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Smart Connections for All
The Transport and ICTGlobal Practice
CHINA PPP OVERVIEW
Hua Tan
Senior Transport Specialist, Transport and ICT Global Practice
China, Mongolia, and Central Asia, World Bank Group
September 12, 2018
Guiyang City, Guizhou Province
1
Local Government UDIC
Bank
Developer Land reserve A Land reserve B
Apply for loan by collateralizing land lease revenue
Issue loan
Obta
in a
loan to
invest
in in
frastru
ctu
re
Auctioning land development rights
Pay la
nd tra
nsactio
n fe
es
and ta
xes
part of the transaction fees goes to UDIC to
repay principal and interests 2
3
4
56
7
Repayment of principal and interests8
• This financing mode is no longer permitted under the new Budget Law.
Prior to 2015, local government financing vehicles (LGFVs) / UDIC were responsible
for infrastructure financing with implicit government guarantees mostly
collateralized by future land revenues
To mitigate financial risks, starting in 2014, the central government introduced a
series of reform policies
2
• Improve local government budget management
• Improve debt management
• Standardize transfer payment
New Budget Law
• Regulate the relationship between local government and LGFVs
• Transition UDICs into independent commercial entities
No. 43rd Decree of
the State Council
• Conduct extensive inventory of existing local government debt
• Manage the total amount of local government debt
• Reduce the cost of debt
Debt investigation
and replacement
Better manage fiscal budget
Mitigate financialrisks
Standardize municipal financing
Policy Objectives
Large scale of PPP project pipeline
RMB trillion, 2015-2016
PPP is proposed as an option for developing and financing public facilities
3
Phase III
33.1
Phase II
29.1
Phase I
21.5
NDRC database
MOF database
2015.05 2015.12 2016.12
11.9 12.5 13.0
+5%
201620152014
Moderate increase of national tax revenue
RMB trillion, 2014-2016
Decrease of national land transfer revenue
RMB trillion, 2014-2016
4.33.3
3.8
-6%
201620152014
Significant increase of national infrastructure
investment
RMB trillion, 2014-2017E
8.7 10.1 11.916.0+23%
2017E201620152014
PPP is promoted as an alternative procurement model to help alleviate local
government financial burden and improve delivery of public services
4
Past Present
• UDIC model
– Local governments inject assets, including land, to UDICs which invest, build, and operate public infrastructure on behalf of local governments
– UDICs pledge assets such as land as collateral for bank loans to finance infrastructure projects
– Banks assume implicit government guarantee to loans issued to UDICs, which are backed by local governments.
– UDIC loans are not included in local government budget (off balance sheet)
– UDIC is responsible for loan repayment and infrastructure operations
• PPP model
– Private partners areresponsible for financing, building, and operating public infrastructure
– Local government financial obligations to the PPP projects are accounted for in its annual budget
– Total local government financial obligations to PPP projects cannot exceed 10% of the annual general public expenditure budget
Improvements in PPP legal framework
processes
“ Notice on the promotion of PPP ” (MOF, No.76, 2014-9-23)
• Defines the basic framework
“Guiding opinions on the promotion of PPP in the field of social
service” (State Council, No. 4, 2015-5-22)
• Defines regulation, fiscal, supervision, and pricing systems
“ Guiding opinions on innovation of investment and financing
mechanisms in key sectors and incentives for social investment”
(State Council, No. 60, 2014-11-26)
• Defines financing principles, tools and policies
“Notice on improvements of PPP projects” (MOF, No. 57, 2015-6-
25)• Establish the PPP information platform of the Ministry of Finance
“Notice on the guidelines for the implementation of PPP projects in
the field of traditional infrastructure” (NDRC, No. 2231, 2016-10-24)• Outlines the selection of social investors, project evaluation, and project
implementation
“Demonstration guidelines on fiscal affordability of PPP project”(MOF, No. 21, 2015-4-7)• Outlines the two major risk assessment methods: VfM and fiscal
affordability
demonstration mechanism and
information disclosure
project evaluation and risk management
financing
system
PPP framework
“Notice on further regulating the debt financing behaviors of local
governments ” (MOF, No. 50, 2017-4-26)• Prohibits local governments from providing guarantees for UDIC debt and
pledging future land sale proceeds to bolster UDIC creditworthiness
local government debt control
Improvements in PPP legal framework
performance-based payment
“ Notice on promoting asset-backed securitization for PPP projects”
(NDRC, No.268, 2016-12-21)
“ Notice on conducting asset-backed securitization for PPP projects in
a regulated manner ” (MOF, No.55, 2017-6-7)
• Promotes ABS as an innovative financing tool for PPP projects
“Notice on mandatory use of PPP model in wastewater treatment
and solid waste treatment projects” (MOF, No. 455, 2017-7-1)• Mandates the use of PPP model in all new wastewater and solid waste
treatment projects.
