47

3.47

3.47

Airport support facilities

6.93

6.93

6.93

6.93

6.93

6.93

6.93

6.93

10.40

10.40

10.40

10.40

10.40

10.40

10.40

10.40

Total

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Annual viability gap funding = availability payment + operation and maintenance fee + tax + value adjusted for performance evaluation – shared return from commercial development. Among them: i×(1+i)n , Availability payment adopts annuity method, A = P (1+i) n −1 P is the investment amount of airport support facilities confirmed by audit (excluding the RMB 2 billion of commercial development investment, which is the responsibility of social capital). i is the tender yield (or interest rate), which takes 7% in the implementation plan. n is the operation period, which takes 8 years in the implementation plan. Income refers to the income from airport supporting facilities, which are recorded per actual. Shared return from commercial development refers to the part of return that is agreed to be shared to PPP project from commercial development. From this case study, it can be seen that in bundled implementation, the base of availability payment calculation must not include commercial real estate development investment, and the two parts should be calculated separately.

14.4 Comparison Between “PPP Project + Resource Compensation” Bundling and “Land for Project” Mode Considering the need to establish compensation mechanism, “PPP project + resource compensation” bundling usually bundles PPP project with real estate development project. “Land for project” mode has the similar operation. These two modes are compared and analyzed below for better understanding.

14.4.1 Land for Project The nature of “land for project” is that “infrastructure and public service” project is attached to real estate development project. In practice, it is divided into the following two cases: One is compliant. For example, in the bid auction and listing of some land parcels for real estate development, it is required in the documents that the land delisting party should build necessary public facilities such as kindergartens, primary schools and affordable housing. Another one is not compliant. For example, when a city transfers a residential commercial land parcel, it is mentioned clearly in the documents that the land delisting party should build an art museum and a cultural museum free of charge (it may not be in the land parcel) for the government. The government has issued a number of documents to prohibit this case, such as the Notice of the General Office of

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the State Council on Regulating the Administration of Receipt and Disbursement of Proceeds of Assignment of Rights to Use State-Owned Land (No. 100, [2006], SC), “no region, department or unit is allowed to reduce or remit the revenue from land transfer in the form of “investment promotion”, or in the form of land for projects, collection first and return later, subsidies, etc.” Article 22 of the Provisions on the Economical and Intensive Use of Land (Order No. 61, MLR), which came into effect on September 1, 2014, stipulates: “it is prohibited to reduce or remit the land transfer price in the form of land for project, collection first and return later, subsidy, reward, etc.” Therefore, the land for project mode should be used carefully in different situations.

14.4.2 PPP Project + Resource Compensation The essence is using the income from real estate development to feed PPP project by bundling PPP project with real estate development project. From the above analysis, it can be seen that despite that both modes link real estate development with government investment projects (PPP projects), in the current policy environment, it is more compliant and legal to bundle the real estate development projects with PPP projects and use the real estate development income as compensation to PPP projects than the “land for project” mode of attaching government investment projects to the real estate development projects. And with the reduction of the amount of PPP projects of local governments, the bundled implementation of “resource compensation + PPP projects” is expected to increase.

14.5 Key Points of “PPP Project + Resource Compensation” Bundled Implementation Under the condition that the real estate development project can balance itself and give certain economic compensation to PPP project, the key points of PPP project + resource compensation bundled implementation are as follows.

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14.5.1 Deal with the Connection Between “Bidding, Auction and Listing” of Real Estate Development Land and Public Competitive Selection Procedure of PPP Project The bundled implementation involves two public selection procedures: one is the bidding, auction and listing procedure for the transfer of land parcel for development, the other is the public competitive selection procedure for the social capital of PPP project, and the bidding subjects of the two procedures are not the same: the bidding, auction and listing of land transfer is under the national land department, while the bidding subject of PPP project is the implementing institutions. Dealing with it in practice is very important. There are usually two ways. 1. Combined bidding of PPP project and land bidding, auction and listing (three in one) Example 1. Qualification pre-review document of “Beijing 2022 Winter Olympics and Paralympics-Yanqing District government PPP project”: “The project is implemented by means of PPP. Yanqing District People’s Government of Beijing Municipality (hereinafter referred to as “Yanqing District government”) is the implementing institution of the project. Beijing Municipal Planning and Land & Resources Management Commission (hereinafter referred to as “the Municipal Land Commission”) is the transferor of the state-owned land use right of the project. Beijing Holding Group Co., Ltd. (hereinafter referred to as “Beijing Holding Group”) is the representative of the government investor of the project. The project is qualified for bidding. Yanqing District government and the Municipal Land Commission are the tenderees. Beijing Municipal Engineering Consulting Corporation is responsible for organizing the bidding of the project and selecting the social capital partner of the project by open bidding.” Example 2. Guangzhou Financial City station integrated transportation hub project. Guangzhou Municipal Planning and Land & Resources Commission and Guangzhou Metro Project Fund Coordination Office conduct open bidding for the PPP project of integrated transportation hub of Financial City Station and the use right transfer of operational state-owned construction land (AT090904). According to the reply on the project feasibility study report, the total construction area of the project is about 78395 m2 (including 43500 m2 of capacity area), the above-ground construction area is 28010 m2 , and the underground construction area is 50385 m2 . The construction includes comprehensive transport hub and channel for intercity and subway transfer, bus station, distribution hall, check-in hall, public service facilities, non-profit public parking lot for rail transit transfer with 500 parking spaces, three connecting channels (overpass), commercial and related supporting facilities, etc. The project will adopt the PPP mode, with the operation mode of “public transport infrastructure BOT + supporting operational property development”, namely:

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The government-authorized project implementation institution and the land & resources authority combine the PPP project bidding with the transfer process of the use right of state-owned construction land, and select the social capital investor and the transferee of the use right of state-owned construction land for operational properties by means of public bidding. The winning social capital and the investment representative appointed by the government jointly establish the PPP project company, which is fully responsible for the investment and development of operating property and owns the property assets. Meanwhile, it is responsible for the investment, construction, operation and maintenance of public transport functional infrastructure within a certain period of time. The project company shall feed the construction of public transport functional infrastructure and the operation cost during the cooperation period with the operating property development income as much as possible, and the government shall pay the viability gap funding to make up for the gap. After the agreed operation and maintenance period expires, the public transport functional infrastructure shall be transferred to the government designated department for free. (1) Analysis of “three in one” From the above two cases, it can be seen that “three in one” refers to the joint bidding of “social capital, general contractor and owner of state-owned land use right”, the implementing institution and the land authority work jointly to cover three open competitive selection procedures in one bidding, which provides useful reference for the promotion of following “PPP project + resource compensation” bundling mode. (2) There is a difference between “three in one” bidding and the “land combined bidding” stipulated in No. 38 and 91 documents The Notice of the General Office of the Ministry of Land and Resources on Issuing the Guiding Opinions on Implementation of Industrial Land Policies (No. 38 [2016], MLR) stipulates that: “in the following cases, the selection of project investors and the selection of land users via competitive procedures can be combined in implementation: (1) relevant land needs to be paid for use in PPP project.” Notice on Jointly Announcing the Third Batch of PPP Demonstration Projects to Accelerate Construction (No. 91[2016], MOF) stipulates: “v. the land for PPP projects shall conform to the overall land use plan and annual plan, and the approval procedures for construction land shall be handled according to law. It is not allowed to directly supply land in package for PPP projects. The way to supply each land parcel shall be determined respectively according to the scope, purpose, and conditions for planned construction of each parcel determined in the detailed regional control planning: (3) the parcel of land or land of which the land use right needs to be supplied through bidding, auction and listing according to law, the selection of project investor and land user through competition can be combined under the prerequisite that the land and resources authorities in cities and counties have prepared land supply program, signed land transfer (lease) contract and carried out post-supply supervision.” It can be seen from the provisions of the above documents that No.38 and 91 documents only stipulate that “investor + land transfer” bidding can be combined

