New incentive policy for Shanxi PPPs

By Wang Jihong and Liu Ying, Zhong Lun Law Firm
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Compared with the vigorous growth of PPP (public-private partnership) projects across the country, there are only 31 PPP projects recorded in Shanxi province with a total investment of about RMB51.7 billion (US$7.7 billion). In order to change this situation of the slow development of PPP projects, the Shanxi government recently introduced Several Policies and Measures for Accelerating Public-Private Partnerships (circular No. 35), which specified a series of policies and measures to accelerate PPP projects.

Wang Jihong, Partner, Zhong Lun Law Firm
Wang Jihong
Partner
Zhong Lun Law Firm

PPP model must be given priority. Shanxi actively encourages the adoption of PPP models in new projects, and transforming existing projects into PPPs. Circular No. 35 specifies that PPP models must be given priority in new key projects in Shanxi, including: highways, railways, airports, urban rail transit and other transportation facilities; gas, power supply, water supply, heat supply, sewage and waste disposal, and other municipal infrastructure; and energy, resource/environment/ecology protection, agriculture, forestry, water conservancy, science and technology, affordable housing, healthcare, hygiene, pension, education, sports, culture, tourism, etc. The priorities cover various projects in more than 25 fields.

For existing projects, the adoption of transfer-operate-transfer (TOT), rehabilitate-operate-transfer (ROT) and other models are encouraged to transfer existing projects into PPP projects and guide social capital to participate in reconstruction and operation. Subject to creditor consent, the transfer of government debt into non-government debt, so relieving local government debt burdens, is also encouraged.

Financing platform company participation in local PPP projects. “Local government financing platform companies” refers to economic entities established by the local government (or related departments and institutions) through financial allocation or injection of assets such as land or equity, which are qualified as independent corporations and undertake the financing function for government-invested projects.

According to the definition of social capital in the Guidelines for the Public-Private Partnership Model and Guidelines for PPP Project Contracts of the Ministry of Finance, social capital refers to domestic and overseas enterprise legal persons that have established modern enterprise systems, other than government financing platform companies and other state-owned holding enterprises belonging to, or under control of, the same level of government.

Government financing platform companies and other state-owned holding enterprises (excluding listed companies) belonging to, or under control of, the same level of government must not participate in PPP projects as social investors within the jurisdiction of the local government. Additionally, the Ministry of Finance takes a negative stance toward local financing platform company investment in PPP projects under the control of the same level of government.

Liu Ying, Associate, Zhong Lun Law Firm
Liu Ying
Associate
Zhong Lun Law Firm

However, local government financing platform companies are not categorically prohibited from participating in PPP projects under the control of the same level of government. According to circular No. 35, a financing platform company may participate in local PPP projects as a social investor if it meets the following conditions: (1) it establishes a modern enterprise system and has market-oriented operations; (2) local government debts borne by the company have been included in the government fiscal budget and are handled properly; and (3) the government and financing platform company have made a clear announcement that the financing platform company will not undertake the debt financing functions of the local government in the future.

EIGHT POLICIES AND MEASURES

Circular No. 35 puts forward eight policies and measures to encourage the development of PPP projects in Shanxi. First, the project review process should be simplified. Second, one-time incentive funds for upfront fees will be granted to the implementation units of provincial PPP demonstration projects based on total investment in the projects. Third, transformation of outstanding debts should be encouraged, and awards will be granted to the government departments that have reduced outstanding debt through the implementation of PPP projects, based on a certain percentage of the debt scale resolved in that year.

Fourth, the existing special funds should be planned and utilized as a whole, and the arrangement of special funds must be given priority to national and provincial PPP demonstration projects in transportation, energy, municipal administration, water conservancy, environmental protection, affordable housing, healthcare, pensions, etc. Fifth, fiscal subsidies must be included in the mid- and long-term fiscal budget, and be guaranteed.

Sixth, diversified land policies should be implemented. Different ways of land supply must be specified to meet the complicated land demand in PPP projects: where projects comply with the land allocation list, the land must be supplied according to its allocation method; where projects do not comport with the land allocation list, the land use rights should be obtained through leasing; and where land use rights are obtained by capital contribution or stock purchase, then the municipal or county governments must be the investors.

Seventh, a provincial PPP financing support fund must be established. The proceeds of the fund must take the priority/inferior structure, with other investors as the priority and financial contributors as the inferior. Finally, financial institutions are encouraged to provide innovative financial services in line with the characteristics of PPP projects, as well as carry out franchise pledges, asset securitization and other businesses. Financing channels for PPP projects should be expanded, and PPP project companies should be guided towards utilizing loans and clean development funds from foreign governments and international financial organizations. PPP project companies can also enjoy Shanxi incentive programmes if they are publically listed.

According to the authors’ experience, although PPP projects in Shanxi have had somewhat of a late start, Shanxi’s financial sector has been aware of the various problems encountered by other provinces during the implementation of PPP projects. Circular No. 35 is practical and emphasizes the training of PPP concepts, ideas and related systems to make municipal and county financial departments at all levels, as well as local advisory bodies, accept correct concepts of negotiation and collaboration with social investors from the very beginning.

Wang Jihong is a partner and Liu Ying is an associate at Zhong Lun Law Firm

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