The State Council issued a document to usher in a new mechanism for more than 10 trillion PPPs, what are the characteristics?

The public-private partnership (PPP) model has ushered in a new and major change, which is related to more than 10 trillion PPP projects.

On November 8, the General Office of the State Council forwarded the Guiding Opinions on Standardizing the Implementation of the New Mechanism for Public-Private Partnership (hereinafter referred to as the "Opinions") issued by the National Development and Reform Commission and the Ministry of Finance, announcing the largest adjustment at the policy level since the implementation of the PPP model in 2014, which has a far-reaching impact on the promotion and application of the PPP model in China.

Lock in the franchise model and focus on user payment

What exactly is the new mechanism of the PPP model? This is reflected in the return mechanism, the specific mode of application, the key areas, the management department and so on.

The "Opinions" make it clear that all PPP projects should be implemented in a franchise mode. PPP projects should focus on user-paid projects, clarify the channels and methods of charging, and the project operating income can cover the construction investment and operating costs, and have a certain return on investment, and will not increase the future expenditure responsibility of the local government due to the adoption of the public-private partnership model.

Previously, there were many subdivision models of PPP projects, but this time it is limited to a franchise model based on user payment. There are three types of PPP return mechanisms, namely government payment, user payment and feasibility gap subsidy, of which the number of PPP projects and investment in government payment and feasibility gap subsidy account for more than 90% of all PPP projects. However, the "Opinions" make it clear that the PPP return mechanism will focus on user payment from now on, and does not emphasize that the PPP model will not increase the responsibility of local governments for future expenditures. A number of PPP experts told Yicai that this means that the number of PPP projects applicable to PPP will be greatly reduced in the future.

The "Opinions" also make it clear that the government may, on the premise of strictly preventing the addition of new hidden debts of local governments and complying with the requirements of laws, regulations and relevant policies, give government investment support to user-paid projects during the construction period in accordance with the principle of equal treatment;

Wang Shouqing, chief expert of the Investment and Financing Policy Research Center of Tsinghua University, said that the new PPP mechanism emphasizes user payment, but it should be correctly understood that this also includes projects that are also user payments through to the public. In addition, no matter what investment and financing model is adopted, projects involving the national economy and people's livelihood, such as subways, still need government subsidies, that is, government subsidies for industry-specific subsidy projects that have nothing to do with the investment and financing model, can also be regarded as user paying; finally, if the user pays insufficient or even missing, but the government legally and compliantly compensates the social capital with other resources (instead of cash), it can also be regarded as user payment。

A number of local government PPP management people told Yicai that at present, there are few PPP projects paid by users, and they can be done in other ways such as local government special bonds, not necessarily PPP mode.

The reason why the new PPP mechanism focuses on user payments is that experts believe that one of the main purposes is to prevent new hidden debts.

Wang Shouqing said that the new PPP mechanism is conducive to promoting the healthy development of PPP in the mainland, because it can directly reduce the number of PPP projects paid by the government regardless of financial resources, resulting in hidden debt, intergenerational unfairness and unsustainability. It can also reduce social capital, especially the central state-owned enterprise engineering company, "the investment is fake, the contract is real", and they want to take the project more than pay less attention to the financial resources and sustainability of local governments. In addition, it can also reduce the excessive dependence of financial institutions on central state-owned enterprises and government credit.

"All in all, the new PPP mechanism is conducive to forcing local governments, private capital, financial institutions and consulting institutions to pay more attention to the market demand, cash flow and sustainability of PPP projects. Wang Shouqing said.

A PPP expert, who did not want to be named, told Yicai that in PPP practice, financial risks should not be regarded in opposition to PPP project payments and subsidies. The only basis for public-private partnerships is that social capital is doing a good job and is efficient, so as to achieve value for money, rather than who pays and who subsidizes. Consideration could be given to incorporating government payments and subsidies into the government debt system and regulating them together.

Xu Chengbin, deputy director of the research center of China International Engineering Consulting Co., Ltd., believes that the "Opinions" require that all PPP projects should be implemented in a franchise model, emphasizing the use of market-oriented mechanisms and focusing on user payment. This not only fully draws on the development experience of the international PPP model, but also draws on the profound lessons encountered in the practice of PPP in mainland China in the past ten years based on China's national conditions, so as to establish a logical and national conditions PPP investment return mechanism.

