Download Box: Rising Interest in Public-Private Partnerships in China

BOX: RISING INTEREST IN PUBLIC-PRIVATE PARTNERSHIPS IN CHINA / PAGE 73
Box: Rising
Interest in
Public-Private
Partnerships
in China
Ian Laing, Head of Asia for Pinsent Masons LLP, Helena Chen,
Partner and Amanda Yao, Partner at Pinsent Masons LLP in
Beijing discuss the rising interest in public-private partnerships
in China and the regulation on Infrastructure and Public Utility
Concessions, introduced by the Ministry of Finance and the
National Development and Reform Commission, China’s leading
economic planner.
The next couple of years will see the focus of
infrastructure investment in China move from
connecting regions to improving cities, placing greater
emphasis on transport schemes such as metros and
the upgrade of water and wastewater networks in
China’s biggest urban centres.
The Chinese Ministry of Finance (MOF) recently estimated that a plan to
integrate the urban region covering the provinces of Beijing, Tianjin and
Hebei would alone require RMB42 trillion (US$6.8 trillion) in investment to
the end of 2020.
However, local governments have incurred colossal debts funding earlier
infrastructure projects. This led to a revised budget law in 2014 which
imposed restrictions on borrowing via local government financing vehicles
(LGFVs), and also introduced a debt cap.
Such a tightening of regional government finances has led to the
central Chinese authorities actively promoting the use of public-private
partnerships (PPP) in the last 12 months, to attract more private
investment for infrastructure projects.
PPP represents a long-term cooperation between governments and
private companies on projects, which are mainly funded and operated by
the latter and supervised by the former.
The PPP model has existed in China since the 1980s, but take-up has
historically been low. Although no official data is available, a survey by
a local broker, Minsheng Securities, revealed that contracts had been
signed on just 13% of the RMB1.6 trillion in PPP projects announced up
to September 2014.
In 2014, the Ministry of Finance and the National Development and
Reform Commission (NDRC), the country’s leading economic planner,
both issued a series of regulations and guidelines on the subject. These
aimed to establish a standard contract form which can be adopted by
participants. The MOF also set up a PPP “leading group” and a dedicated
“PPP Centre”. New PPP Contract Guidelines were prepared by a team
from Pinsent Masons and released by the PPP Centre in January 2015.
On 1st June 2015, the regulation on Infrastructure and Public Utility
Concessions (the ‘Concession Regulations’) came into force, allowing
large-scale investment projects to operate for a typical term of 30 years
or more, thereby targeting companies which take a long-term view on
operating in China. So what projects are available?
In December last year, the Ministry announced 30 pilot PPP projects
across 15 provinces, with a combined investment of Rmb180bn
(US$29.3bn). The focus for these schemes was on the energy, transport,
water and environmental protection sectors.
This was followed in May 2015, when the NDRC announced 1,043 PPP
projects totalling RMB1.97 trillion (US$317.8bn). The government also
said it would streamline approval procedures for PPPs and that PPPs in
public services will enjoy tax breaks and other financial rewards.
The NDRC list includes projects in 27 of China’s 33 provinces and
covers a range of sectors, from transportation to natural resources
and water conservation. Among the projects are a range of metro line
developments, such as the CNY51.9bn (US$8.15bn) scheme planned
for the eastern city of Hangzhou. Some estimates suggest that by 2020,
up to 50 Chinese cities will have developed a metro system, with a total
track length of over 6,000km.
Whilst it is understood that many of these schemes have since been
delayed as both local governments and private investors get familiar with
the PPP process, it has failed to deter the Ministry of Finance, which in
September 2015 launched a US$28.3bn PPP fund, to which ten Chinese
financial institutions have contributed, including the China Construction
Bank and the Bank of China.
The announcement was followed by a presentation of 206 PPP projects,
with an overall cost of CNY659bn (US$103.5bn), including a new
expressway in Beijing.
GLOBAL CONSTRUCTION 2030 / PAGE 74
CHINA WATER AFFAIRS GROUP: Water treatment plant in Guiyang, Guizhou. The water treatment plant is a part of the Nanming River Project, which is one of the 30 leading
PPP projects announced by the Ministry of Finance
Changing Regulations
For many local governments in China, adopting the PPP process
will require major shift in attitude towards how they have traditionally
approached infrastructure development, as well as acceptance of
constraints on their administrative power.
Such lack of expertise in structuring public-private partnerships in China
is believed by many to present huge opportunities for overseas advisors.
In June 2015, for example, it was reported that the UK has sent officials
to China to give advice on how to involve the private sector in building
infrastructure including schools and hospitals.
Local advisors will have limited experience in this field, placing European
and North American consultancies in a good position to offer guidance
and support to ensure that the PPP pricing process is competitive.
There is some caution in the fact that Chinese public-private partnerships
differ significantly from western PPPs, so to start with at least, the
opportunities may not be as great as first perceived.
A further 262 water-related schemes were among the 1,043 PPP projects,
with a total investment value of nearly US$322bn, announced by China’s
NDRC in May 2015.
The construction and operation of water and wastewater facilities is
being seriously encouraged, with foreign investors able to own up to 100
percent of individual projects.
China’s water sector was described by Moody’s as “highly fragmented”,
comprising 1,346 players at the end of 2014, with the top 10 accounting
for just 15 percent of the market. Growth opportunities could therefore
result in intensifying competition and industry consolidation.
Asian Development Bank (ADB) is undertaking a Technical Assistance
(TA) Project where five Case Study reports on water-related schemes and
one PPP sample contract on water-related schemes prepared by Pinsent
Masons will be submitted to ADB and MOF under the TA Project by the
end of 2015.
Recent investigation by the Financial Times, for example, found that
privately held companies invested in only 22% of the PPP projects
examined. Further, their research found that just 17% of foreign enterprises
were considered as the ‘private party’, with 50% being classed as fully
state-owned enterprises or state-owned holding companies.
In a July 2015 report, Moody’s said that high participation by SOEs in PPP
projects means that infrastructure-related debt is simply reshuffled from
regional and local government balance sheets to state-owned enterprises’
balance sheets, without reducing the public sector’s overall leverage.
Despite the caution, we can conclude that the opening up of the PPP
market in China could create many opportunities for investment and that
the scale of these opportunities will make it had for many international
organisations to ignore.
Water, Water Everywhere
A recent Moody’s report indicated that there could be a strong flow of
private sector opportunities in the Chinese water sector as the country
struggles to overcome water shortages and higher environmental
standards regarding water quality. Companies will be encouraged by
recent regulations, such as the Water 10 Provisions, together with the fact
that 12 of the 30 pilot PPP projects launched by the Ministry of Finance in
late 2014 water-related.
Pinsent Masons – winner of the Financial Times ‘Most
Innovative Law Firm’ in Europe awards 2015.
We are infrastructure sector specialists and operate on an
international basis through our network of offices in Europe, the
Middle East, Asia and Australia. We work throughout the life
cycle of complex infrastructure assets, supporting the sector’s
major infrastructure providers.
We have over 30 years of experience operating within China and
our offices in Shanghai and Beijing are approved by the Chinese
Ministry of Justice. New PPP Guidelines were set up by a team
from Pinsent Masons and released in January 2015 by the new
PPP Centre, part of the Chinese Ministry of Finance. For further
information please visit:
www.pinsentmasons.com