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when the land occupied by PPP project itself needs to be provided by means of transfer rather than assignment, which is different from the combined bidding of real estate development in the two examples before. For example, a stadium covers an area of 150 mu, which needs to be provided by way of transfer. If it is separated into two biddings, it needs to go through two open competitive procedures, namely the bidding of PPP investors by the implementing institution, and land bidding, auction and listing by land authority, which is cumbersome and there may be two different parties winning the bid. No. 38 and 91 documents can properly address this issue. However, if another 500 mu of real estate development land nearby (including industrial R & D land, etc.) is involved as bundled resource, it cannot apply No. 38 and No. 91 documents for combined bidding, but it can refer to the “three in one” approach mentioned in the two examples above. 2. Separate bidding for PPP project and land bidding, auction and listing ➀ First, delist the land for real estate development, and then select the social capital of PPP project It is necessary to have “clean land” condition, and the government-related company usually first delist the land for development, and then cooperate with the winning social capital for development. ➁ Select social capital of PPP project first, and then delist real estate development land In the case that the development land to be compensated for resources is not “clean land”, the bidding of PPP project’s “integrated investment and construction” comes first. After the development land to be compensated for resources becomes clean, the bidding, auction and listing procedures will be carried out. Of course, there is also the possibility that the winning social capital may not necessarily delist the development land, which requires that the return mechanism for two situations of delisting and not delisting be agreed in PPP bidding conditions.

14.5.2 The Compensation Mechanism of Real Estate Development Project to PPP Project Needs to Be Quantified in the Bidding Stage Since bundling is to feed PPP project, a quantitative compensation mechanism should be established, usually in the following ways. 1. Reflect in the land transfer price Namely, social capital will forecast the construction cost, operation cost and user payment income (if applicable) of PPP project by itself, and report the transfer price on this basis. This way of quotation is not suitable for some projects with nonstandard construction and various changes.

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2. Compensation amount based on the area of buildable property The compensation amount per square meter is taken as the competition indicator in the bidding document, while the return mechanism of PPP project is calculated separately. This way of quotation can better adapt to complex projects.

14.5.3 Properly Handle the Financing and Tax Issues The great difference between PPP project and real estate development project in terms of financing rules and taxation needs to be considered with priority in bundled implementation. 1. Financing The proportion of capital for real estate development is usually 35%. Bank financing usually requires that four certificates be complete, and the shareholders of the project company have the real estate development level II or above qualification (this requires that the potential bidders, including the joint bidder to have the qualification in bundled bidding). Meanwhile, the bank’s judgment on the source of repayment is based on the sales expectation of real estate projects. These are obviously different from PPP projects. When real estate development and PPP projects are under one project company, the definition and identification of project capital and repayment sources need to be communicated with the financing bank in advance. 2. Taxation Mainly to clarify whether the income compensated to PPP project can be included in the cost of real estate development project. If not, a large amount of land valueadded tax, income tax, etc. need to be paid to compensate PPP project with the after tax profit of real estate development.

14.5.4 The Real Estate Development Project Shall not Be Transferred Free of Charge After the Cooperation Period Expires The main reasons for that are as follows. 1. The term of property right is different from the term of cooperation Social capital (or project company) owns the property right of real estate development projects (40 or 50 years), but the cooperation period is often shorter than the property rights period of real estate development projects, for example, some projects’ cooperation period is about 10 years.

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2. The practice of free transfer conflicts with the value of the real estate development property (1) Possible book balance In the project with PPP cooperation period shorter than 20 years, when the cooperation period expires, the book balance of the real estate property in the project company (it needs to be depreciated according to the minimum 20 years for fixed assets). (2) Market value Even if the operation period reaches or exceeds 20 years, although the book residual value of the real estate property fixed assets after depreciation is 5% (Notice of the State Administration of Taxation on the Follow-up Management of the Approval of Cancelled Enterprise Income Tax (No. 70 [2003], SAT) stipulates that after the cancellation of filing, in order to prevent enterprises from arbitrarily reducing the proportion of residual value and increasing the depreciation amount of fixed assets, the depreciation ratio of fixed asset residual value is defined at 5% when enterprises calculate the deductible fixed asset depreciation before the combination of income tax for domestic and foreign enterprises.) However, these properties often have market value, especially when the social capital is state-owned, it is impossible to transfer the commercial properties to the government free of charge after the expiration of the cooperation period. Therefore, the scope of free transfer under the mode of “PPP project + resource compensation” should be limited to the PPP project.

14.6 Common Misunderstandings in the Bundled Operation of PPP Project + Resource Compensation 14.6.1 The Misuse of BOO From the three elements of “investment, operation and ownership of property”, the real estate development project, especially the self-owned property, also meets this requirement, but it is not BOO mode, that is, in the bundled implementation of “PPP project + resource compensation”, only the PPP project part has the three elements of “investment, operation and ownership of property”, which can be called the BOO mode.

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14.6.2 Misuse of “Operating Mechanism, User-Paid Income” In the bundled implementation of “PPP project + resource compensation”, it is necessary to distinguish whether the operating income of the project company comes from PPP project or resource compensation. For example, in the following two cases of operation and income: first, income from selling tickets and organizing sports events at the stadium; second, income from selling or leasing office buildings in the bundled project of high-speed railway station square + office building (land transfer) in the square. In the second case, the operation of sales or leasing of commercial buildings is common operation of social investment projects, not the operation in the sense of PPP projects. Its income is not “user payment”, but only income of social investment projects. The bundled implementation of “PPP project + resource compensation” improves the project income through resource compensation and reduces the pressure of financial subsidies. This mode has obvious effect on enhancing the enthusiasm of the society to participate in PPP projects and exerting its professional management capability. On the other hand, the mode involves more transaction links and therefore higher compliance requirements. Now, the first trial of several similar projects in Beijing, Guangzhou and other places will help to further improve and promote the mode in PPP.

