Slashing debt

By+Wang+Jun

In China， all eyes—and heavy expecta- tions—lie on the public-private partnership（PPP）， which will hopefully reduce local government debts and furnish a fund for an urbanization drive.

Understandably， then， PPP will be the object of government oversight， and as expected， the National Development and Reform Commission （NDRC） and the Ministry of Finance （MOF） issued their guidelines and operational guides for the PPP on December 4. Both sets of rules define parameters for government-private investor cooperation that， hopefully， will yield positive economic results.

A PPP is a contract business relationship between a private company and a government agency that aims at completing a project in the publics interest.

The private sector promises to provide a public service or project， thus assuming substantial financial， technical and operational risks. In a PPP， the government will share a portion of the risks.

The PPP model can be used to finance， build and operate projects like public transportation networks， parks and convention centers， lessening the financial burden involved in completing a project quickly—or even making the project a possibility in the first place.

As Chinese local governments financing platforms draw to a close， PPP may provide benefits， though the rules still offer opportunities for abuse.

Regulations

The NDRCs guidelines make it clear that PPP mainly applies to market-oriented operation and projects that fall under some kind of government supervision， like public services or infrastructure. Local governments can use the PPP， on projects involving gas， water， heat， garbage disposal， senior care， transportation， among others， though the rules encourage local government to begin by using the PPP model in the newly approved municipal facilities and urbanization projects.

The MOF regulations provide further information about the government sharing the risks involved in starting a new project with the private sector.

While the private sector takes responsibility for project design， construction， finances and operations； the government will assume responsibility for legal matters， policy and minimum demand risks. Both parties will share risks brought on by force majeure. The government will take into account its own risk control capacity， the agreement on investment returns and the risk control capability of the market.

To help transition into PPP， the MOF has designated 30 pilot projects （eight new， 22 transferred from local financing platforms） that will use the PPP model. The projects are worth a total of 180 billion yuan （$29.41 billion）.endprint

In an interview with Economic Information Daily， Sun Jie， Secretary General of the Public-Private Partnership Research Committee of China Finance Academy， said that after the State Council issued the opinions on strengthening the management of local government debt in September， local governments have paid more attention to the PPP model because it strictly limits the amount of government financing.

Local governments need money， because economic development starts from the ground-up， so the 40-trillion-yuan （$6.5-trillion） urbanization investment requires huge financing from the government. Local governments currently operate on bond-issue restrictions， so the PPP will become a key method for them to acquire needed funds.

A possible kink in the regulations includes the fact that each was written without the opposite regulators knowledge， so the documents will require comparison.

“It is good news that the NDRC and the MOF will issue documents on the same day. But this may also need coordination from the State Council， otherwise the public would not know which document to follow when the two documents contradict，” said Sun.

Benefits

The State Council is of the opinion that， in order to strengthen the management of local government debt， finance departments of local governments should encourage and guide projects financed by local financing platforms to be transformed to the PPP model， so as to attract more private funds to participate in these projects and effectively reduce risks in local government financing platforms.

According to Sun， another target for promotion of PPP is to reduce the existing debts， which can be done through the transfer-operate-transfer （TOT） form， where a private investor buys the property and operational rights of a facility， and receives the returns through normal business operations within a concession period. At the end of such a period， the investor then transfers the facility to the government for no cost.

Li Maonian， Director of Strategic Development of Minsheng Securities Co. Ltd.， said it is necessary to accelerate development of the PPP model. China is now accelerating the urbanization drive， which will grow the size of fixed-assets investment. If Chinas GDP doubles to 80 trillion yuan （$13 trillion） in 2020 and the ratio of fixed-assets investment against the GDP is reduced to 60 percent， fixed-assets investment will reach 48 trillion yuan （$7.84 trillion）. That is far too little to meet such a huge demand for fixedassets investment， and it becomes necessary to introduce private funds.endprint

“China is now promoting the PPP model， whereas the build-operate-transfer （BOT） would be a good model for newly approved projects，” Sun said.

Li believes that PPP is important to the transformation of local government financing platforms.

“We should not just input more money to these financing platforms，” Li said. “China can transform local government financing platforms into companies for infrastructure construction and operation， even professional PPP investment institutions.”

Besides financing， PPP can also help improve the efficiency of the projects. Jin yongxiang， General Manager of Dayue Consulting Co. Ltd.， said PPP is conducive to balancing the relationship between the government and private companies. Through PPP， the government and companies become equal parties through a contract， and thus the companies will take more initiatives to improve the business efficiency.

Abuse prevention

Due to its ease of access， the PPP model is growing and will continue to grow rapidly in China. However， the model has shown hiccups in practice. Sun worries that private sector companies may take advantage of the government funds offered by PPP.

Sun said some local governments mix up PPP and the models previously used. For instance， when developing an industrial park， a local government may assign some private companies to provide services that should be assumed by the government or even assign a single company to monopolize a certain business that should be market-oriented.

“This may lead to corruption， and is not what it was designed for，” Sun said， who believes that the income that belongs to the government must go to the government， while the benefits that belong to private sector must be given in legal ways， instead of through transactions under the table.

“We must first define the specific forms of PPP. Otherwise this concept might be abused in the future，” Sun said.

In developed countries， PPP is a more clearly defined and tested system. For instance， PPP refers to Private Finance Initiative in the United Kingdom， and it refers to BOT in the Philippines. South Korea adopts the forms of build-transfer-operate and buildtransfer-lease.

“To prevent an abuse of PPP， the government must first define the concept of PPP clearly. Now we have a definition of PPP， but it is not accurate enough，” Sun said. According to him， there are two primary requirements for a PPP project： It must be a project of for public interests within the responsibilities of the government， and it must include private investment. Moreover， “government expenditure on a PPP project must be combined with the projects performance in providing products and services，” said Sun.endprint