“Notice on regulating management of PPP integrated information
platform database” (MOF, No. 92, 2017-11-10)• Increases the threshold for PPP projects entering the national database
• Requires 30% of government payments made on performance basis
“Guidelines on the issuance of PPP project bonds” (NDRC, No. 730,2017-4-25)• Introduces PPP project bonds as a new financing tool for refinancing
PPP projects in operation
mandate PPP in wastewater and solid
waste sectors
PPP project bonds
Asset-backed Securitization (ABS)
“Notice on strengthening risk control of State-owned Enterprises in
PPP sector” (SASAC, No. 192, 2017-11-17)• Prohibits SOEs who has a debt ratio over 85% from participating in PPPs
SOE debt control
“PPP Law in the Infrastructure and Public Service Sectors (Draft for
Comment)” (State Council, 2017-7)
• A draft of the proposed law that consists 7 chapters and 50 articles has
been handed to China's cabinet as well as local authorities
PPP legislation
Ministry of Finance (MOF) and National Development and Reform Commission
(NDRC) regulate PPP project development
7
Legislative Affairs Office of the State Council
MOF NDRC
Role Regulator Regulator
Responsible Sectors
Public Services:
• Primarily social services and small
scale infrastructure projects
• Energy, transport, municipal
infrastructure, agriculture, forestry,
water, environmental protection,
social welfare projects, health
care, elderly care, education,
science and technology, culture,
sports, tourism, etc.
Traditional infrastructure Projects:
• Primarily large-scale traditional
infrastructure projects
• Energy, transport, water,
environmental protection,
agriculture, forestry, and major
municipal infrastructure
Life-cycle Management
• 5 phases with a total of 19 steps
• For PPP project approval,
requires VfM analysis and fiscal
affordability assessment
• Follows the normal project
management process
• For PPP project approval,
requires the feasibility study to
include VfM analysis and fiscal
affordability assessment
Major Law Government Procurement Law Bidding and Tendering Law
MOF requires VfM Assessment and Fiscal Affordability Assessment
8
VfM
Assessment
Qualitative
Analysis
Quantitative
Analysis
(optional)
Life cycle integration
Risk identification and allocation
Performance oriented and incentives for innovation
Potential competition
Capability of governmental institutions
Feasibility of financing
Supplementary evaluation metricsEquity investment present value
Operation subsidy present value
Risk premium present value
government counterpart funds present value
Construction and O&M net cost
Comparative adjusted value
Total project risk premium
Present Value of
Life-cycle Project
Cost
PSC
VfM Assessment is qualitative rather than quantitative
Fiscal affordability assessment combines qualitative and quantitative analyzes
FAA (Fiscal
Affordability
Assessment)
Expenditure Estimate
Capability Assessment
Government equity investment
Operation subsidy
Risks
Government counterpart funds
Fiscal expenditure assessment
Industry and sector balance assessment
PPP has become a significant infrastructure financing vehicle in China
9
3.13.8
5.5
6.5 6.77.6
9.4
11.2
13.1
15.8
201120102007 2015201420132012
+19.41%
+20.06%
+19.91%
201620092008
Infrastructure Investment in China
2006-2016, RMB 1 Trillion
2016
~17
~9.0
(52%)
~6.5
(36%)
~2.0
(11%)
Current PPP Volume in China
2016, RMB 1 Trillion
Local
NDRC
MOF
* The PPP project data referred in this deck comes from PwC Strategy& PPP database. The information has been collected till September 2016.
Sources: NDRC, Ministry of Finance PPP Center
Provinces and municipalities with strong fiscal capacity are more cautious with
PPPs
10
2,1933,429
3,6403,630
3,1504,393
2,2434,116
2,4121,372
137843
1,892606
1,690844
495829
81,375
2691,427
6413,450
2,906660688
465272
45TibetQinghaiNingxiaHainanGansu
XinjiangGuizhou
ShanxiYunan
JilinHeilongjiang
ChongqingTianjin
GuangxiJiangxi
Inner MongoliaShaanxiLiaoning
AnhuiBeijing
ShanghaiFujianHunanHebeiHubei
SichuanHenan
ZhejiangShandong
JiangsuGuangdong10,390
8,1215,860
5,3013,154
3,3893,102
2,8512,6982,655
6,4065,081
2,6732,199
1,8342,0172,151
1,5562,723
2,2281,1481,254
1,8121,5571,561
1,299787638388238156
General Budgetary Revenue
RMB 100 Millions, 2016Analysis
• 1st tier cities have fewer PPP
projects by number, but they
tend to use PPP model on large
complex projects. The average
project value for 1st tier cities is
3.6 billion compared to 1.4~1.5
billion for 2nd and 3rd tier cities.
