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Ministry of Finance Seeks New Model for Local Gov'ts to Finance Projects


(Beijing) – A model of financing infrastructure projects called a public-private partnership (PPP) has been a topic of conversation among officials around the country recently.

The PPP model sees the government cooperate with private investors to build infrastructure projects and develop public utilities. The projects include roads, airport and power plants.

The model has been used in the past in China. The Beijing city government partnered with three private businesses to build and operate Line 4 of the subway from 2004.

The Cities Development Initiative for Asia (CDIA), an international partnership initiative that provides assistance to medium-sized Asian cities on urban investment projects, has been holding training sessions on the model for financial officials in Beijing, the northeastern city of Harbin and the central city of Luoyang in recent months. The CDIC, which is cooperating with the Ministry of Finance, will hold more sessions this year.

The State Council, the country's cabinet, held a meeting on July 31 2013 to discuss ways to attract private funding for infrastructure projects. The cabinet released guidelines for this in September.

"It's a signal the government wants to push forward with the PPP model," said Wang Shouqing, a professor at Tsinghua University's Department of Construction Management.

The finance minister, Lou Jiwei, said at the end of 2013 that the PPP model will play an important role as the country modernizes and urbanizes, and the government changes its role in the economy from player to supervisor.

Many local governments are interested in the new model because they have big debts but a lack of money. In the past, when local governments were short of cash, they would use the build-transfer model for infrastructure projects. Private businesses would build the projects, and then transfer them to the government. Because the credit relationship was not clear, the governments took the projects and big debts.

The new approach indeed has the potential to resolve local governments' debt problems, a report by a research institute under the ministry says.

Better Contracts

The Ministry of Finance is pushing the PPP model, and mentioned it in a report on the 2014 budget. The ministry also held training sessions for financial officials on the idea on March 17 and 18.

Wang Baoan, the vice minister of finance, said at the sessions that the ministry was promoting the model in a variety of ways. He also said the ministry asked some local governments to carry out trials as soon as possible, and will give financing support through channels such as the central government budget.

Some local governments are already working on trials. The Asian Development Bank (ADB) lent Harbin and Luoyang US$ 100 million each for PPP projects. The ministry has also selected the eastern province of Jiangsu to serve as a testing ground. Other provinces, like Hunan in the central part of the country and Zhejiang in the east, have also asked to run trials.

However, there are questions as to whether the model will succeed because some PPP projects failed in China in the 1990s. Wang, the professor at Tsinghua, blamed those problems on local governments breaching their agreements with private enterprises.

The government is working to ensure local governments and private businesses have equal standing in the future, Wang, the professor at Tsinghua, said. He said future contracts would be protected by civil and commercial laws.

Laws Needed

China has tried to find ways to attract private capital into infrastructure and public utility projects in recent years, but its efforts had little effect. This was largely due to a large of legal support, Professor Wang said. He suggested the legislature pass special laws on PPP and the government set up special departments to supervise and manage projects.

There would seem to be some progress on this front. In December, the National People's Congress, the country top legislature, said research on such a law should begin so draft legislation can be written.

The National Development and Reform Commission, the county's economic planner, began research on a draft in 2007, and plans to submit it to the State Council this year.

Also, Wang, the vice minister of finance, said the ministry will set up departments to manage PPP affairs. In the past, a PPP project had to get approval from many different departments, a process that took a long time and allowed officials to abuse their powers, he said.

A high-level department will help promote the PPP projects, said Sun Jie, a researcher under the Ministry of Finance.

The ministry might first set up a PPP center, Professor Wang said. The center could serve to establish regulations and gather information on how projects have worked out.

The central government also discussed the feasibility of local financial departments setting up PPP centers, and "some provinces and cities are interested," Vice Finance Minister Shi Yaobin said at a symposium on February 11.

Local governments should be aware of the potential risks in the PPP model, said ADB president Takehiko Nakao said at a forum on March 23. Professor Wang agreed. "It is wrong for local governments with lots of debts to use the PPP model to solve their problem" he said.

From : CaixinOnline

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