Recently, the Ministry of Finance issued the “Notice on Standardizing the Management of the Project Database of the Comprehensive Information Platform for Public-Private Partnerships (PPP)” (Cai Ban Jin [2017] No. 92, hereinafter referred to as the “Notice”). In connection with this, a relevant official from the Ministry of Finance provided an interpretation of the “Notice.”

　　I. What is the background behind the issuance of the “Notice”?

　　Since the end of 2013, after the state has vigorously promoted and applied the Public-Private Partnership (PPP) model, with more than three years of concerted efforts from all parties, PPP initiatives have made significant progress. The market environment has been steadily optimized, project implementation has accelerated continuously, and PPP has played an important role in stabilizing growth, promoting reform, and improving people’s livelihoods. However, during the development process, some localities have increasingly exhibited irregular practices, such as overgeneralizing and misusing the PPP model, and even using PPP as a disguised form of financing, thereby exacerbating the risks of implicit local government debt. Since this year, the Party Central Committee and the State Council have emphasized placing risk prevention in a prominent position. Both the National Financial Work Conference and the Executive Meeting of the State Council have issued clear directives on controlling the risks of implicit local government debt and rectifying irregularities in the PPP model. To implement the decisions and deployments of the Party Central Committee and the State Council, the Ministry of Finance, together with relevant departments, has previously issued the “Notice on Further Regulating Local Government Debt and Financing Activities” (Cai Yu [2017] No. 50), which strictly prohibits borrowing and financing under the guise of PPP. Building on this foundation, and in order to further address the phenomenon of overgeneralization and misuse of the PPP model, we have drafted this “Notice.” The aim is to take the management of the PPP Comprehensive Information Platform Project Database (hereinafter referred to as the “Project Database”) as a key lever to further standardize the operation of PPP projects, guide PPP back to its original purpose as an innovative mechanism for providing public services, and promote the sustainable development of the PPP initiative.

　　II. What are the main contents of the “Notice”?

　　The Notice puts forward three key measures to standardize the management of the project database: First, implement categorized management. The project database will be divided into a reserve list and a project management database based on project stages. Projects listed in the reserve list will focus on incubation and promotion, while projects in the project management database will be subject to stringent oversight to ensure standardized operations throughout their entire lifecycle. Second, unify the criteria for adding new projects to the database. It is clearly stipulated that projects unsuitable for implementation under the PPP model, those lacking adequate preparatory work, or those without an established performance-based payment mechanism shall not be included in the database, thereby enhancing the quality of projects admitted. The notice also clarifies the next policy direction: giving priority support to revitalizing existing public assets through the PPP model, proceeding with caution in government-payment projects, and preventing rapid growth in fiscal expenditures that could exceed the government’s fiscal capacity. Third, organize centralized cleanup of projects already included in the database. Local finance departments will be tasked with identifying and removing from the database projects that are operated improperly, lack the necessary implementation conditions, or have incomplete information. This initiative aims to encourage localities to establish and improve regular management mechanisms featuring dedicated personnel, continuous monitoring, and dynamic adjustments, thereby enhancing both the quality of information and the overall management level of the project database.

　　III. What specific provisions does the “Notice” make regarding strengthening performance management of PPP projects?

　　To implement the PPP philosophy of placing operation at the core and performance as the guiding principle, promote a shift in PPP projects from emphasizing construction to emphasizing operation, and ensure the long-term stable operation of these projects, the Notice has taken the following measures to encourage the establishment of performance-based payment mechanisms for projects:

　　First, government payments should be linked to project performance evaluation results, thereby strengthening the incentive and constraint effects of project output performance on returns to social capital. This will prevent the government from assuming unconditional payment obligations for all project expenditures, thus avoiding the distortion of PPP into a prolonged version of BT.