Chapter 15

2013–2018 PPP Highlights Yang Xiaolu

November 12, 2013. The Third Plenary Session of the 18th Central Committee of the Communist Party of China adopted the Decision of the CPC Central Committee on Several Major Issues of Comprehensively Deepening Reform, pointing out that to make the market play a decisive role in resource allocation and better play the role of the government, social capital is allowed to participate in urban infrastructure investment and operation through concession and other ways. November 26, 2014. The State Council issued the Guiding Opinions on Innovating on the Investment and Financing Mechanisms in Key Areas to Encourage Social Investment (No. 60 [2014], SC), which proposed three measures: establishing and improving the mechanism of PPP, giving full play to the guiding role of government investment, and innovating financing methods. April 9, 2015. The Ministry of Finance and the Ministry of Environmental Protection jointly issued the Implementing Opinions on Advancing the Cooperation between the Government and the Social Capital in the Field of Water Pollution Prevention and Treatment (No. 90 [2015], MOF), which made it clear that the funds of the Ministry of Environmental Protection could be used for PPP project construction. September 15, 2015. The Notice of the General Office of the State Council on Forwarding the Guiding Opinions of the Ministry of Finance, the National Development and Reform Commission and the People’s Bank of China on Popularizing the Public-Private-Partnership Mode in the Public Service Fields (No. 42 [2015], SC) was issued, which clearly defined the working requirements for promoting the PPP mode in public service, and stressed that the relevant departments of the State Council should strengthen the guidance and supervision on the local promotion of the PPP mode. January 20, 2016. The National Development and Reform Commission and the United Nations Economic Commission for Europe officially signed a memorandum Y. Xiaolu (B) General Management Department, TUPPP, Beijing, China e-mail: [email protected] © Social Sciences Academic Press and Springer Nature Singapore Pte Ltd. 2020 T. Wang et al. (eds.): Annual Report on The Development of PPP in China, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-15-5724-8_15

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of understanding on cooperation, and the two sides will strengthen exchanges and cooperation in promoting PPP mode. January 20, 2016. Tsinghua University, together with City University of Hong Kong and the United Nations Economic Commission for Europe, signed a cooperation agreement in Geneva to jointly build the United Nations PPP China Center. March 2, 2016. The China Environmental Chamber of Commerce submitted a proposal on improving the payment mechanism of PPP projects in environmental protection to the national “two sessions”. March 5, 2016. Premier Li Keqiang made a report on the work of the government at the fourth session of the 12th National People’s Congress, which clearly proposed to promote the transformation and restructuring of local financing platforms for marketbased financing, improve PPP mode, make good use of 180 billion yuan guidance fund, strictly perform the contract in accordance with the law, and fully stimulate the enthusiasm of social capital participation. March 5, 2016. The Ministry of Finance made the Report on the Implementation of 2015 Central and Local Budgets and 2016 Central and Local Budget Draft at the fourth session of the 12th National People’s Congress. The report proposed to promote PPP financing support fund and PPP related legislative work, focusing on the use of PPP mode to invest in housing security and affordable housing projects. March 17, 2016. The 13th Five-Year Plan for National Economic and Social Development of the People’s Republic of China was officially released. The PPP mode has been given an important task of improving means of macro-control, and has become an important component of mechanism of sustainable financial development. March 24, 2016. The National Development and Reform Commission, together with the Ministry of Industry and Information Technology and other ministries and commissions, issued the Guiding Opinions on Promoting the Development and Reform of Private Economy in Northeast China (No. 623 [2016], NDRC), which pointed out that a number of PPP projects were launched in infrastructure, public utilities, public services and other fields to support and guide the equal participation of private capital. This is the first time in the strategy of revitalizing northeast China that the country has mentioned the application of PPP mode to introduce private capital. April 8, 2016. The Ministry of Civil Affairs and the Health and Family Planning Commission jointly issued the Notice on Effectively Conducting the Licensing Work for Institutions Combining Medical and Health Service and Elderly Care Service (No. 52 [2016], MCA), which pointed out that the government could relax market access and guide social capital into various fields of construction and operation of medical-elderly care services. April 12, 2016. The Ministry of Land and Resources issued the 13th Five-Year Plan of Land and Resources, which mentioned improving the land use policy of PPP and supporting innovative financing mode.

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April 19, 2016. The National Development and Reform Commission organized the first meeting of the leading group for infrastructure and public utilities concession legislation, deployed to accelerate the concession legislation, so as to improve the legal system of PPP, encourage and guide social capital to participate in infrastructure and public utilities construction and operation, and improve the quality and efficiency of public services. April 22, 2016. TUPPP jointly initiated by the National Development and Reform Commission, China Insurance Regulatory Commission and Tsinghua University was officially inaugurated. According to the cooperation agreement signed between Tsinghua University and UNECE, TUPPP will also assume the function of UNECE PPP China Center. May 9, 2016. The General Office of the State Council issued a notice requiring special supervision on the implementation of policies to promote private investment. In the promotion of PPP mode, the notice requires to focus on the supervision of PPP mode to see if there are problems such as imperfect policies, unscientific mechanisms, and unfulfilled commitments. May 18, 2016. The National Development and Reform Commission held a teleconference on “promoting private investment, fostering new driving forces and developing new economy”. The meeting stressed that special supervision and inspection on promoting private investment should be carried out in the near future, and continued to vigorously promote the PPP mode. May 30, 2016. The Ministry of Finance and the National Development and Reform Commission jointly issued the Notice on Further Jointly and Effectively Conducting the Work concerning Public-Private Partnership (No. 32 [2016], NDRC), which put forward relatively detailed and specific work requirements for improving the financing efficiency of PPP projects and strengthening supervision and management. June 21, 2016. The first China PPP Forum was held in Qingdao. The National Development and Reform Commission, the Ministry of Housing and Urban Rural Development, the China Insurance Regulatory Commission, the government of Shandong Province and the United Nations Economic Commission for Europe serve as the guiding units, jointly sponsored by Tsinghua University, Qingdao Municipal People’s government and China International Engineering Consulting Corporation, and hosted by TUPPP. July 5, 2016. The National Development and Reform Commission established a matching mechanism for investment and financing cooperation with more than 40 financial institutions and relevant associations. The National Development and Reform Commission will take the initiative to provide services to financial institutions. For example, promote major policies such as PPP mode, and introduce PPP major project information to financial institutions.

