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Six years of PPP: the future of China's environmental protection industry

2019-05-23 09:59:14

Since the intensive PPP policy was introduced in 2013, related projects have been launched on a large scale. In the past six years, the industry has also experienced a process from start to brutal growth to falling into the bottom.


Just as the society’s rethinking of PPP has come and gone, the Ministry of Finance recently issued the “Implementation Opinions on Promoting the Standardization of Government and Social Capital Cooperation” (hereinafter referred to as “Implementation Opinions”), marking the industry’s gradual entry into the stage of rational development.

In the era of standard development, only companies with a more thorough understanding of the public service sector, stable cash flow, and stronger financing capabilities can stand out from the crowd and truly survive the industry downturn.


Where does the PPP model come from, and why does the government push it?


In recent years, China's urbanization has two major drivers: land finance and local government borrowing have changed.


With the country's regulation of the real estate market and the establishment of the policy of “staying and not speculating”, the model of relying on real estate to drive the economy as in the past has ended, and the economic development model supported by local land finance is no longer effective, thus affecting local governments. Revenue. One of the tasks in the supply-side reforms in recent years has been to leverage, which is to reduce the debt of local governments and local platform companies. It is also out of place to promote urbanization through debt issuance and leverage.


In the case that land finance is unsustainable and local governments are no longer leveraging, in order to achieve the requirements of national governance modernization, fiscal system reform, new urbanization, and local debt settlement, it is necessary to effectively use social stock funds to help the government to urbanize. Construction, the PPP model has become a key link between government and social capital.


The PPP model, through a model of government and social capital cooperation, establishes a long-term cooperative relationship in the field of infrastructure and public services, while at the same time achieving the public construction function, it also brings benefits to the private sector. The PPP model can reduce government debt as the private sector shares the initial financial input of the public sector. PPP is responsible for the design, construction, operation and maintenance of social capital, and obtains a reasonable return on investment through “user pays” and necessary “government payment”; the government is responsible for the price and quality supervision of infrastructure and public services to ensure the public interest is maximized. . If used well, the PPP model will enable both the public and private sectors to achieve a win-win situation.


In 1992, the UK first applied the PPP model. In developed countries, this model has also been widely used in infrastructure construction, such as water plants, power plants, highways, and environmental protection projects.


Since 2014, with the Ministry of Finance and the National Development and Reform Commission vigorously promoting the PPP model, China has become the world's largest PPP market.


What is the current status of the PPP industry and what are the most common problems?


After nearly six years of development, the PPP market is characterized by continued expansion of the overall scale and accelerated project landing. According to the Ministry of Finance, there are currently 8,839 PPP warehousing projects in China, and the amount of warehousing projects is 13.41 trillion yuan. Among them, municipal engineering, transportation, ecological construction and environmental protection, urban comprehensive development, water conservancy construction and education projects are the most concentrated, accounting for about 80% of the total. The development of PPP mode is unbalanced in various industries. The municipal engineering with high investment and clear profit model is still a hot spot of PPP.


In the course of PPP development, some problems have inevitably emerged and have been concentrated in the past two years. Since the PPP model has been accelerated, a large amount of funds have swarmed and local investment construction has become overheated. However, due to insufficient preparation in the early stage, the generalization and alienation of PPP projects frequently occurred, and the industry service capability could not keep up with the speed of project launches.


In the policy environment of financial deleveraging, many successful bidders of PPP projects are in financial difficulties. The financing channels have narrowed, the financing costs have risen, and financial institutions have been more cautious about PPP project loans, which has caused many companies' capital chains to break, resulting in the suspension of PPP projects.


Take the well-known listed companies in the environmental protection industry and the oriental gardens that were aggressive in the PPP project in the early stage. The company has quickly won many PPP environmental protection projects since 2015. The performance growth and the company's expansion speed can no longer be achieved. In the fastest expansion of 2017, Oriental Garden won the bid for 88 PPP projects with a total investment of 143.451 billion yuan. In the field of environmental protection, it has also surpassed the “veterans” such as Bishuiyuan and Beijing Enterprises in the deep-growing industry for many years.


However, due to the tightening of the financing environment, the company had problems such as difficulties in bond issuance, multiple job stoppages, and wage arrears. Lastly, it led to a series of problems such as stock price plunging and stock pledge.


Second, the insidious debt of some local governments has intensified, which runs counter to the proper meaning of the PPP model. The Ministry of Finance stipulates that the annual expenditure for the payment and subsidy of all PPP projects cannot exceed 10% of the local general public budget expenditure, plus some local governments have not included specific infrastructure operating expenses into the budget, or the corresponding budget is severe. Insufficient, and there is no clear and stable source of paid funds, which makes it unable to pay the relevant expenses of the enterprise on time and in full, which makes the accounts receivable of the company remain high, which aggravates the problem of hidden debts of local governments.


In the context of stricter regulation, due to concerns about the deterioration of government debt, many local governments with limited financial capacity have called for PPP projects “one size fits all”, resulting in a significant increase in corporate financing costs for participating in these projects.


