Lack of PPP knowledge may hinder wave of infrastructure construction

By Wang Jihong, Zhong Lun Law Firm
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Against the background of countries around the world painfully extricating themselves from the global financial crisis, the central government has on the one hand been clearing and regulating local government debt, and on the other been supporting and promoting new urbanisation and accelerating the construction of infrastructure. The central government has decided to promote the PPP (public-private partnership) model on a nationwide scale since the end of 2013, so as to accelerate the development and construction of the nation’s infrastructure. As a new infrastructure construction model, PPP represents central government efforts to spark a third wave of infrastructure construction. However, the author has discovered that, in practice, both government authorities’ and enterprises’ knowledge of the PPP model is rather vague.

王霁虹 Wang Jihong 中伦律师事务所 合伙人 Partner Zhong Lun Law Firm
王霁虹
Wang Jihong
中伦律师事务所
合伙人
Partner
Zhong Lun Law Firm

The meaning of PPP

The term “PPP model” means a construction co-operation model between a government and an enterprise for the purpose of co-operating in the construction of an urban infrastructure project, or the provision of certain public goods or services, where the parties co-operate for the development of the project, jointly bear the risks, and share in the benefits. Under this model, the government and the enterprise clarify their respective rights and obligations through the execution of a contract. Such a model ultimately leads to a more beneficial result for the parties than if they act independently.

The concept of PPP is relatively broad. The definitions of PPP given by relevant international organisations and development organisations are more or less similar. The author has listed some definitions of PPP given by some major international organisations.

Asian Development Bank: PPP means a series of co-operative partnership relationships, possibly established between public and private departments, for the purpose of carrying out infrastructure construction and public service.

United Nations Development Programme: PPP means a mutual co-operation relationship formed among the government, private enterprises, and non-profit organisations on the basis of a specific project. In this relationship, the government does not entirely pass the liabilities of the project to the private departments. Rather, the participating parties share the liabilities and financing risks.

European Commission: PPP means a co-operation relationship between public departments and the private sector for the purpose of providing public projects or services traditionally provided by public departments.

World Bank: PPP is a long-term contract between a private department and a government institution for the purpose of providing public assets or services, in which the private department bears significant risks and management responsibilities.

The author is of the opinion that the PPP model is a long-term co-operative partnership relationship between a government and an enterprise for the purpose of co-operating in development and construction. The character of such a relationship is the sharing of risks and benefits between a government and an enterprise. This model pays attention to the output standards rather than the method of realisation. Its purpose is to stimulate the enthusiasm of private funds, to encourage innovation in service and technology, and realise the aim of win-win among multiple parties including the government, an enterprise and the public.

For the government, PPP broadens the source of funds for infrastructure construction and facilitates the increase of investment and employment, the promotion of economic growth, the shift of the risks related to financing, construction and operation the government faces, and the reduction of fiscal expenses and debt burden of the government.

Premier Li Keqiang mentioned in his government work report in March 2014 that the government will formulate measures for the participation of non-state capital in investment in projects of enterprises under the central government, and detailed measures for the entry of private enterprises into the infrastructure sector, to provide a stage on which private capital could play a part. The PPP model is an advantageous investment model that is in compliance with this spirit.

Implementation methods

PPP can be applied to a broad range of sectors, and is a suitable model for public utility projects such as water supply, power supply, sewage treatment and telecoms. It also applies to infrastructure projects such as highways, railways, ports, airports, subsidised housing, hospitals, schools, retirement homes, prisons, land reserves, ecological construction and environmental protection, industry and energy, agricultural, forestry and water resources construction later on, and also to the new urbanisation and urban complex development and construction now being vigorously promoted by governments at every level.

Models vary

Based on practice in various countries around the world, PPP does not have a fixed model. Rather, it varies to a certain extent depending on the features of each individual project. The following are the principal methods of implementation.

The first is a PPP of a non-financing nature, mainly including service outsourcing, operation and maintenance contracts (O&M) and transfer-operate-transfer (TOT). In these forms of implementation, an enterprise mainly replaces the government in providing services to the public, but financing is not involved.

The second is an equity/property rights transfer PPP and equity joint venture or co-operative joint venture PPP. The co-operative form in an equity/property rights transfer is realised in the form of a private concern acquiring state-owned equity/property rights; and equity joint venture co-operation is mainly realised in the form of a state-owned enterprise and private enterprise jointly establishing a new economic entity.

The third is a PPP of a financing nature. The ways of manifestation of this implementation method are relatively numerous, the following being the principal ones: build-operate-transfer (BOT); private finance initiative (PFI); build-own-operate-transfer (BOOT); build-transfer (BT); build-transfer-operate (BTO); rehabilitate-operate-transfer (ROT); design-build (DB); design-build-finance-operate (DB-FO); build-own-operate (BOO); buy-build-operate (BBO). The financing type PPP is being enthusiastically embraced by local governments at present, as it can effectively relieve governments’ debt burden and funding pressures, and rapidly promote the investment in, and construction of, local infrastructure.

As compared to the previous two waves of infrastructure construction, the central government is mainly relying on system innovation, not simple injection of funds, in this current wave, and the PPP is key to this wave.

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