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July 7, 2016. Li Keqiang presided over the executive meeting of the State Council and listened to the report on the promotion of PPP mode. Two departments, the Ministry of Finance and the National Development and Reform Commission, respectively proposed opinions on “concession legislation” and “PPP legislation”. February 1, 2018. The Information Office of the State Council held a press conference on the reform and development of civil affairs in 2017. Huang Shuxian, Minister of the Ministry of Civil Affairs, introduced ten measures of the Ministry of Civil Affairs in 2018, in which he pointed out that it would continue to deepen the reform of “streamline administration, delegate powers, and improve regulation and services” for elderly care institutions, comprehensively liberalize the market for elderly care services, support and liberalize, and encourage the development of PPP projects to meet the needs of an aging society. July 18, 2016. The CPC Central Committee and the State Council jointly issued the Opinions on Deepening the Reform of the Investment and Financing System to encourage cooperation between the government and social capital. According to the needs and financial situation, various departments in various regions can adopt a variety of forms, such as single project, combined project and continuous development in the fields of transportation, environmental protection, medical care, pension, etc. through concession, government purchase of services, etc. to expand the supply of public goods and services. July 31, 2016. The Ministry of Finance entered the stage of soliciting Opinions on the Suggestions on Preferential Tax Policies to Support PPP mode. August 8, 2016. The Legislative Affairs Office of the State Council took the lead in organizing PPP legislation. February 1, 2018. The Ministry of Finance issued the Notice on announcement of the Fourth Batch of PPP Demonstration Projects (No. 8 [2018], MOF). The fourth batch has 396 demonstration projects, with a total investment of RMB 758.8 billion yuan, covering 31 provinces, autonomous regions and municipalities directly under the central government. August 10, 2016. The General Office of the National Development and Reform Commission issued the Notice on the Methods for Approving New Public-Private Partnership Projects of the National Highway Network (No. 1818 [2016], NDRC). August 18, 2016. The National Development and Reform Commission issued the Notice on Effectively Conducting the Work Relating to Public-Private Partnership in Traditional Infrastructure Fields (No. 1744 [2016], NDRC). September 3, 2016. President Xi Jinping met with President Obama on the G20 Summit in Hangzhou. There are 35 major consensus and results reached between China and the United States, of which the 9th is about PPP: China and the United States promise to promote the best practices of PPP mode to their local governments, and further strengthen the exchange and information sharing in the field of public service investment and operation.

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September 6, 2016. Premier Li Keqiang presided over the executive meeting of the State Council. He emphasized more efforts in key areas and weak links to make up for the shortcomings. He proposed to pay attention to the use of PPP mode, and then introduce in a centralized manner a number of projects with cash flow and stable return expectation to the society, and further relax investment restrictions in infrastructure. September 24, 2016. The Ministry of Finance issued the Interim Measures for the Financial Management of Public-Private-Partnership Projects (No. 92 [2016], MOF), which clarified the key points of the whole life cycle of PPP projects and guaranteed the standardized implementation of PPP projects. September 28, 2016. The National Development and Reform Commission and the Ministry of Housing and Urban Rural Development jointly issued the Notice on Further Improving the Innovation of Public-Private Partnership (PPP) in the Field of Major Municipal Projects (No. 2068 [2016], NDRC), requiring the deepening of PPP innovation in small and medium-sized cities and related industries in the municipal field. October 11, 2016. The Ministry of Finance issued the Notice on Deeply Advancing the Public-Private Partnership in Public Service Fields (No. 90 [2016], MOF), proposing to further promote PPP mode, actively guide the participation of all kinds of social capital, involving 15 areas of public services. October 11, 2016. The Ministry of Finance, together with 20 ministries and commissions, announced the Notice on Jointly Announcing the Third Batch of PPP Demonstration Projects to Accelerate Construction (No. 91 [2016], MOF). There are 516 demonstration projects, with an investment amount of RMB 117 million. It is required to complete the procurement by the end of September 2017. October 13, 2016. China Assets Appraisal Society issued the Operation Guideline for PPP Project Assets Appraisal and Related Consulting Services, which provided detailed guidance on the business procedures, important business focuses, specific implementation methods and results of PPP projects. October 18, 2016. The PPP investment project promotion meeting of private enterprises was successfully held in Tsinghua University. The promotion meeting was jointly sponsored by the Investment Department of the National Development and Reform Commission and the Department of Economy of the All-China Federation of Industry and Commerce, and hosted by TUPPP. A total of 668 traditional infrastructures with a total investment of about RMB 1.14 trillion yuan were introduced at the conference. October 24, 2016. The Ministry of Finance publicly solicited opinions from the public on the Guideline for the “Value for Money” Assessment of PPP (Revised Draft) (No. 118 [2016], MOF).

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October 27, 2016. The National Development and Reform Commission issued the Notice on Issuing the Guiding Rules for Implementing Public-Private Partnership Projects in Traditional Infrastructure Fields (No. 2231 [2016], NDRC), further standardizing the operation process of PPP projects in traditional infrastructure. October 28, 2016. The Interim Measures for the Administration of Information Disclosure of PPP Projects (Draft for Comments) of the Ministry of Finance was released to the public, and it entered the stage of soliciting opinions and comments. November 21, 2016. The National Development and Reform Commission, together with the State Forestry Administration, issued the Guiding Opinions on Advancing Forestry Construction through Public-Private Partnerships (No. 245 [2016], NDRC). November 30, 2016. Premier Li Keqiang signed the State Council order and promulgated the Regulation on the Administration of the Confirmation and Recordation of Enterprise Investment Projects, which comes into force from February 1, 2017. This is the first administrative regulation in fixed asset investment in China. The purpose of this regulation is to further regulate the government’s approval and filing of enterprise investment projects and accelerate the transformation of the government’s investment management functions. December 12, 2016. The Investment Division of the National Development and Reform Commission and the PPP Center of the United Nations Economic Commission for Europe convened the “Belt and Road” PPP working mechanism symposium in Beijing. December 19, 2016. The National Development and Reform Commission and the Ministry of Agriculture issued the Guiding Opinions on Advancing Public-Private Partnership in the Agricultural Field, proposing to vigorously promote cooperation between government and social capital in agriculture, which is also the first PPP guidance document in agriculture. December 21, 2016. National Development and Reform Commission issued the Measures for the Administration of PPP Project Database in the Field of Traditional Infrastructure (Trial), which specifically explained the inclusion of PPP projects into the project bank. December 6, 2016. The Global Infrastructure Hub (GH) project library was officially launched. The project library will help government departments of all countries to develop and promote infrastructure projects, release information on infrastructure projects of all countries to global social capital, promote project financing, and support cooperation between public and private capital. December 21, 2016. President Xi Jinping, chairman of the Central Leading Group on Financial and Economic Affairs, chaired the fourteenth meeting of the Leading Group. He stressed that in order to correctly distinguish government responsibilities and market functions, the government should create conditions to guide private