Some local governments are waiting to see the central policy orientation, requiring all government-invested projects that are not built and not started to stop construction. The PPP projects with less cash flow and lack of operational nature are strictly restricted to prevent the government debt risks.


The various problems in the implementation process of PPP projects also reflect that the current operation of China's PPP model lacks the support of national laws and regulations, and social capital faces the problem of imperfect legal protection.


In the PPP market where the government dominates the voice, some local governments pay too much attention to their own financial pressures and neglect the responsibilities they need to bear, resulting in the absence and misplacement of the government's role, the smooth implementation of PPP projects, and the enthusiasm of social capital to participate in PPP projects. Have a big impact.


PPP will gradually enter the era of normative development


It is precisely because of the various problems encountered in the process of practicing the PPP model that the country began to gradually release industry norms to guide the industry back to a healthy development track.


In the second half of 2017, the state began to issue relevant documents, including “No. 87 Document”, “No. 92 Document” and “No. 192 Document” from the Ministry of Finance, and “No. 2698 Document” jointly issued by the National Development and Reform Commission and the China Securities Regulatory Commission.


Recently, the implementation opinions issued by the Ministry of Finance clearly define the conditions for the standard PPP projects to be met: public welfare projects belonging to the public service sector. The cooperation period is in principle more than 10 years, and the value-for-money evaluation and financial sustainability are performed according to the regulations. Argument procedures, etc.


The implementation opinion also stipulates that the new government-paid projects should, in principle, meet prudential requirements. For example, areas with fiscal expenditures accounting for more than 5% of the total, and no new government-paid projects.


“Specifications” are the key words in the implementation comments, and the many details in the industry are regulated. However, the document did not “suppress” the PPP model, but instead increased support for the regulated PPP project.


For example, the implementation opinions show that it is necessary to encourage the participation of private capital and foreign capital, increase financing support, focus on key areas, and guarantee reasonable expenditure. It also mentioned the introduction of high-quality projects with good government credit and stable project income to private enterprises, and given priority support to private enterprises participating in projects under the same conditions.


Many industry insiders believe that the release of the implementation opinion indicates that PPP has entered the development stage of the specification adjustment, bringing confidence to the PPP project that is market-oriented and standardized.


The expert of the PPP Institute of the China Academy of Fiscal Science told the Economic Information Daily that the implementation opinion was another programmatic document after the Ministry of Finance issued the “Guidelines for the Operation of Government and Social Capital Cooperation Models (Trial)”. The above is inherited, the role is leading, and does not emphasize the validity period of the document, indicating that PPP enters the normative normalization adjustment development stage.


Jin Yongxiang, general manager of Da Yue Consulting, told the media that the implementation of the opinions clearly stipulated the conditions for standardizing PPP, and set clear boundary conditions for local governments to operate PPP, which would greatly improve the operational efficiency of PPP.


Some companies will stand out


Under the background of stricter regulation and industry standardization, only enterprises with good financing ability and compliance with industry norms can achieve sustainable development in the PPP industry.


On the one hand, most of the PPP projects have the characteristics of public welfare or public goods, so they have the characteristics of long investment return period, slow cash flow return, and high requirements for capital and financing capacity. On the other hand, the characteristics of the PPP industry require that companies participating in the cooperation cannot have “excessive returns”.


Because of the above characteristics, many viewpoints suggest that state-owned enterprises and central enterprises may be more suitable for the social capital side of PPP.


"Securities Daily" said that central enterprises are the main players in the current PPP market. The media quoted experts as saying that central enterprises have the advantages of strong capital, strong financing ability, high-quality talent reserves, and easier coordination with local government disputes, making them the most important social capital side of PPP business.


A typical case is the old-fashioned color TV company Konka. Last year, Konka began to implement a new development strategy oriented toward transformation and upgrading. At present, Konka’s main concept in A-share listing is “PPP”. Konka’s annual report last year showed that its revenue share in the PPP model has increased from "0" in 2017 to 6.78% last year. Since its establishment in May last year, Konka Environmental Protection Division has won 15 PPP projects with a total order value of over 11 billion yuan.


Konka’s major shareholder, OCT, is the background of state-owned assets, behind the SASAC. With the background of state-owned assets and relative financing facilities, Konka quickly cut into PPP environmental protection projects in a short period of time, and in the case of many environmental protection enterprises facing financing difficulties, they were able to expand against the trend.


However, Huang Zhilong, director of the Macroeconomic Research Center of Suning Financial Research Institute, reminded that enterprises with state-owned backgrounds also face risks in participating in PPP. First, the risks of PPP projects themselves include relatively insufficient consideration for project profit prospects and cash flow. Second, participation in PPP The leverage of the project is too high.


It can be seen that even state-owned enterprises and central enterprises cannot rush into the PPP field. Enterprises that can enter the track must first have confidence in their cash flow, and their central enterprise background can further provide guarantee for the smooth implementation of the project.



At a time when the PPP industry is increasingly standardized, companies that can closely follow the national PPP policy, return to the industry, and have financing facilities and risk control capabilities can achieve better development in the PPP field


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