Ministry of Finance: Standardize the construction and operation of existing PPP projects and encourage financial institutions to optimize financing structures

According to the Zhitong Finance APP, the Ministry of Finance, in conjunction with relevant departments, has recently drafted the "Guiding Opinions on Regulating the Construction and Operation of Existing Government and Social Capital Cooperation Projects." A relevant person in charge of the Ministry of Finance pointed out that currently, about 70% of PPP existing projects have entered the operational phase, and their operational status directly relates to the quality and efficiency of public service supply. The guiding opinions require that under the current market interest rate level, there is reasonable room for interest rate reduction and extension for existing project loans. It is advisable to adhere to the principle of seeking truth from facts, encourage financial institutions and social capital parties to actively negotiate, and adopt methods such as adjusting repayment plans, reducing interest rates, extending terms, and refinancing to support the optimization of project financing structures.

In addition, the guiding opinions require local governments to include expenditures in budget management as stipulated, to pay promptly according to performance evaluation results, and not to delay completion times or postpone performance evaluations. If it is determined that there are overdue accounts payable to enterprises, they should be resolved in a timely and proper manner according to national regulations. It requires social capital parties to provide public services that meet relevant quality and standard requirements as stipulated in contracts.

Original text as follows:

A relevant person in charge of the Ministry of Finance answers reporters' questions on regulating the construction and operation of existing government and social capital cooperation projects

Over the past decade, the development of government and social capital cooperation (PPP) has led to the implementation of a large number of projects in various regions using the PPP model in fields such as transportation, municipal engineering, area development, ecological protection, and water conservancy construction, continuously improving public service supply and promoting infrastructure modernization, playing a positive role in stabilizing growth, adjusting structure, and benefiting people's livelihoods. To further regulate the construction and operation of existing PPP projects, enhance project operation quality and efficiency, continuously improve the level of public service supply, and promote stable and healthy economic and social development, the Ministry of Finance, in conjunction with relevant departments, has drafted the "Guiding Opinions on Regulating the Construction and Operation of Existing Government and Social Capital Cooperation Projects" (hereinafter referred to as the "Guiding Opinions"), which will be forwarded to localities and departments for implementation in the name of the State Council after approval by the State Council. Recently, a relevant person in charge of the Ministry of Finance answered reporters' questions regarding the "Guiding Opinions."

1. Many infrastructure and public service projects in our country have adopted the PPP model, and the construction and operation status of existing projects in various regions is of great concern. What is the background for the issuance of the "Guiding Opinions"?

At the current stage, the adjustment of China's economic structure has shifted from focusing on increasing capacity to adjusting existing capacity while optimizing new capacity. Strengthening support for the smooth construction and efficient operation of existing PPP projects is an inevitable requirement for revitalizing existing resources, driving new growth through existing capacity, and injecting new momentum into economic development. The formulation of the "Guiding Opinions" and the promotion of its public release are mainly based on three considerations:

First, there are central requirements. The Party Central Committee and the State Council attach great importance to the work of government and social capital cooperation. The "Decision of the Central Committee of the Communist Party of China on Further Deepening Reform and Promoting Chinese-style Modernization," approved at the 20th National Congress of the Communist Party of China, pointed out the need to establish a long-term mechanism for government investment to support the construction of major projects that are foundational, public welfare-oriented, and long-term, and to improve the system and mechanism for government investment to effectively drive social investment. The Central Economic Work Conference requires strengthening the coordination between finance and financial support, effectively driving social investment with government investment; balancing the relationship between optimizing new capacity and revitalizing existing capacity, and comprehensively improving resource allocation efficiency. Issuing guiding documents on regulating the construction and operation of existing PPP projects is a concrete measure to implement the decisions and deployments of the Party Central Committee and the State Council Second, there is a need for people's livelihood. Various regions are using the PPP model to accelerate infrastructure construction, expand public service supply, and have built projects such as sewage treatment plants, waste-to-energy plants, highways, subway lines, water conservancy irrigation, and urban water supply, focusing on ensuring the production and living conditions of the masses and continuously improving the quality of life. The issuance of the "Guiding Opinions" is conducive to strengthening the support for the construction and operation of existing projects, promoting the improvement of the quality and efficiency of public service supply, and further serving and improving people's livelihood.