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capital into areas where the market can play a role, and support all kinds of market participants to participate in project implementation and gain profits in various ways. December 22, 2016. The State Council issued the Guiding Opinions of the State Council on Strengthening the Government Integrity Construction (No. 76 [2016], SC), which requires strengthening the construction of government integrity in PPP, local government debt, government procurement and other fields. December 23, 2016. The State Council issued the 13th Five-Year National Plan for the Development of Strategic Emerging Industries, making comprehensive arrangements for the key tasks, policies and measures of China’s strategic emerging industry development during the “13th Five-Year Plan” period. The contents related with PPP include: innovating financial and tax policy support, actively using PPP and other modes, guiding social capital to participate in major project construction; using PPP mode to promote remote sensing satellite construction etc. December 23, 2016. The construction of Hangzhou-Shaoxing-Taizhou high speed railway, the first high speed railway PPP project controlled by private capital, was officially started. December 26, 2016. The National Development and Reform Commission and China Securities Regulatory Commission jointly issued the Notice on Promoting the Work concerning the Asset Securitization of Public-Private-Partnership (PPP) Projects in the Traditional Infrastructure Field, indicating the official opening of PPP asset securitization. December 30, 2016. The Ministry of Finance officially issued the Notice on Issuing the Measures of the Ministry of Finance for the Administration of PPP Expert Database, regulating the establishment and management of PPP expert database. January 5, 2017. The National Development and Reform Commission and the Ministry of Transport jointly issued the Notice on Further Completing the Preliminary Work of PPP Projects in Toll Road (No. 2851 [2016], NDRC), making corresponding adjustments to the preliminary work management of toll road PPP project. January 6, 2017. The Ministry of Finance and the National Development and Reform Commission issued the Notice on Submitting the List of Cities and Counties with Marked Effect in Promoting PPP mode in the form of urgent document, recommending and selecting cities (prefectures), counties (cities, districts) with marked effect in promoting PPP and high participation of social capital for incentive. January 7, 2017. The National Development and Reform Commission, the Ministry of Foreign Affairs and other 13 departments and units jointly established the “Belt and Road” PPP working mechanism, strengthened cooperation with the countries along “the Belt and Road” in infrastructure and other fields, actively promoted the PPP mode, encouraged and helped Chinese enterprises “go out”, and promoted the related infrastructure projects to implement as soon as possible.

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January 9, 2017. The Investment Division of National Development and Reform Commission, the bond department of China Securities Regulatory Commission, Asset Management Association of China and relevant enterprises held a forum on asset securitization of PPP projects. It marks the official start of asset securitization of PPP project. January 11, 2017. The Ministry of Finance solicited opinions on the Measures for the Administration of PPP Consulting Agency Database Directory (Draft for Comments) to manage the directory of PPP projects. January 13, 2017. The National Development and Reform Commission issued the Notice on Issuing the Interim Measures for the Administration of GovernmentSponsored Industry Investment Funds, aiming to optimize the way of government investment, give play to the guiding role and amplification effect of government funds, improve the efficiency of using government funds, and attract social funds to the fields and industries supported by the government. January 17, 2017. China PPP Center of the Ministry of Finance officially launched the expert database, and nearly 300 experts were first included in the database. January 18, 2017. The Ministry of Transport issued the Letter on Soliciting Opinions on the Management Measures of Bidding and Tendering of Investors in Highway Construction PPP Projects (Draft for Comments). January 18, 2017. The State Council issued the Notice of the State Council on Several Measures for Expanding Opening Up and Vigorously Using Foreign Capital to support foreign capital’s participation in infrastructure construction by way of concession. January 21, 2017. The National Development and Reform Commission, together with the General Administration of Sport, issued the Notice on the implementing Plan of the 13th Five-Year Plan for the Popularization of Public Sports, encouraging social capital to build the national fitness center project by PPP, public construction with private operation and other ways, and defining the subsidy standard for the construction by PPP. February 6, 2017. TUPPP released the list of 342 experts in the first batch of PPP expert database of National Development and Reform Commission, and undertook the operation, maintenance and daily management of the expert database. February 21, 2017. The National Development and Reform Commission and the Ministry of Housing and Urban Rural Development jointly issued the Notice on Further Improving the Innovation of PPP in Major Municipal Projects (No. 328 [2017],NDRC), which clearly defined the list of key small and medium-sized cities carrying out PPP innovation work.

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February 28, 2017. The National Development and Reform Commission improved the existing PPP project database by relying on the online approval and supervision platform for investment projects, and established a national unified PPP project database in the traditional infrastructure field. February 28, 2017. The first national PPP asset trading and management platform - Tianjin Financial Assets Exchange PPP Trading Platform, which was arranged and promoted by the Ministry of Finance, was officially launched. March 5, 2017. At the opening of the fifth session of the 12th National People’s Congress, Premier Li Keqiang once again referred to “PPP mode” in the government work report. The report proposes to implement and improve policies and measures to promote private investment, deepen PPP, and improve relevant preferential policies such as prices and taxes. The government should take the lead in integrity and never change the agreement at will. March 6, 2017. At the first press conference of the fifth session of the 12th National People’s Congress, He Lifeng, director of the National Development and Reform Commission, Zhang Yong, deputy director, and Ning Jizhe, Deputy Director, answered questions from Chinese and foreign journalists about “economic and social development and macro-control”, of which PPP was mentioned twice. March 7, 2017. The press center of the fifth session of the 12th National People’s Congress held a press conference. In response to questions from reporters, Xiao Jie, Minister of Finance, said that PPP is still in the exploration stage in China. While focusing on the landing rate of PPP projects, attention should also be paid to the standardized implementation and risk prevention of projects. March 9, 2017. At the national “two sessions”, proposals on how to improve the enthusiasm of private capital to participate in PPP projects were as follows: Zhang Zhaoan, deputy to the National People’s Congress, submitted Proposals on Promoting Private Capital to Participate in PPP Projects; Liu Zhengjun, deputy to the National People’s Congress, put forward Proposals on Accelerating PPP Legislation to Ensure Private Investment; Zhou Bingjian, member of the CPPCC, submitted Suggestions on Speeding Up the Establishment of a Unified, Standardized and Transparent Market for PPP; Ding Shiyong, member of the CPPCC, put forward Standardizing the Promotion of PPP mode and Improving Public Service Capacity; the All-China Federation of Industry and Commerce submitted Proposals on Further Improving Policies and Encouraging Private Capital to Participate in PPP; the Central Committee of Jiusan Society submitted Proposals on Improving the Legal System of PPP and Stimulating the Vitality of Social Capital; the Central Committee of the rural labor party submitted the development of innovative environmental PPP mode to promote the transformation of environmental protection industry; the Chinese Peasants and Workers Democratic Party submitted the Innovating Environmental PPP Mode to Promote the Transformation and Development of Environmental Industries; the China National Democratic Construction Association submitted the Proposal on Promoting the Planning and Construction of Characteristic Towns with High Quality.

