New round of PPP promotion warrants a note of caution

By Yao Yi and Guo Da, East & Concord Partners
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Lou Jiwei, the Minister of Finance, has been busy promoting the Public-Private Partnership (PPP) model that China actively developed at the G20 meeting of finance ministers and central bank governors on 21 September 2014. On September 24, the Ministry of Finance issued the Notice on the Issues related to Promoting Partnership by using Public Capital and Private Capital (notice No. 76), indicating that the demonstrative PPP programmes with government and private capital are to be implemented nationwide.

Yao Yi Partner East & Concord Partners
Yao Yi
Partner
East & Concord Partners

After the National Development and Reform Commission (NDRC) launched the first 80 demonstrative infrastructure programmes introducing private capital, the Ministry of Finance announced another 30 demonstrative PPP programmes in November with a total investment amount of around RMB180 billion (US$28.8 billion), along with the issuance of the Trial Operational Guidelines for Public-Private Partnerships. PPP programmes are now mushrooming throughout the country, and the promotion of this new round of PPP programmes is highly welcomed in China and abroad.

Official definition

According to the official definition in notice No. 76, PPP refers to the partnership of government capital and private capital, i.e. a long-term partnership established in the infrastructure or public service sectors. In the normal model most of the design, construction, operation, and maintenance of infrastructure is borne by private capital, and the reasonable return on investment is rewarded by payment from the users and necessary payment from government. The governments are responsible for price and quality supervision of the infrastructure or public service, to ensure the maximisation of the project for the public interest.

Implementation of PPPs can be traced back to mid-1980s, and programmes in this early phase included a BOT (build-operate-transfer) programme of Shenzhen Shajiao B Electric Power Plant, White Swan Hotel in Guangzhou and Beijing International Hotel. Since 1994, the former State Development Planning Commission (SDPC) had chosen five BOT pilot programmes. After the issuance of the Notice on Relevant Issues Concerning Absorption of Foreign Investment by Means of BOT as the first relevant regulation by the former Ministry of Foreign Trade and Economic Co-operation, the State Council, SDPC, Ministry of Housing and Urban-Rural Development, Ministry of Transport and other departments have all successively issued relevant regulations or policies related to PPPs. In practice, private capital and state capital are flowing into projects in urban water supply, gas supply, wastewater treatment, waste disposal, highway and others, while build and transfer (BT), build-own-operate (BOO), build and manage (B&M) and other models are derived from BOT.

This is when our team entered into the PPP area. We represented Beijing Waterworks Group in the management transfer transaction of Beijing No.9 Waterworks with Beijing Holdings (a Hong Kong-based company solely owned by Beijing Municipality) in 1997. At the beginning of 2008, we were consulted when the NDRC considered standardising the regulations on PPPs, and we combined domestic and international theoretical research and practical experience to submit a legal research report to the NDRC.

These works are part of our works from the public perspective for PPPs or quasi PPP programmes; however in practice, we provide more legal support services for private capital to access PPP programmes. For example, we provided full legal services for the listed company Beijing Capital in more than 100 water supply and wastewater treatment programmes in the past decade.

We also helped foreign investors from France, Spain, Singapore and other countries to successfully invest in dozens of power plants, water works, road and bridge construction, regional development and other programmes through PPP models. However, these programmes were mostly initiated by the investors, where they reached agreement with the government through negotiations without a public bidding procedure, therefore they were not well known.

Positive effect

The latest notice No. 76 and operational guidelines issued by Ministry of Finance have had a positive effect on the establishment of a PPP legislative framework and regulating the procedures of identification, preparation, procurement, implementation and transfer of PPP programmes.

Guo Da Associate East & Concord Partners
Guo Da
Associate
East & Concord Partners

However, from our perspective, in this new round of promotion of PPP programmes, the phenomenon that investors were flocking to infrastructure programmes under the impact of investment in the years after 2008 should be borne in mind, and when faced with the PPP boom, we should calmly analyse the background of these PPP programmes and regulations launched by the Ministry of Finance, and the potential problems to be faced in practice.

Take for instance, the separation of powers within the government departments. The PPP model has more than 20 years of history in China, and the relevant legislation was hosted by the NDRC in the past, but now it is being pushed by the Ministry of Finance. Realistically, PPP programmes are more involved with the NDRC, Housing and Urban-Rural Development Ministry, Ministry of Transport, Ministry of Water Resources and other ministries. However notice No. 76 and the operational guidelines are issued only by the Ministry of Finance, and we have no idea about the opinions of other authorities.

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In practice, if PPP programmes are not involved with financial subsidies or government financing, financial departments actually have no authority over them. In addition, concerning the application scope and implementation bodies of PPP programmes, in particular the options for private capital to enter into PPP programmes and the safeguard of return, the regulations and benchmark set up by notice No. 76 and the operational guideline are the standardised formats for PPPs that are currently commonly adopted in the international world, without taking full consideration of special circumstances faced by past PPP programmes in China.

Therefore, facing the new wave of promotion of PPP programmes, beyond the highly praised PPP regulations, we are concerned about how to implement the PPP regulations smoothly in practice when faced with China’s own national circumstances.

Yao Yi is a partner and Guo Da is an associate at East & Concord Partners

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