Third, there are expectations from all parties. The Ministry of Finance has conducted multiple on-site investigations at project locations and held several multi-party symposiums at the provincial, municipal, and county levels. It has covered provinces with a large number of existing PPP projects in the eastern, central, and western regions, systematically summarizing and sorting out grassroots practical experiences, closely tracking the progress of work in various places, and incorporating good experiences and practices into the "Guiding Opinions." Government entities, financial institutions, and social capital parties have all expressed the hope for the public release of a comprehensive guiding document to further clarify policy expectations, respond to concerns from all parties, and strengthen support for the smooth implementation of existing PPP projects.

Second, existing PPP projects are numerous and widespread. We also understand that although the specific situations of projects vary greatly across regions, the working principles followed are common. May I ask what directional requirements the "Guiding Opinions," as a national-level guiding document, propose for promoting the smooth operation of existing PPP projects?

According to the requirements of the systematic reform of PPP, local governments, especially provincial governments, must earnestly assume the main responsibility, take timely targeted measures, actively coordinate resources from all parties, and organize relevant parties within their jurisdiction to earnestly implement and support the stable operation of existing PPP projects. This can be summarized as "four persistences":

First, persist in systematic promotion. Existing PPP projects involve multiple fields and subjects, with a long time span, and their construction and operation status are highly related to economic and social development. The "Guiding Opinions" require local governments to adhere to a systematic perspective, integrating the construction and operation of existing PPP projects into the overall economic and social development of the locality, coordinating the connection between new government investment projects and existing PPP projects, and further enhancing the systematic and coordinated nature of economic and social development.

Second, persist in classified policies. Relevant departments and units should, under the leadership of their respective governments, study key elements such as project implementation stages, industry fields, and return mechanisms one by one, conducting specific analyses for specific projects, implementing classified policies, and promoting orderly progress. They should comprehensively utilize resources and tools such as finance and credit, adopt multiple measures, and make precise efforts to effectively ensure the standardized construction and operation of existing PPP projects within their jurisdiction.

Third, persist in reducing costs and increasing efficiency. The "Guiding Opinions" propose encouraging equal communication and mutual benefits among government parties, social capital parties, financial institutions, and other participants, scientifically adjusting project implementation content, cooperation duration, financing rates, return indicators, and other elements, strengthening project management, reducing operating costs, tapping into operational potential, and enhancing project output quality and efficiency to serve stable economic operation.

Fourth, persist in strengthening guarantees. All participating parties in the project are required to uphold the spirit of the contract, fulfill their obligations in accordance with the law, and work together to promote project implementation. Government parties and social capital parties are required to timely and fully pay project capital, ensure quality and quantity in project completion and operation, and the government pays based on performance. Financial institutions are required to objectively assess and actively support reasonable financing for ongoing projects according to market-oriented and rule-of-law principles 3. We have noticed that most of the existing PPP projects have entered the operational phase, and all parties involved in the projects are eagerly awaiting this guiding document. What requirements does the "Guiding Opinions" propose to support the smooth operation of existing projects?

Currently, about 70% of existing PPP projects have entered the operational phase, and their operational status directly relates to the quality and efficiency of public service supply. To support the smooth operation of existing projects and ensure that the public's sense of gain, happiness, and security is more substantial, guaranteed, and sustainable, the "Guiding Opinions" emphasizes the following requirements:

First, adhere to contractual obligations. Contracts are the fundamental basis for managing specific projects and ensuring long-term governance, with the rights and responsibilities of relevant parties clearly defined in the contracts. Existing PPP projects have all signed contracts, and "having a contract means following the contract" is the foundation and guarantee for the smooth implementation of existing projects.

Second, emphasize timely and effective payment. Local governments are required to include expenditures in budget management as stipulated, making timely payments based on performance evaluation results, without delaying completion times or postponing performance evaluations. If there are overdue payments to enterprises, they should be resolved promptly and appropriately according to national regulations. Social capital parties are required to provide public services that meet relevant quality and standard requirements as per the contract.

Third, emphasize cost reduction and efficiency improvement, prioritizing savings. Localities are required to combine actual conditions to increase revenue and reduce expenditure. On one hand, projects should be streamlined to reduce unnecessary construction content, save on later operational costs, and reasonably adjust return on investment, capital discount rates, and other yield indicators, while appropriately extending the cooperation period. On the other hand, project benefits should be effectively improved, requiring social capital parties to innovate operational models, introduce advanced technologies, and improve management methods to enhance the professionalism of project operations.

Fourth, encourage financial institutions to optimize financing structures. The period from 2015 to 2018 was the peak period for implementing PPP projects across various regions, coinciding with a time of relatively high financing interest rates. Under the current market interest rate levels, there is reasonable room for interest rate reductions and extensions for loans on existing projects. It is advisable to adhere to the principle of seeking truth from facts, encouraging financial institutions to actively negotiate with social capital parties to adjust repayment plans, reduce interest rates, extend terms, and replace financing methods to support the optimization of project financing structures.

Fifth, require strengthening project operation supervision. Industry regulatory departments must fulfill their supervisory responsibilities, guiding project implementation agencies to strictly conduct performance monitoring and evaluation, strengthen the application of results, and link them to government payments, incentivizing social capital parties to improve the quality and efficiency of public service outputs, and conduct mid-term evaluations in a timely manner. For projects with fees, both income management must be strengthened, and potential value must be explored. For projects that can charge fees but are not yet charging, they can be implemented according to procedures after sufficient demonstration.

Sixth, require standardized project handover. Industry regulatory departments and project implementation agencies are required to conduct acceptance checks on project construction and operation conditions. It is emphasized that project implementation agencies should take over in a timely manner, conduct asset evaluations, register accounts, and manage subsequent operations, with projects no longer managed as existing PPP projects after the cooperation period expires.

4. What requirements does the "Guiding Opinions" propose for existing PPP projects that are still under construction? For ongoing construction projects that have already commenced and formed physical work volume, the focus is on ensuring their smooth completion and timely realization of the benefits from prior investments. To this end, the "Guiding Opinions" propose targeted requirements:

First, prioritize the order. Based on local economic and social development needs, project nature, and financial conditions, prioritize the implementation of projects with certain returns; other projects should be reasonably prioritized according to urgency and importance, advancing steadily and orderly in stages. For projects that have not started construction by the end of 2024, the principle is not to implement them using the PPP stock project model; if it is necessary to start construction, other models may be adopted.

Second, accelerate construction progress. Further verification of project construction content is required, compressing implementation scale, optimizing construction standards, and adjusting supporting content to reduce unnecessary construction costs, which should not exceed the approved total investment budget. For projects nearing completion, efforts should be made to expedite construction, timely acceptance of final accounts, and early operation.

Third, ensure financing needs. Financial institutions are required to conduct objective assessments and actively support financing for ongoing projects. For projects with signed loan agreements, they should perform according to the contract and timely disburse loans; for projects without signed loan agreements, thorough due diligence should be conducted to reasonably determine loan scale, interest rates, terms, collateral, and other credit conditions. At the same time, financial institutions should optimize credit approval processes, not terminate or stop without reason, and should not require local governments or relevant departments to provide commitment or certification documents.

Five, how to understand the "comprehensive use of various resources and policy tools" proposed in the "Guiding Opinions"?

PPP stock projects are divided into three categories: fully government-paid projects, feasibility gap subsidy projects, and user-paid projects, among which fully government-paid projects and feasibility gap subsidy projects require government subsidies. Promoting the smooth operation of stock projects requires specific analysis based on local conditions, as well as a systematic approach to coordinate funding resources from various parties, using multiple measures to strengthen guarantees.

First, fully arrange the budget and strictly implement it. The government expenditure responsibilities in PPP stock projects should be included in budget management, and according to budget management procedures, the construction costs and operational subsidies borne by the government should be included in budget management, strictly implementing the expenditure plan, and not misappropriating or unilaterally changing the intended use of budget funds for PPP stock projects.

Second, make good use of local government bond tools. For eligible ongoing projects, local governments can comprehensively utilize special bonds, general bonds, and other funds for government expenditures in the construction costs of PPP stock projects. For projects that have been completed and are operational, local governments can arrange the use of relevant local government special bond funds as required, orderly addressing the issue of social capital pre-financing construction costs, and promoting the continuous operation of PPP stock projects.

Third, integrate relevant funding resource channels. While fully utilizing budget and bond tools, local governments should comprehensively use central transfer payments and local self-owned funds reasonably for the construction costs and operational subsidies of stock projects. PPP stock projects involve specific industry sectors, and industry regulatory departments should fully play their roles and make good use of relevant funds to effectively ensure the smooth implementation of stock projects across various industries. In addition, the "Guiding Opinions" also propose requirements such as "incorporating PPP stock projects into future relevant incremental policies for overall consideration." 6. How to Promote the Better Implementation of the "Guiding Opinions" Involving Various Participants and Interest Groups in PPP Stock Projects?

The construction and operation of PPP stock projects involve multiple departments, links, and entities, requiring local governments to play a leading role in organizing relevant departments, social capital parties, and financial institutions within their jurisdiction to strengthen collaboration and form a working pattern of government coordination, departmental collaboration, division of responsibilities, and joint management.

First, local governments should take on the main responsibility. Local governments, especially provincial governments, should implement their main responsibilities and territorial responsibilities, establish and improve management systems such as performance evaluation and mid-term assessment according to local conditions, and organize effective implementation. Regions should take practical measures to standardize project construction and operation, ensuring the legal rights and interests of all parties. At the same time, they should carry out policy publicity and interpretation, and respond promptly to concerns from relevant parties.

Second, industry regulatory departments should fulfill their supervisory responsibilities. Strengthen guidance, coordination, and supervision of project units, develop performance indicator systems, industry technical standards, and technical specifications for public products or services, and enhance the supervision of public utilities and public service quality. Ensure proper handling of land use planning permits, environmental impact assessments, construction project commencement permits, and project investment change approvals. Strengthen guidance for implementing agencies and standardize the behavior of intermediary agencies.

Third, financial departments should strengthen budget and debt management. According to budget management procedures, include the construction costs and operational subsidies borne by the government in budget management. Strengthen local government debt management; local governments raising construction funds through the issuance of government bonds must not exceed the statutory limit.

Fourth, financial management departments should enhance coordination of financial policies. Strengthen business guidance for financial institutions, support and guide financial institutions to legally and compliantly conduct credit business for PPP stock projects and reasonably optimize financing structures, actively supporting the reasonable financing needs of PPP stock projects.

Fifth, project implementation agencies should manage projects effectively. Carry out completion acceptance, performance evaluation, information sharing, and supervision of project companies, supporting all participants in obtaining information and promptly informing relevant parties of significant adjustments and changes. For ongoing projects, strengthen the supervision and management of project assets in conjunction with completion acceptance or asset acceptance; for projects already in operation, enhance supervision and management of asset registration, usage, disposal, inventory, and property rights protection.

This article is compiled from: Ministry of Finance official website; Edited by Zhitong Finance: Chen Xiaoyi