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Deputy Finance Minister Wang Baoan: Vigorously Promote the Application of PPP Model

2016-05-08

The Decisons of the Central Committee of the Communist Party of China on Several Major Issues of Comprehensively Deepening Reform promulgated at the third plenary session of the 18th CPC Central Committee is the most systematic and inclusive reform deployment in the history of our Party and is the guiding document for comprehensively deepening reform under the new circumstances. The Decisions has made clear and specific requirements in order to accelerate the transformation of government functions, build the sound urbanization development system and mechanism and facilitate management innovations in city construction. The Decisions points out that we must enhance the responsibilities and abilities of macro-control of the central government as well as strengthen the responsibilities of public services, market supervision, social management and environment protection of the local governments. To promote the practice of government purchasing services means that, regarding transactional work services, the governments should in principle introduce the competitive mechanism to make purchases from the society through contract or commission. At the national fiscal work conference at the end of last year, by the specific instructions of Minister Lou Jiwei, the Public-Private Partnership Session was convened, during which a comprehensive and systematic work deployment on developing PPP model was made from the perspective of systematic and mechanism innovations. At present, Ministry of Finance is promoting PPP model in multiple aspects including institutions, organizations, projects and capacity building. Following the instructions of Minister Lou that “ to organize PPP work training sessions and make real efforts to promote PPP model”, Ministry of Finance held this PPP training session with the purpose to deepen the understanding and practical abilities concerning PPP work of local financial departments at all levels, financial institutions and large enterprises. And here I would like to provide some suggestions on how to conduct PPP model promotion following the spirits of the third plenary session of the 18th CPC Central Committee and the national fiscall work conference.

 1. Why should we vigorously promote the application of PPP model under the new circumstances?

 As to the meaning of promoting the application of PPP model under the new circumstances, Minister Lou has given a comprehensive, profound and systematic explanation at the national financial work conference at the end of last year. We have printed and distributed Minster Lou’s speeches as training materials for this session. I hope you can read them carefully. Besides, I would like t reiterate three points.

 First, promoting the application of PPP model is an important way to support the new urbanization construction. Urbanization is necessary to realize modernization and is every important for building a moderately well-off society in an all round way and accelerating the socialist modernization. According to relevant estimation, currently the urbanization rate of our country is 53.6%, but if counted by the registered population and taking the factors of public services into consideration, that figure would be much less. And the urbanization rate is predicted to reach 60% by 2020 and thus would lead to an investment demand of about 4.2 billion RMB. Since the drawbacks of the investment and financing system that mainly relies on public finance and land transaction have begun to come out, making it difficult to sustain the current system, it’s urgent for us to establish a standard and transparent investment and financing mechanism of urban construction. And PPP model effectively addresses the key issue of the financing demand of urbanization and can attract social capital and helps to broaden the financing channels for urbanization, thus creating a diverse and sustainable funding mechanism.

 Second, promoting the application of PPP model is an important measure to improve the public services of the government. Promoting the modernization of the state governing system and capacity is one of the overall objectives of the third plenary session of the 18th CPC Central Committee to comprehensively deepen reform. This is a major theoretical innovation both in management and governance. It stresses the sound interaction between multiple subjects: the government, the market and the society as well as clear and equal responsibilities and obligations based on their respective roles. And PPP model can combine the strategic planning, market supervision and public services of the government with the management efficiency and technological innovations of the social capital in a sound way, and thus can help distinguish the roles of the government and the market, improve the legal system, contract and market consciousness of the government so that the government can better implement its public functions and comprehensively improve the public service quality.

 Third, promoting the application of PPP model is the intrinsic requirement to build the modern fiscal system. Public finance is the basis and important support of state governance and the financial institution demonstrates the relations between the government and the market, the government and the society, as well as the central and the local governments. As PPP model stresses the role of the market mechanism, the complementary functions of the government and the social capital, and the deep engagement of the social capital that can effectively alleviate the debt pressure of the government and balance spending between fiscal years, it conforms to the requirements of the modern fiscal system to optimize allocation of resources and promote social justice and its budget management that features “One Commitment, Payment by Installment and Adjustment on Regular Basis” is highly consistent with the modern fiscal system.

 2. Main tasks in promoting the application of PPP model under the current circumstances

 Currently, our country is facing a complicated environment for economic development. In terms of the domestic circumstances, we are in the middle of an unusual stage that witnesses the switch of economic acceleration, the pain of structural transformation and the digestion of policies while in terms of the external environment, the profound implications of the international financial crisis still linger on and the recovery of the global economy remains fragile. However, we should notice that opportunities always come with challenges. The long-term economic development of our country basically remains sound and the comprehensively deepening reform will certainly motivate strong internal development growth. And the huge investment potential in urban and rural infrastructure construction is an important acting point for breakthroughs where PPP model can play an great role. The financial departments at all levels must fully implement the decisions made at the third plenary session of the 18th CPC Central Committee so as to bring the fiscal functions into a better play as well as vigorously promote the application of PPP model.

 First, “remove obstacles and clarify rules” in order to build a friendly institutional environment for the development of PPP model. A sound system is fundamental to the comprehensive and long-term development. Based on experiences in other countries, as PPP is a long-term cooperative relationship, one of the key factors to attract social capital is to establish stable and predictable policy environment as well as reduce policy risks while in domestic practices, the current regulations and policies concerning PPP are mostly department rules or local regulations that lack authority. And some of the documents are even contradictory to each other, for example, the names and content of different models and the transfer and ownership of project proprietorship. So, in order to promote the application of PPP model, we should go through the current regulations and policies to remove the contradictory institutional obstacles and further clarify the operation rules of PPP projects, including market access, government procurement, budget management, risk allocation, process management, performance evaluation and dispute settlement. Local financial departments at all levels should on the basis of the actual situations actively promote the establishment of a friendly institutional environment that inspires and leads social capital to engage in PPP projects and brings its initiatives into full play to realize multilevel and diversified development.

