The year 2015 will be a PPP promotion year, 2016 will be a contractual year and 2017 will be a land landing norm year.

After more than three years of development, the Chinese version of the PPP has once again witnessed Chinese speed:

According to the latest quarterly reports, there were 13,554 PPP projects, with investments of $16.3 trillion, 2021 projects, 3.3 trillion investments and 34.2 per cent, and the proportion of fixed assets invested in PPP projects had risen.

China has grown to become the world’s largest PPP market, and the pace of PPP landing has accelerated. The effects of the economic pull-out have gradually been felt, and the success of the PPP reform is to be recognized.

It is undeniable, however, that the Chinese PPP is still in its early stages of development, and that, in a situation where local debt risks are strictly controlled and financing is restricted, the perception of some government and social capital has not yet been completely changed, and that the PPP model is not fully understood and correctly:

The Government sees PPP as an alternative to local financing platforms and as a simple financing tool;

(b) Social capital is not positioned itself, such as construction enterprises that do not have the qualifications to operate and are unwilling to take operational risks only to earn short-term construction profits;

The participation of monetary institutions in PPPs is mostly based on short-term fixed returns, reluctance to participate in real-equity forms, and demands various additional credit guarantees.

This has led to a violation of the principle of “benefit sharing, risk sharing” and to the alienation of the PPP project, where irregularities such as disguised financing have emerged.

In order to correct the situation in a timely manner, the Ministry of Finance has issued a series of papers, Nos. 50 and 87, listing various local government violations of debt financing, strengthening guidance and supervision, and preventing and controlling the risk of local government debt. In response, local governments and financial institutions were caught by surprise, and even the existence of PPP equity investment funds and government-paying PPP projects were over-restricted.

In particular, in the context of serious accountability, where does government infrastructure finance come from, many local governments are anxious and confused?

Financial institutions are deeply confused and disoriented, and it is known that, following the publication of documents Nos. 50 and 87, many banks have suspended their lending, with far-reaching implications for capital project financing.

At such a critical moment, On 31 July, a symposium was held under the chairmanship of Vice-Minister Shi Yobin, Chairman of the PPP Task Force of the Ministry of Finance, to further advance the normative development of the PPP. I have been asked to report on some of the problems and recommendations of the current work of the PPP. Deployment to further the PPP normative development process, The idea of the Ministry of Finance's next move to regulate the PPP is illustrated by the fact that the Ministry of Finance is not the only one who has the power to regulate the PPP. It is a sign that the Chinese version of the PPP has officially entered the 2.0 era. From the time of rapid development of 1.0 to the time of normative development of 2.0, The Chinese PPP will undergo a major shift in the following eight areas.

The way forward: from development to norms

As can be seen from the recent intensive PPP policy, norms are the backbone of the future PPP development. On the one hand, after more than three years of rapid development, some non-compliance issues, such as disguised financing, have also been exposed in the PPP model as it matures, and need to be corrected; On the other hand, 2017 is the year of risk prevention, and the PPP model, which involves local governments and financial institutions, is closely linked to local debt and financial risk and must regulate operations.

Focus: From quantity to quality

The Chinese version of the PPP, which was catalyzed by good policy, led to the development of a well blow-out, which for the first time exceeded one trillion by the end of June 2016, with an alarming increase of 16 trillion by the end of June 2017. In the case of limited local financing, the PPP model has been given a heavy role as a “one-size-fits-all drug” for steady local growth. The lack of clarity in the boundaries and scope of application has resulted in uneven quality of the PPP project, mixed with fish dragons, and many risks hidden. At the same time, some of the Government's PPPs are close to or above 10 per cent of the red line, so that in the future more attention will be paid to the quality of the PPPs, preventing their generalization and prohibiting the use of the PPPs' banner as “mixed audio-visual”.

Leading mode: from government to market

In the context of the era of seeking to transform economic growth patterns and resolve local government debt, the State Council, relevant ministries and local governments have launched a series of PPP policy documents to promote the PPP model and promote the PPP project. It can be said that the Chinese PPP is Government-led and encourages the participation of social capital. However, this runs counter to the PPP reform, which “lets the market play a decisive role in the allocation of resources”, and only a regulated PPP can stimulate market dynamism and therefore grow well.

Functional positioning: from financing to management

PPP is not a simple mode of financing, but rather an integrated model of management that brings not only social capital but also “value added” in terms of the know-how, management experience, innovation, market constraints, etc. of the funders. In the past, however, local governments have been too eager to promote the PPP model and transform it into a financing tool. The future must be geared to the functional positioning of the PPP, a long-term, systemic reform that promotes supply-side reforms in the public service, introduces market mechanisms and resources, upgrades management capacity and promotes efficiency in public service institutions, rather than simply solves financing problems.

Assessment focus: from construction to operation

Whether the BOT, BOO or ROT, which are common models for new projects, or stock projects, all include the operational component, which is at the heart of the PPP project and seeks to leverage social capital advantages and improve efficiency. In practice, however, the phenomenon of “build-and-operate” is widespread and runs counter to the original PPP model. In response, the Minister of Future History suggested that no financial provision should be made for projects that did not contain operational elements and that social capital did not actually assume the operational risks of the project. In addition, performance payments have gradually become an important factor in government-paid projects, and local financial authorities have to shift from “repair” to “back-up” operations, forcing social capital to focus on project operations.

Duration of cooperation: short-term to long-term

When PPP projects are actually run, there is a higher demand for the qualifications of social capital and a corresponding adjustment of the cooperation model. Particularly after changes in the way performance is evaluated, it is difficult for social capital to capture short-term lock-in gains and to secure its own gains by providing long-term quality services.

Financing modalities: from single to multiple

In the early stages of the development of the PPP model, where banks were the main providers of funds, the banks ' involvement in the PPP model was prudent, taking into account their liquidity preferences, yield requirements and security guarantees. In the recent past, however, there has been an increase in the funding support policy for the PPP model, with the progressive development of the PPPF, PPP-specific debt, PPP asset securitization, risk matching and so forth, and the diversification and diversification of future PPP financing.

Risk allocation: from shared to shared

While risk sharing is a key element of the PPP model, in order to attract the participation of social capital and financial institutions, some local governments undertake most of the risks through government buy-backs, warranty commitments, push-downs, etc., resulting in an uneven distribution of risk, as exemplified by Wuhan Metro, which is verified by the Ministry of Finance. In the allocation of risk, the risk should be identified so that the more capable and advantaged party bears the corresponding risk, and each risk should be borne by the partner best placed to respond to the risk, thereby minimizing the overall risk.

Source: Economic Report for the 21st Century (author: Senior Fellow, Financial Think Tank for People)