• Most developed provinces such
as Jiangsu, Shandong,
Zhejiang and Guangdong
demonstrate a balanced PPP
portfolio in relation to their fiscal
capacity
• On the contrary, local
governments at the prefecture,
county, and lower levels lack
the capacity of PPP project
screening, preparation,
procurement, implementation,
and supervision
Total Value of Signed Projects RMB 100 Millions, 2016
PPP payment mechanisms: “User Pays”, “Government Pays”, and “Mixed User Pays and
Government Pays”(VGF*). The “Government Pays” model is the most popular.
User Pays
Govt. Pays
Mixed
(VGF*)
Government
Users
Users
Private Partner
Services
Fees
Services
Fees
Availability
payments
Services
Subsidies
Government Private Partner
Private Partner
PPP Projects by Payment Model
VGF
Government Pays33%
33%
33%
34%
28%
Announced
projects
User Pays
Signed
project
38%
VGF*: in the Chinese context, “Viability Gap Funding – VGF” can mean any government payments to the project company either during
construction or operation. There are four types of government payment mechanisms: guaranteed ROE, minimum demand/fare box guarantee,
shadow toll, construction/operation subsidies.
Ownership of private partners: SOEs are dominant in the PPP market
12
76.0%
Led by SOE
24.0%
Led by private
companies
31%
69%
100%
Project Value Leading Companies
SOE
Private
Source: BRIdata. (2017). 2017 Annual Report on PPP Development in China. Available from http://www.bridata.com/front/pdf/detail?id=1537
Leading large-scale EPC SOEs
Leading domestic listed companies specializing in EPC and real estate
Amount Ownership
China State Construction Engineering
Corporation
857 Central
China Communications Construction
Company
585 Central
China Railway Construction Corporation 428 Central
Metallurgical Corporation of China 370 Central
China Railway Group 359 Central
China Fortune Land Development Co., Ltd 289 Private
Power Construction Corporation of China 236 Central
China Gezhouba Corporation 193 Central
Yunnan Construction Engineering Group 115 Local SOE
Beijing Orient Landscape 95 Private
Recent PPP winners, RMB billion
contract
signed
under
development
Type of private partners: primarily contractors, lack of experienced operators
13
6.9%
12.6%
2.6%
72.2%
3.1%
2.6%
100%
PPP winners’ background,
As of October 2017
Leading Companies Capacities
• Large-scale SOEs
• Mostly contractors
• Leading commercial banks
• Investment arms of large-scale SOEs
• Equipment supplier
• Operators
contractors
banks
funds
OEM
operatorsothers
Source: PwC Strategy& PPP Database. Not publicly available.
• The local government will designate a representative entity to invest in the project company with equity contributions between 5-30% of the total equity contribution
• Debt financing depends on the strength of private
partners’ balance sheets and the implicit guarantee in
the form of government representation in the project
company
• As of 2017, 72% of all the established PPP Project
Companies has a local government as a shareholder
either directly or through a UDIC type company
China’s practice differs from international practice in that governments
participate in PPP projects through a ‘platform company’
14
China PracticeInternational Practice
Local
Government
Private
Partner
Project CompanyFinancial
Institute
Local
Government
Project CompanyFinancial
Institute
Platform
Company
(e.g. UDIC)
debt
Private
Partner
debt
investShareholder agreement
contract
designate
investinvest
contract
Shareholder agreement
Key findings and recommendations
15
• Select appropriate PPP candidates. Do not use PPP simply because it is not accounted for as public debt. Do not use PPP as an option unless the project is suitable to be a PPP
• Allow enough time for project preparation and PPP procurement. Do not set overly ambitious timelines; the private sector is less willing to bid for projects if they are not confident of the government’s ability to meet its timetable
• Revenue from PPP projects is still heavily relies on land than actual demand, even though land revenue is decreasing in most parts of China
• Encourage the participation of international players and create opportunities for open transparent competition in the PPP market
• Pilot project finance on selected demonstration projects to encourage private sector participation because project finance is based on cash flow produced by the project not the credit and asset of the sponsors
• Capacity building
• Issue periodic updates of PPP policies based on lessons learned and implement to ensure continuous improvements of the PPP program
• Conduct periodic reviews, including ex-post review of PPP projects, embed feedback loops to learn from projects, develop national best practices, and improve institutional capacity of the sub-national programs
World Bank Group is working with central and several sub-national governments
• Partnering with MOF and NDRC to identify and prepare PPP demonstration projects for WBG support
• Shanghai – Infrastructure Financing Facility
• Urumqi – financing based on revenues
• Zhengzhou metro – PPP implemented
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