13 Oct China Encourages Foreign Investment Through PPP
Large-scale projects worth 10.6 trillion yuan ($1.6 trillion) are becoming the main drivers of China’s One Belt, One Road initiative. Earlier this year, the Chinese government announced it will “intensify efforts to promote more standardized, rapid development of public-private partnerships (PPP)”. Setting up an 180-billion-yuan fund is one of the efforts to support the financing PPP projects.
World Bank defines PPP as “a long-term contract between a private party and a government agency for providing a public asset or service, in which the private party bears the significant risk and management responsibility”. The PPP model fits in the projects related to the construction of economic infrastructures such as roads, bridges, and public transport systems. The model is also used for social infrastructures such as schools, prisons, and hospitals.
The term PPP has been widely used by the Western countries to attract private capital to co-invest into infrastructure development and to reduce risks of government spending. In China, PPP has become a national reform strategy seeking to reach three main objectives:
- To promote the modernization of national governance system and capacity (macro level);
- To push reforms of administrative, fiscal, and investment and financing systems (meso level);
- To realize the value of money (micro level).
However, the ambitious plan has faced numerous obstacles, such as a lack of expertise in the local governments, uncertainty about profitability and insufficient policy regulations. Premier Li Keqiang also acknowledged that the local governments in China tend to work more with state-owned companies, rather than the private investors. To promote PPP, MOF announced in August it “is considering revising related fiscal and tax policies to facilitate implementation of the projects”.
Case Studies and Opportunities
According to the Chinese government, “the year 2016 has seen the implementation of more than 600 PPP projects, accounting for 23.8 percent of signed PPP contracts”. MOF statistics show that 39 percent of them have private business partners. Among those implemented projects are Zhelin Lake Ecological and Environmental Protection in Jiujiang City with Xingyuan Environment Technology Co., Ltd. as a private partner; Engineering of water diversion of Dawen River in Ningyang County with Shandong Luzhu Group Co., Ltd. as a private partner and many others.
Despite the rising concerns on China’s economic slowdown, the best time to invest in PPP projects is now. The concept is still new to the country and most opportunities remain open. Long-term contracts of 10-30 years come with the stable returns on investment. At last, Belt and Road initiative is a government priority and represents multiple benefits for all the participants.
How to get involved with PPP projects in China?
Before bidding on a specific project, check out the Catalogue for the Guidance of Foreign Investment Industries (amended in 2015) that has an extensive list of encouraged and restricted industries.
Zaizai Huang and Rubing Han from Tianyuan Law Firm outline three ways for foreign capital to participate in PPP projects:
- Directly invest in a PPP project and possibly set up a joint venture with a representative of local government (usually a local financing platform of government),
- Form a bid consortium with Chinese enterprises and participate in PPP project as private capital side,
- Invest indirectly by establishing or participating in a PPP fund with the representative of local government.
World Bank describes project finance as one of the most common and “often most efficient” financing arrangements for PPP projects. It usually takes the form of limited recourse lending to a specially created project vehicle. Project finance is one of the key services provided to our global clients at Carlton Mansfield Limited and includes all operation models approved by MOF. We assist our clients on every stage of their involvement with PPP projects. For more information, please refer to the Project Finance page on our website.