Just two weeks into 2018, multiple provinces (autonomous regions and municipalities) have submitted their 2017 PPP work summaries. According to statistics, as of January 12, 27 provinces have released their summaries and outlined plans for 2018.
After nearly four years of rapid expansion, the PPP market now seems to have entered a period of adjustment. Many provinces have made the standardization of PPP projects a priority for 2018, as if stirring up a regulatory storm for PPP.
For example, the Shandong Provincial Department of Finance stated that it will carry out the "Standardized Development Year" activity for PPP projects, strictly enforce project database entry standards and management requirements, promptly remove projects with non-compliant conditions, irregular operations, or incomplete information from the database, and focus on standardizing project operations and improving project quality.
In November 2017, the Ministry of Finance issued the "Notice on Standardizing the Management of the Project Database of the Comprehensive Information Platform for Public-Private Partnership (PPP)" (hereinafter referred to as "Document No. 92"), requiring the completion of centralized cleanup of local project management databases by March 31, 2018.
On the other hand, standardizing PPP development is also one of the key tasks in preventing financial risks. The National Financial Work Conference held at the end of 2017 made it clear that support should be given to the battle of preventing and defusing major risks, with the focus on effectively preventing and controlling local government debt risks, resolutely curbing illegal and irregular financing guarantee activities, and strictly prohibiting disguised borrowing in the name of government investment funds, public-private partnerships, government purchases of services, etc.
As localities begin to standardize PPP projects, central SOEs, as the main social capital parties participating in PPP projects, have also started self-inspecting existing projects.
Many PPP personnel from central SOEs said that project approval for new projects has been tightened, with a focus on standardized projects. When selecting PPP projects, standardization is the primary requirement.
Actively Carrying Out Self-Inspection and Cleanup
In recent years, the social capital parties participating in PPP projects have mainly been central SOEs. Data shows that as of December 2017, private enterprises accounted for less than 25% of investment scale. In terms of cumulative contract winning amounts, China State Construction Engineering Corporation ranked first with 992.09 billion yuan, and central SOEs such as China Communications Construction Group and China Railway Construction Corporation ranked in the top five. Therefore, some industry insiders pointed out that this rectification has a greater impact on central SOEs.
After the issuance of multiple documents including the "Notice on Standardizing the Management of the Project Database of the Comprehensive Information Platform for Public-Private Partnership (PPP)" (Document No. 92), central SOEs have been tightening PPP projects and actively carrying out self-inspection and cleanup work.
A person in charge of PPP projects at a central SOE branch said that the group has already started internal self-inspection and cleanup, expecting a rectification period of six months to a year. "A branch or subsidiary may have hundreds of projects under inspection and rectification, making up for deficiencies according to document requirements, such as completing the two evaluations and one plan (value-for-money evaluation, fiscal affordability assessment, preliminary implementation plan); and eliminating practices like 'fake equity, real debt'."
Officials from the Ministry of Finance have repeatedly emphasized that PPP is not a simple financing tool and that "fake PPP" projects with "fake equity, real debt" must be eliminated. Document No. 92 also clearly states that PPP projects constituting illegal or irregular debt guarantees, including those where the government or government-designated institutions repurchase social capital's investment principal or guarantee principal losses, or where the government promises fixed returns to social capital, must be cleaned up.
In this regard, Zhao Quanhou, director of the Financial Research Center of the Chinese Academy of Fiscal Sciences, explained to reporters that the practice of "fake equity, real debt" actually turns PPP projects into debt financing, meaning that participants such as social capital receive fixed returns and do not bear the investment, construction, and operation risks that PPP project investors should bear. Strictly prohibiting "fake equity, real debt" means that the government and social capital will negotiate multiple times to create true risk-sharing PPPs, and their implementation speed will slow down.
Total PPP Projects in Database Decline for First Time
Reporters learned from multiple social capital parties and banks that application and approval for new PPP projects are currently stricter.
The person in charge said that central SOEs are quite cautious about approving new projects. Now, if investing in a PPP project, there are many internal review conditions. "In the past few days, several documents have been received, with more than 30 preconditions. Only after meeting them can project approval and feasibility study begin, and finally bidding participation."
Another staff member from the investment and financing department of a central SOE branch also said that PPP projects are currently in a tightening state, focusing on undertaking standardized PPP projects. It is not difficult to see that the industry regards "standardization" as the primary requirement for PPP.
In fact, standardizing PPP has always been a requirement of relevant departments. At the end of 2017, an official from the Ministry of Finance stated at a public forum that there are some non-standard phenomena that require sufficient attention.
Data also shows that the PPP market has slightly slowed down. A research report by Minsheng Securities shows that the total amount of PPP in the database declined for the first time. As of the end of December 2017, there were 14,064 projects in the national database, with a cumulative investment of 17.76 trillion yuan, and 2,728 projects in the execution phase, corresponding to 4.58 trillion yuan in investment. In the fourth quarter, the total amount in the database decreased by more than 40 billion yuan net, and the total amount of newly implemented projects was 480 billion yuan, a decrease of 40% from the previous quarter.
At present, central SOEs' attitude towards PPP is to temporarily slow down. Considering deleveraging and debt reduction, central SOEs now do not have much investment impulse.
In this regard, Li Jin, executive director of the China Enterprise Research Institute, believes that PPP projects involve large investment amounts and long return periods, and even some project operations are not very standardized, which increases the financial risks of central SOEs. They should not increase their asset-liability ratio due to carrying out PPP business.
Zhao Quanhou told reporters that due to the impact of controlling leverage ratios, central SOEs' participation in PPP may decrease, but not necessarily very quickly. Overall, the difficulty of implementing PPP projects will increase, and the time required will also increase.