New rules pave the road for PPP

Infrastructure investment and development is extremely hot in China. Rapidly-rising rates of urbanization (with the State Council targeting an official urbanization rate of 60% by 2020) is adding to the existing demand for infrastructure and public utilities, notably for health, housing, power, water, transportation and waste services. At the same time, a number of commentators and the State Council's own Development Research Centre believe that accelerated investment in infrastructure is critical to stabilizing China's economic growth, at a time when property and manufacturing remain weak. Within this space, the public-private partnership (PPP) model is expected to play a key role.

However, a number of structural issues with PPPs in China have historically hindered the full potential of this method for developing key social and strategic infrastructure, making certain international players wary of entering the market.

The State Council's Measures for the Administration of Concessions for Infrastructure and Public Utilities (Measures), which was adopted on April 21 2015 and came into force on June 1, have been welcomed as an important development that makes Chinese PPPs a more attractive option for foreign developers and investors.

Any investor engaging in a project in China must have negotiable and enforceable contracts, effectively manage changing circumstances, set dispute resolution mechanisms and maintain reliable relationships.

Public-private partnerships

Although the Measures do not define a precise meaning or scope for PPPs, the model is generally recognized as involving one or more long-term contracts between a government entity and a private party, for the provision of a public service or asset, in which the private party bears significant risk and management responsibility, and where remuneration is linked to performance.

The Shajiao B Power Plant in Guangdong Province, which came into operation in 1988, is generally regarded as China's first PPP project. Since that time, there have been a significant number of PPPs throughout the country, predominantly in the energy, transportation and water sectors.

There is no single authority or body charged with administering or regulating PPPs in China, nor is there a centralized database or generally accepted set of principles for classifying or assessing such projects. One of the goals of the Measures is to address this qualitative and quantitative deficiency.

What seems certain is that PPPs fit neatly into official central government policy about the “decisive” role that market forces should play in China's economy. This was articulated during the Third Plenum of the 18^th National Congress of the Communist Party of China (Third Plenum) in November 2013 and in the September announcement by the Ministry of Finance (MOF) of 206 new PPP projects worth a total of Rmb659 billion ($104 billion).

Supporting successful PPP

While there is no comprehensive database or review of all PPPs in China, several academic studies have kept track of the model's application and records may be enhanced moving forward. The influential Comparative Study of Critical Success Factors for Public-private Partnerships between Mainland China and Hong Kong SAR identified 7 principal critical success factors necessary for a successful PPP project in China:

(i) equitable allocation of risk; (ii) strong private consortium; (iii) judicious government control (inception to operation); (iv) transparent and efficient procurement; (v) project economic/business viability; (vi) adequate legal framework and stable socio-political environment; and (vii) strong funding options.

The support of the political, social, economic and legal environment in meeting these criteria will facilitate successful PPP projects that are more likely to produce beneficial outcomes for the public and private sectors, as well as the public at large.

The regulatory road

The Measures were jointly promulgated by National Development and Reform Commission (NDRC), MOF, the People's Bank of China and the Ministries of Housing and Urban-Rural Development, Transport and Water Resources.

Accordingly, the Measures have the endorsement of the key bodies responsible for major infrastructure development. Since the Third Plenum, there have been a number of regulatory instruments seeking to enhance public-private social investment, notably:

• The NDRC's Circular on Releasing the First List of Infrastructure Projects and Projects of Other Sectors in Which Private Investment is Encouraged (May 2014) and Guiding Opinions on Launching Public-private Partnerships (December 2014);
• The MOF's Circular on Issues Relevant to Promoting the Use of Public-private Partnerships (September 2014) and Operational Guidelines for Public-private Partnerships (Trial Implementation) (November 2014); and
• The State Council's Guiding Opinions on the Investment and Financing Mechanisms for Innovative Key Sectors and Encouraging Private Investment (November 2014).

The Measures are an important next step but far from the end of the regulatory road; on the contrary, they are essentially detailed principles which contemplate (and require) enabling legislation to be passed by the central, provincial and local governments to realize their stated aims.

They are comprised of 60 articles, broken down into 8 parts as follows: