Market players have become increasingly engaged in infrastructural projects as the government gradually opens up investment in them. A variety of transaction modes for market players to participate in infrastructure investment can be divided into “standard modes” and “non-standard modes”, depending on whether they have a clear legal basis.
In practice, standard modes mainly include the public-private partnership (PPP) and franchise modes, while non-standard modes mainly include financing and construction, authorisation and equity co-operation, and investment co-operation.
In this article, the authors perovide details on compliance in both the standard and non-standard investment modes.
The key to compliance of standard modes is assessing whether they comply with provisions of the relevant applicable laws, depending on whether it is an investment in PPPs or franchises. For PPPs, attention should be paid to the following compliance matters:
(1) Project nature and term of co-operation. A PPP project is actually a public welfare project in the field of public service, so the term of co-operation should in principle be more than 10 years;
(2) Risk-sharing mechanism. The government mainly bears policy and legal risks in a PPP, while social capital is mainly responsible for project investment, construction and operation, bearing corresponding risks;
(3) Pay-for-performance mechanism. PPP projects should establish a payment mechanism fully linked to a project’s performance – without fixing the scope and amount of the expenditure responsibility of the government in advance – by lowering the assessment criteria or government repurchases of investment principal from the social capital, promises of fixed returns or guarantees of minimum returns;
(4) Procurement in compliance with legal procedures. The government should select its market investor through competitive means such as public tendering, selective tendering and competitive negotiation;
(5) Compliance of implementation process. As no formal laws or administrative regulations have been issued for PPP projects, specific implementation should mainly follow the normative documents issued by the Ministry of Finance, National Development and Reform Commission (NDRC) and other relevant national ministries and commissions. For example, prepare and submit project implementation plans to the local government for approval, and perform procedures for value-for-money evaluation and financial affordability evaluation as required.
For franchises, important compliance matters are substantially similar to the PPP mode. However, the specific implementation of projects should follow relevant provisions of the Measures for the Administration of Concession for Infrastructure and Public Utilities promulgated by the NDRC.
For example: prepare and submit franchise project implementation plans to the local people’s government or its authorised department for approval; conduct project feasibility and value-for-money evaluation as required; and carry out financial affordability evaluation for projects requiring viability gap funding from the government.
Lack of uniform legal provisions for non-standard modes means that compliance analysis cannot be accomplished by measuring how well it follows applicable requirements of relevant legal documents, but instead whether any prohibitive provisions are violated under applicable laws. Main points of concern are:
Government implicit debt should be avoided. The Budget Law stipulates that the budgets of local governments at all levels shall be prepared according to the principles of “keeping expenditures within the limits of revenues and maintaining a balance”, and no deficit shall be listed unless otherwise provided for in the Budget Law.
A portion of funds necessary for construction investment in the budgets of governments of provinces, autonomous regions and municipalities approved by the State Council may be raised by issuing local government bonds (general or special bonds), within a limit determined by the State Council. Otherwise, local governments and their subordinate departments may not borrow debt in any way.
According to the Government Procurement Law, government procurement shall be carried out in strict accordance with approved budgets. Procurement of goods, projects and services should not be conducted before relevant budgets are in place.
Therefore, for non-standard modes involving government funds, the use of such funds should comply with the above-mentioned regulations – otherwise, it may constitute government implicit debt.
Advance-fund construction is prohibited for government investment projects. According to the Government Investment Regulations, government investment projects are directly invested by the government or with its capital injection. Funds required for government investment projects should be in place in accordance with relevant state regulations, and construction entities may not advance funds for them.
Compliant use of expected state-owned land use right transfer revenue. Since infrastructure projects often involve large investments, a certain amount of profit-oriented land revenue is usually used to supplement the funding of projects operated by market players.
However, it should be noted that land use right transfer revenue is a budget for the government-managed fund and its use should strictly follow the principle of “revenue and expenditure separation”, according to the methods and scope of use stipulated in the Measures for the Management of Income and Expenditure from the Transfer of the State-owned Land Use Right.
In addition, according to the Notice of the Ministry of Finance on Further Regulating the Debt Financing of Local Governments, local governments are not allowed to commit expected land use right revenue from reserve land as the source of debt-repayment funds for financing platform companies.
Therefore, if a portion of profit-oriented land revenue is needed to supplement the funding of projects operated by market players, attention should also be paid to legal compliance of the supplementing mechanism.
This analysis of compliance of transaction modes of market players’ participation in infrastructure project investment is based on the authors’ practical experience.
As for specific projects, the authors suggest that all participants pay sufficient attention to compliance of the relevant transaction modes, and fully analyse and demonstrate such compliance from an early stage of the project to lay a solid foundation for sound implementation and realisation of investment revenue.