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March 10, 2017. Four PPP asset securitization projects were approved for issuance, marking the formal implementation of PPP asset securitization that the industry has been expecting. March 16, 2017. The General Office of the State Council issued the Opinions on Further Boosting the Dynamism of Investment in Social Fields, proposing 37 specific and operable policies and measures, aiming to further stimulate the investment vitality in the social fields such as medical care, elderly care, education, culture, sports, etc., many of which have a positive impact on the PPP mode. March 23, 2017. Boao Forum for Asia proposed that countries should develop flexible and diverse cross-border PPP cooperation modes, actively promote technological innovation to facilitate the cross-border flow of knowledge and information, so as to benefit all countries and regions, all sectors and all groups. March 27, 2017. The National Energy Administration issued the Implementation Opinions on Deepening the Reform of Investment and Financing System in the Energy Industry, explicitly encouraging PPP. March 27, 2017. The State Administration of Science, Technology and Industry for National Defense made it clear that the Chang’e-4 project will be open to social capital and social capital and enterprises will be encouraged to participate in the Chang’e-4 mission. March 27, 2017. The Ministry of Finance issued the Circular of the Ministry of Finance on Issuing the Interim Measures for the Administration of PPP Consulting Agency Database. April 18, 2017. The Notice of the State Council on Endorsing the Opinions of the National Development and Reform Commission on the Key Work of Deepening the Economic System Reform in 2017 ([No. 201727, SC]) was issued. It was the first to clarify the division of responsibilities between the Ministry of Finance and the National Development and Reform Commission in promoting PPP mode. April 24, 2017. The General Office of the State Council issued the Circular of the General Office of the State Council on Commending and Encouraging the Places with Marked Effect of Implementing Relevant Major Policies and Measures in 2016 (No. 34 [2017], SC), commending the 30 cities and counties (cities and districts) that have made remarkable achievements in promoting the PPP mode and have high participation of social capital, and will give priority and support on special subsidies for the preliminary work of PPP projects in the central budget. April 25, 2017. The General Office of the National Development and Reform Commission issued the Guideline for Issuance of the Special Bonds of Public-Private Partnership (PPP) Projects.

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April 26, 2017. The Ministry of Finance, the National Development and Reform Commission, the Ministry of Justice, the People’s Bank of China, CBRC and CSRC issued the Notice on Further Regulating Local Government’s Debt Financing (No. 50 [2017], MOF). It is strictly forbidden for local governments to use PPP and other disguised forms of debt financing. When local governments and their subordinate departments participate in PPP projects, they shall not promise to buy back the investment of social capital parties, bear the principal loss of social capital, or promise the minimum return to the social capital party in any way. May 4, 2017. China Insurance Regulatory Commission issued Guiding Opinions on the Support of the Insurance Industry for the Development of the Real Economy, which pointed out that insurance funds will be promoted to participate in PPP projects and major project construction. Support qualified professional management institutions to initiate the establishment of infrastructure investment plans as trustees and raise insurance funds to invest in qualified PPP projects. May 4, 2017. The National Development and Reform Commission announced the second batch of PPP asset securitization projects. May 14, 2017. “Belt and Road” Forum for International Cooperation was held. President Xi Jinping said that we need to establish a stable, sustainable and controllable financial guarantee system, innovate investment and financing mode, promote PPP mode, and build diversified financing system and multi-level capital market. May 17, 2017. The National Development and Reform Commission signed a memorandum of understanding with the United Nations Economic and Trade Commission, and made specific agreements on promoting the PPP mode in countries along the “Belt and Road”, namely establish and improve the PPP legal system and framework system, screen 10 typical cases of PPP projects, establish “Belt and Road” PPP international expert database, and establish a “Belt and Road” PPP dialogue mechanism. May 24, 2017. The National Development and Reform Commission selected 43 projects as typical cases of the second batch of PPP projects. May 26, 2017. TUPPP released the 2017 China Urban PPP Development Environment Index. May 28, 2017. The Ministry of Finance issued the Notice on Resolutely Curbing the Illegal Financing of the Local Governments in the Name of Government Procurement of Services (No. 87 [2017], MOF), which clarified the reform direction, implementation scope, budget management, information disclosure and other matters of government purchase of services, and prohibited illegal borrowing in the name of government purchase of services. June 2, 2017. The State Council issued a notice on carrying out the fourth major supervision, requiring preventing risks in key areas, steadily promoting the replacement of existing local government debts, reducing the cost of government debts,

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investigating and dealing with illegal financing guarantees, and strictly controlling borrowing behaviors such as “debt investment in the name of equity”. June 6, 2017. The Ministry of Finance and the Ministry of Agriculture issued the Implementing Opinions on Deeply Promoting PPP in the Field of Agriculture. June 7, 2017. The Ministry of Finance, the People’s Bank of China and China Securities Regulatory Commission issued the Notice on Issues concerning Regulating the Asset Securitization of Public-Private-Partnership Projects (No. 55 [2017], MOF). June 19, 2017. The second BRICS Finance Ministers and Central Bank Governors Meeting was held in Shanghai when China was the chair of BRICS. All parties believe that a framework for PPP cooperation should be established to lay a solid foundation for BRICS countries to carry out PPP cooperation. June 29, 2017. China PPP Center of the Ministry of Finance issued a notice on launching the inclusion of PPP consulting institutions in the database. July 5, 2017. Premier Li Keqiang presided over the executive meeting of the State Council, calling for more high-quality assets, introducing all kinds of investment through PPP mode, and recycling funds to be used for new infrastructure and public utility construction to achieve a virtuous circle. July 7, 2017. The National Development and Reform Commission issued the Notice on Accelerating the Use of PPP Mode to Activate Existing Infrastructure Assets, guiding local governments to accelerate the use of PPP mode, standardize the orderly use of existing infrastructure assets, and form a virtuous investment cycle. July 19, 2017. The Ministry of Finance, the Ministry of Housing and Urban Rural Development, the Ministry of Agriculture and the Ministry of Environmental Protection issued the Notice on Comprehensive Implementation of PublicPrivate Partnership in Sewage and Waste Treatment Projects Participated in by the Government. July 21, 2017. The Legislative Affairs Office of the State Council issued a notice on soliciting public comments on the Regulation on Public-Private Partnership in Infrastructure and Public Service Fields (Draft for Comments). This is the PPP regulation with the highest legal level in China. July 24, 2017. The Political Bureau of the CPC Central Committee held a meeting to analyze and study the current economic situation and deploy economic work in the second half of the year. The meeting stressed that we should actively and steadily resolve the accumulated debt risks of local governments, effectively regulate local governments’ debt financing, and resolutely curb the increase of implicit debt. July 27, 2017. 19 ministries and commissions, including the Ministry of Finance, jointly issued the Notice on Application for the Fourth Batch of PPP Demonstration Projects.

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August 1, 2017. The General Office of the National Development and Reform Commission issued the Notice on Giving Full Play to the Guiding Role of Government-Funded Industrial Investment Funds to Promote the Work Related to Market-oriented Debt-to-Equity Swap of Banks, supporting existing governmentfunded industrial investment funds or newly-established government-funded marketoriented debt-to-equity swap special funds to participate in the market-oriented debt-to-equity swap project. August 5, 2017. The National Development and Reform Commission and the Ministry of Agriculture issued the Notice on Issuing the First Batch of PPP Pilot Projects in Agriculture. August 9, 2017. The list of the second batch of experts in the PPP expert database of the National Development and Reform Commission was released, with 145 people in total. August 9, 2017. The Supreme People’s Court issued Notice of the Supreme People’s Court on Issuing the Several Opinions on Further Strengthening Financial Trials, requiring that the nature, effect and responsibility of the administrative act or the signed administrative agreement made by the local government by means of platform company financing, PPP, investment fund, purchase of services and other forms of disguised debt be recognized in accordance with the law, clarify the judgment rules, draw out the responsibility boundary, and effectively prevent the accumulation of local government debt risk. August 16, 2017. The National Development and Reform Commission issued the Status of Remedying Shortcomings in Promoting Investment in the First Half of 2017 and the Work Focus in the Second Half of 2017, which clearly pointed out that various PPP operation modes should be promoted to activate the existing assets and form a virtuous cycle of investment. Various efforts should be made to strengthen the promotion of PPP projects and promote the participation of private capital in PPP projects. August 18, 2017. The Ministry of Finance, the Ministry of Civil Affairs and the Ministry of Human Resources and Social Security issued the Implementing Opinions on Using PPP Mode to Support the Development of the Elderly Care Service Industry, encouraging using PPP mode to promote the supply-side structural reform of the elderly care service industry. August 22, 2017. The Ministry of Finance issued the Notice on Improving the Management of PPP Expert Database of the Ministry of Finance, which proposed to strengthen the information management of experts in the database, improve the review and the exchange activities of experts in the database. September 4, 2017. BRICS leaders jointly issued the Xiamen Declaration, which said, “We have noted that BRICS finance ministers and central bank governors have reached consensus on PPP, including sharing PPP experience and developing good practices of BRICS PPP framework”.