　　Second, both the construction costs and operating costs of government-funded projects should be paid based on performance assessment results. Moreover, the portion of construction costs subject to performance assessment must account for at least 30% of the total construction costs. This measure is intended to prevent certain current projects from using the so-called “availability payment” approach—under the guise of “payment upon project completion”—to prematurely lock in the government’s unconditional obligation to pay construction costs, thereby weakening the binding force of project operational performance assessments.

　　Third, government payments should be arranged continuously and smoothly throughout the project’s cooperation period, preventing excessive deferral of fiscal expenditure responsibilities in an effort to launch more projects, which could exacerbate fiscal expenditure pressures in subsequent years and lead to intergenerational imbalances. At the same time, this approach also avoids concentrating fiscal expenditure responsibilities too far ahead of time, enabling private capital to quickly recover most of its investment and thus facilitating early exit from the project.

　　IV. What requirements does the “Notice” set forth regarding the standardized management of PPP project financing?

　　In response to the current issues—such as insufficient financing for some PPP projects, difficulties in starting and implementing these projects, and the failure of social capital to make actual contributions or to contribute the full amount required by regulations, which in turn drives up project leverage ratios and reduces the risk-resistance capacity of project companies—the Notice has adopted the following measures to strengthen project financing management:

　　First, social capital is required to fulfill its debt financing obligations for the project as stipulated in the contract, thereby preventing the project from being shelved or even failing due to insufficient or delayed funding.

　　Second, both the government and social capital are required to strictly comply with the state’s relevant regulations on the management of equity capital for fixed-asset investment projects, promptly and fully contributing the required project equity capital. Debt financing must not be used as equity capital, so as to prevent the “hollowing out” of equity capital, which could lead to a weakening of social capital’s long-term operational responsibilities and exacerbate the phenomenon of overemphasis on construction at the expense of operations.

　　Third, it is required that shares held by social capital may not be held on behalf of the investors by third parties. This measure aims to curb the current practice whereby some social capital entities, after winning a bid, arbitrarily designate their affiliated companies, subsidiaries, funds, or other third parties to fulfill their capital contribution obligations on their behalf. It also addresses the irregular practice in which certain members of joint ventures merely undertake project construction or design tasks without actually contributing capital or taking equity stakes. By doing so, we can ensure the seriousness and fairness of the social capital selection process and firmly establish the investment, construction, and operational responsibilities of social capital entities.

　　V. How will the project database cleanup be organized and implemented? Are there any deadlines?

　　The “Notice” stipulates that the provincial-level finance departments shall uniformly organize the finance departments of cities, districts, and counties within their jurisdictions to carry out a centralized review and cleanup of projects to be included in the database. The PPP Center of the Ministry of Finance is responsible for conducting the cleanup of PPP demonstration projects under the jurisdiction of the Ministry of Finance.

　　The deadline for completing the centralized cleanup is March 31, 2018. For regions that fail to complete the cleanup work by the deadline, the PPP Center of the Ministry of Finance will provide guidance and urge them to make rectifications within 30 days. If a region fails to complete the rectifications on time or the rectifications are insufficient, new projects in that region will be suspended from being included in the database until the rectifications are fully completed.

　　6. How should we view the role and impact of the issuance of the “Notice”?

　　The issuance of the “Notice” aims to rectify the deviations and distortions that have emerged in the implementation of current PPP projects, further enhance the quality of projects included in the project database, and improve the effectiveness of information disclosure, thereby better accommodating public oversight. The removal of certain projects that were never suitable for implementation under the PPP model will help restore clarity and authenticity, and promote the orderly advancement of PPP projects as well as the efficient allocation of public resources. After being refined and improved in accordance with the requirements, some projects will become more standardized and transparent, facilitating comprehensive lifecycle management. In the long run, the dynamic nature of the project database—where projects are both added and removed—will encourage all stakeholders to place greater emphasis on standardized operations and project management, helping to prevent and control risks, bolster market confidence, and foster the long-term sustainable development of the PPP sector.