Based on the new PPP mechanism focusing on the user-paid franchise model, the "Opinions" require a reasonable grasp of key areas. PPP should be limited to projects with operating income.

The National Development and Reform Commission is in charge, giving priority to supporting the participation of private enterprises

In order to solve the unclear division of labor, the executive meeting of the State Council in July 2016 clarified the division of responsibilities of relevant departments in the PPP field. Subsequently, the Ministry of Finance and the National Development and Reform Commission made it clear in the document that the financial department is responsible for the PPP reform in the field of public services, and the National Development and Reform Commission is responsible for the promotion of PPP in the field of infrastructure. However, in practice, there are still some problems in PPP management, such as lack of clarity of responsibilities.

After the "Opinions" put forward a new PPP mechanism, the division of management responsibilities of all government parties is clarified.

According to the "Opinions", the National Development and Reform Commission should take the lead in promoting the franchise model and effectively strengthen policy guidance. Local people's governments at all levels should earnestly assume the main responsibility and standardize and promote the franchise projects within the scope of the government's authority. Local people's governments at all levels may, in accordance with laws and regulations, authorize the relevant industry authorities, public institutions, etc., as franchise project implementation agencies (hereinafter referred to as project implementation agencies), responsible for the preparation of franchise programs, franchise selection, franchise agreement signing, project implementation supervision, cooperation period expiration transfer and acceptance, etc. Local development and reform departments at all levels should play a comprehensive and coordinating role, strictly control the relevant content of the project franchise plan, and perform the duties of project approval, approval or filing in accordance with laws and regulations.

According to the "Opinions," financial departments at all levels should strictly implement the budget management system, strengthen the management of local government debts, intensify financial and accounting supervision, and strictly enforce financial and economic discipline.

The "Opinions" also proposed that private enterprises should be given priority to participate in PPP projects. It is necessary to adhere to the original intention, return to the origin, encourage private enterprises to participate in new construction (including reconstruction and expansion) projects of government and social capital cooperation to the greatest extent, and formulate the "List of New Franchise (Including Reconstruction and Expansion) Projects Supporting Private Enterprises to Participate (2023 Edition)" (hereinafter referred to as the list, see annex) and dynamically adjust it.

Specifically, PPP projects with a high degree of marketization and weak public attributes should be wholly owned or controlled by private enterprises; projects that have a strong public nature and have strong public attributes should in principle account for no less than 35% of the equity of private enterprises; and a small number of projects involving national security, strong public attributes and natural monopoly attributes should actively create conditions and support private enterprises to participate. Private enterprises may be actively encouraged to participate in public-private partnership projects outside the areas listed in the list.

Wang Shouqing believes that the "Opinions" put forward the dynamic list of the above three types of projects to leave more space for private enterprises, which is more conducive to attracting private enterprises to participate in PPP, and also leaves space for central state-owned enterprises, which is conducive to the implementation of the new PPP mechanism. However, due to the fact that private enterprises have failed to invest in PPP in the past few years, their interest and confidence have decreased, and their financing difficulties and high financing costs have not been completely resolved, local governments still prefer central enterprises due to their worries about all aspects of private enterprises and fear of their own responsibility, and do not expect too much that private enterprises will flock to the PPP as they did in the early years of PPP promotion since 2014.

After the implementation of the new PPP mechanism, it is a major problem to deal with the PPP projects that have been implemented before. According to official data, more than 5,000 PPP projects have been started under construction, with an investment of more than 8 trillion yuan.

In this regard, the "Opinions" stated that the implementation of the new mechanism will be steadily promoted. Grasp the intensity and rhythm of work, and the projects that have not completed the bidding and procurement procedures before the clean-up and verification of PPP projects in February 2023, as well as the newly implemented PPP projects in the future, shall be implemented in accordance with the new mechanism stipulated in these Guiding Opinions, and the Notice of the General Office of the State Council on Forwarding the Guiding Opinions of the Ministry of Finance, the Development and Reform Commission and the People's Bank of China on Promoting the Public-Private Partnership Model in the Field of Public Services (Guo Ban Fa [2015] No. 42) issued in May 2015 will no longer be implemented.