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September 8, 2017. China PPP Center of the Ministry of Finance issued the Announcement on the Information Disclosure of PPP Consulting Agency Database. September 12, 2017. TUPPP opened the PPP Theory and Practice Program for Tsinghua public management MPA graduate students. September 15, 2017. The General Office of the State Council issued the Guiding Opinions of the General Office of the State Council on Further Animating Effective Private Investment and Promoting Sustainable and Sound Economic Development, which pointed out that we should increase the opening-up of infrastructure and public utilities to create equal competition opportunities for private enterprises. September 28, 2017. The second “China PPP Forum” was held in Beijing, under the guidance of National Development and Reform Commission, China Insurance Regulatory Commission and United Nations Economic Commission for Europe, hosted by Tsinghua University and undertaken by TUPPP. Note: this part is organized by Yang X.L„ TUPPP. Yang X.L., Deputy Director, General Management Department, TUPPP. September 28, 2017. The opening ceremony of “China University PPP Forum” was held in Beijing. TUPPP proposed to establish a PPP alliance of Chinese universities with global influence jointly initiated by relevant departments or PPP research institutions of 58 universities. November 10, 2017. The General Office of the Ministry of Finance issued the Circular on Regulating Project Database of the National PPP Integrated Information Platform. November 21, 2017. The General Office of SASAC issued the Notice of Enhancing the PPP Risk Management and Control of Central Enterprises (No. 192 [2017], SASAC), requiring the central enterprises to control the PPP risk, so as to promote the long-term, healthy and sustainable development of PPP business. November 28, 2017. The National Development and Reform Commission issued Guiding Opinions on Encouraging Private Capital to Participate in PPP Projects, which for the first time systematically put forward ten suggestions on encouraging private capital to participate in PPP projects. November 29, 2017. The Ministry of Transport issued the Implementation Opinions on the Promotion of Public-Private Partnerships in the Area of Toll Roads. December 18, 2017. The National Development and Reform Commission and the Ministry of Water Resources issued the Notice on Issuing the Operating Guidelines for the Major Water Conservancy Projects Constructed via Public-PrivatePartnership (for Trial Implementation).

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December 19, 2017. The Ministry of Finance issued the Guiding Opinions on Increasing the Investment of State-owned Capital in Public Welfare Industry, pointing out to promote PPP and attract social capital such as state-owned enterprises to participate in the investment, operation and management of public goods and public service projects. February 8, 2018. The National Development and Reform Commission and the Ministry of Finance jointly issued the Notice on Further Strengthening the Corporate Bonds’ Capacity of Serving the Real Economy and Strictly Preventing Local Debt Risks (No. 194 [2018], NDRC). It is required to firmly fight against and resolve major risks, strictly prevent the risks of local debts and firmly curb the increase of implicit debts of local governments. March 1, 2018. PPP theory and practice, the first MOOC course on PPP, was fully launched. The online course is jointly built by TUPPP and Xuetangx.com on the online platform. March 2, 2018. The General Office of the State Council issued the 2018 Legislative Work Plan of the State Council (No. 14 [2018], SC), and the Regulation on PublicPrivate Partnership in Infrastructure and Public Service Fields were included in the legislative work plan. March 10, 2018. China University PPP Forum announced the list of the first academic committee and secretariat, in which Wang Shouqing, Chief Expert of TUPPP and professor of Construction Management Department, was the chairman of the first academic committee, and Yang Yongheng, Executive Director of TUPPP and vice president of School of Public Management, was the Secretary General of the secretariat. March 28, 2018. The Ministry of Finance issued the Notice on Issues concerning Regulating the Investment and Financing Behaviors of Financial Enterprises for Local Governments and State-owned Enterprises (No. 23 [2018], MOF), proposing that no debt fund shall be provided as capital of local construction projects, government investment funds or PPP projects. Meanwhile, state-owned financial enterprises are required to provide financing to state-owned enterprises or PPP projects participating in local construction in accordance with the “penetration principle” to strengthen capital review and ensure that the source of capital for financing subject is complaint and the financing project meet the requirement on capital proportion. April 3, 2018. The World Bank released the 2018 PPP Infrastructure Procurement Report. April 11, 2018. The CPC Central Committee and the State Council issued the Guiding Opinions of the State Council on Supporting Hainan in Comprehensively Deepening the Reform and Opening-up, which pointed out that investment and financing methods should be innovated to standardize the use of PPP mode, and guide social capital to participate in projects on infrastructure and people’s livelihood.

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April 19, 2018. The Ministry of Culture and Tourism and the Ministry of Finance jointly issued the Guiding Opinions on Promoting Public-Private Partnership in the Tourism Field (No. 3 [2018], MCT), encouraging the use of PPP mode to improve the supply of tourism public services. April 24, 2018. The Ministry of Finance issued the Notice on Further Strengthening the Standardized Administration of Demonstration Public-Private-Partnership (PPP) Projects (No. 54 [2018], MOF). May 4, 2018. The Ministry of Finance issued the Summary and Analysis Report on the Financial Affordability of PPP Project, which for the first time summarized and disclosed the whole-life-cycle financial expenditure of the projects in the database. May 18–19, 2018. The National Ecological and Environmental Protection Conference was held in Beijing from May 18 to 19, 2018. Chinese President Xi Jinping attended the meeting. Xi Jinping stressed that we should improve the level of environmental governance, make full use of market means, improve the price mechanism of resources and environment, and adopt various ways to support PPP cooperation projects. June 13, 2018. TUPPP hosted the Symposium on the Regulation on Public-Private Partnership in Infrastructure and Public Service Fields (Draft for Comments). The research results are submitted to the relevant departments as reference for the revision and improvement of the PPP regulations draft. June 16, 2018. The Central Committee of the Communist Party of China and the State Council issued the Opinions on Comprehensively Tightening Ecological and Environmental Protection and Firmly Win the Uphill Battle for Prevention and Control of Pollution, which clearly proposed that we should promote the socialized ecological and environmental treatment and protection, and adopt direct investment, investment subsidies, operation subsidies and other ways to standardize and support PPP projects. June 25, 2018. The Investment Department and Finance Department of the National Development and Reform Commission held a symposium with relevant unit and discussed in depth the ways to build PPP credit system, credit indicators and credit files, credit data collection and analysis, and the application of credit results. The National Development and Reform Commission will speed up the establishment of PPP credit system with relevant parties, promote PPP participants to improve their credit level, standardize the operation of PPP projects, and promote the healthy and sustainable development of PPP mode. June 27, 2018. The State Council issued the Three-Year Action Plan for Keeping Our Skies Blue (No. 22 [2018], SC), proposing to expand investment and financing channels, and supporting the construction of PPP projects in air pollution prevention and control in accordance with laws and regulations.

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June 28, 2018. The General Office of the State Council issued the Opinions on Further Strengthening the Management of Urban Rail Transit Planning and Construction (No. 52 [2018], SC). It is required to strictly prevent the risk of new local government debt caused by urban rail transit construction by the municipal government, and it is strictly prohibited to borrow money in the name of financing platform company or PPP in disguised form. July 17, 2018. The Ministry of Finance issued four circulars in succession, which announced the illegal borrowing and guarantee behaviors by Yunnan, Guangxi, Anhui, Ningbo and other local governments, and disclosed in detail of these violations and rectification results, and many officials directly responsible have been dismissed. In the cases of that circular, local governments often borrow illegally in the name of purchasing services, build-transfer (BT) and other ways. July 18, 2018. Pearl River Enterprises Group successfully issued RMB 1.02 billion special bonds for PPP projects on social industries, with Haitong Securities as the main underwriter. This is the first PPP project special bond issued in China. July 21, 2018. The second BRICS Finance Ministers and Central Bank Governors Meeting was held in Buenos Aires, Argentina. The meeting considered PPP as an effective way to promote infrastructure financing, agreed to further strengthen knowledge and experience exchange, and explored other specific ways to carry out PPP cooperation. The meeting adopted the terms of reference of the BRICS PPP and Infrastructure Working Group, and agreed to submit the updated BRICS PPP Good Practice to the BRICS meeting in Johannesburg. July 30, 2018. The Ministry of Finance issued the Guidance on Promoting the Thirdparty Performance Evaluation of Government Service Procurement (No. 42 [2018], MOF). August 5, 2018. The General Office of the State Council printed and issued the Notice on the Plan for Division of Key Tasks of the Teleconference on Transforming Governmental Functions by the Reform of “Simplifying Procedures, Decentralizing Powers, Combining Decentralization with Appropriate Control, and Optimizing Services” (No. 79 [2018], SC), which made it clear that PPP regulations in infrastructure and public services should be formulated and issued before the end of 2018. August 16, 2018. At the executive meeting of the State Council, Premier Li Keqiang proposed that private investment is an important force to support stable growth, structural adjustment and employment, and stressed that a large number of projects with huge commercial potential and clear investment return mechanism should be centrally introduced to private capital, and private capital holding should be actively supported. August 27, 2018. The signing ceremony of the MPA + EMBA dual degree program cooperation agreement between Tsinghua University and City University of Hong

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Kong was held in Tsinghua University. Yang Bin, vice president of Tsinghua University and Ye Haosheng, vice president of City University of Hong Kong attended the signing ceremony. August 30, 2018. The Ministry of Ecology and Environment issued the Guidance on Further Deepening the Reform of “Simplifying Procedures, Decentralizing Powers, Combining Decentralization with Appropriate Control, and Optimizing Services” in Ecology and Environment and Promoting High-quality Economic Development (No. 86 [2018], MEE). It pointed out that: regulate the PPP mode in ecology and environment, accelerate the issuance of the Implementation Opinion on Strengthening the Battle of Pollution Prevention and Control and Promoting PPP in Ecology Environment, and take various ways to support PPP projects with strong supporting role and significant ecological and environmental benefits to achieve the goal of pollution prevention and control. Introduce ecological and environmental PPP projects and third-party environmental pollution control projects into the third-party guarantee payment platform. September 1, 2018. The CPC Central Committee and the State Council issued the Opinions on Comprehensively Implementing Budget Performance Management, emphasizing to actively carry out the performance management of government investment funds, sovereign wealth funds, PPP, government procurement, GOVERNMENT PURCHASE OF SERVICES and government debt projects involving general public budget and other financial funds. September 18, 2018. Premier Li Keqiang presided over the executive meeting of the State Council, calling for orderly promotion of PPP projects, and actively attracting private capital to participate in the construction. September 20, 2018. The CPC Central Committee and the State Council issued Several Opinions on Improving and Promoting the Consumption System and Mechanism to Further Stimulate the Consumption Potentiality of Residents, proposing to encourage and support social forces to participate in infrastructure construction in culture, tourism, sports, health, elderly care, household service, education and other fields through PPP mode, special bonds of social industries and enterprises etc. September 29, 2018. The Ministry of Finance issued the Notice on Issuing the Special Fund Budget for Developing Inclusive Finance in 2018 (No. 103 [2018], MOF). The central finance issued RMB 10 billion yuan special fund for inclusive finance development in 2018, of which 2.309 billion yuan was incentive for PPP projects as subsidy. October 10, 2018. The National Development and Reform Commission and other departments issued the Action Plan on Improving and Upgrading Rural Tourism (2018–2020) (No. 1465 [2018], NDRC), encouraging and guiding private investment to participate in the construction and operation of rural infrastructure with certain benefits through PPP, public construction with private construction etc.

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October 11, 2018. The State Council issued the Guiding Opinions of the General Office of the State Council on Maintaining Efforts to Remedy Shortcomings in Infrastructure Field (No. 101 [2018], SC), encouraging local governments to adopt PPP and other methods in accordance with laws and regulations to leverage social capital, especially private investment in major projects on improving weak links in infrastructure. November 8, 2018. The Ministry of Finance issued the Notice on Strengthening the Management of China’s PPP Fund (No. 95 [2018], MOF). November 13, 2018. The Ministry of Culture and Tourism and the Ministry of Finance jointly issued the Guiding Opinions on Promoting Public-Private Partnership Mode in the Field of Culture (No. 96 [2018], MCT). November 22, 2018. The Investment Department, the Law Department, the West Development Department, the Foreign Investment Department, the International Cooperation Department of the National Development and Reform Commission, and experts from the research center of China International Engineering Consulting Corporation organized a delegation to participate in the 2018 Annual Intergovernmental PPP Work Meeting of the UNECE. December 1, 2018. The third China PPP Forum was held in Tsinghua University, focusing on the theme of “Radical Reform to Standardize Development”, under the guidance of National Development and Reform Commission, China Banking and Insurance Regulatory Commission and the United Nations Economic Commission for Europe, hosted by Tsinghua University and undertaken by TUPPP. Note. This part is organized by Yang X.L., TUPPP. Yang X.L., Deputy Director, General Management Department, TUPPP.