 Second, “fulfill responsibilities and enhance implementation” by facilitating the establishment of PPP coordination and management organizations. According to the work division plan of the Decisions, Ministry of Finance is the first person responsible for implementing the reform measure of “allowing social capital to participate in urban infrastructure investment and operation through franchise”. As the saying goes, what worries the governor is that there is no policy but even worse is that good policies are not implemented. That is to say, with sound deployment and good institutional environment, we also need full implementation. Looking at the international experiences, the financial departments of UK, Australia, Canada and some other countries have established special PPP management organizations to promote the development of PPP model, whose responsibilities include research and design, project reserve, funding support, management of bidding and tendering and dispute settlement. Since 1990s, China has started PPP practices which are mainly spontaneous exploration from bottom to top and limited to the project level and lack summaries of experience, institutional arrangement and theoretical guidance. At present, Ministry of Finance is working on the PPP work mechanism and actively promoting the establishment of PPP management organizations to provide more coordinated guidance on risk allocation, competitive mechanism, reasonable commitment of the government and subsequent contract management. Some local departments have proposed to explore the establishment of PPP management organizations when learning Minister Lou’s speeches on PPP. And the departments with sufficient conditions should take actions as soon as possible without wasting time waiting for help to establish effective organizations for further progress.

 Third, “focus on setting up good examples” and launch PPP pilot projects as soon as possible. PPP is a widely adopted financing model by the international community in infrastructure construction, has abundant practical experiences and has formed relatively mature working process and standards in different stages such as project selecting, planning, calling for bids, designing, construction and operation. In domestic practices, there are successful and unsuccessful PPP projects. And the key to successful PPP project lies in institutional design, scientific evaluation and honor of commitments. In order to promote PPP model in China, we should take the development conditions of the industries and the supervision and management systems into consideration while learning from international experiences and conduct some pilot projects to accumulate experience and formulate relatively uniform models. Minister Lou pays high attention to the PPP project pilot and has made clear instructions that we must develop some PPP projects in the real sense. In the early stage, we have conducted surveys about the infrastructure construction in some places and made profound researches. There is a saying that choose things with more incomes than losses to do. Similarly, we can consider choosing projects with relatively stable benefits, relatively large investment scale, and relatively clear long-term contractual relation and relatively mature technology as pilot projects. And we can also upgrade current projects by introducing PPP model. Up to now, we have asked some local authorities and departments to provide some projects as options and are making selections. Local financial departments at all levels and relevant enterprises can contact with us if you have projects to recommend. And local financial departments at all levels should focus on profitable projects in promoting PPP model and conduct a scan of the existing and newly-added urban infrastructure construction projects so as to select proper pilot projects as soon as possible. We will follow the process and provide financing support through multiple channels including the infrastructure construction budget of the central government, foreign government loans, insurance funds and pension.

 Fourth, “enhance consensus and improve abilities” to promote publicity and training concerning PPP model. In-depth and effective publicity and training are important guarantees to promoting the application of PPP model and help to build the friendly market environment and social environment. In foreign experiences, it is one of the important functions of PPP coordination and management organizations to conduct publicity and training, which have played an important role in promoting PPP model. Currently, Ministry of Finance has conduct publicity to a certain extent on PPP model through media including newspapers, magazines and websites. The next step is to further enhancing publicity and training by focusing on: firstly, organize all-dimensional and multi-level training right away to let the relevant staff of the financial departments and enterprises understand the operation model and key management points of PPP in order to promote better practice. And special training sessions for the staff of financial departments at the grassroots level, enterprises and relevant units immediately after this meeting. Secondly, strengthen public opinion guidance through extensive media publicity to enhance consensus among the government, the society and the market subjects as well as increase acknowledgement of PPP model by the public. Local financial departments at all levels should make full use of the newspaper, TV, radio broadcast and the internet to continue to conduct publicity. Thirdly, summarize the experience of PPP work in other countries and our country in a timely manner to build a database and establish a public and efficient information release platform to support the PPP promotion.

 3. How to actively and steadily promote the application of PPP model?

 The year 2014 marks the beginning to fully implement the guidelines of the third plenary session of the 18th CPC Central Committee and to comprehensively deepen reform. Secretary General Xi Jinping stresses that deployment accounts for ten percent and the left ninety percent relies on implementation; the performance of this year’s work is very important to a good starting; and we should focus on reform implementation in a swift, steady and practical manner. Local financial departments at all levels and relevant enterprises must adapt to the new circumstances, new tasks and new requirements, understand the essence of PPP model, and actively and steadily promote the application of PPP model by grasping the overall reform trend, accelerating institutional and systematic building and innovating work concepts and methods. And here, I would like to put up several requirements.

 First, adhere to the principle of combining theory with practice and vigorously promote institutional innovation. In the long term, to promote the application of PPP model, we should innovate the urbanization financing model but more importantly we should make institutional innovations to keep improving public service quality and better promote economic development, social progress and improvement of the people’s livelihood. Financial departments at all levels and relevant enterprises must pay high attention to the institutional designing and innovation and follow the principle of combining top-level design and practical exploration and accumulate experience in practice so as to gradually form a long-term institutional arrangement that is good for the development of PPP model and build a institutional environment that is friendly for the standard, transparent and sound development of the PPP market. By now, in the international community and our country as well, a lot of PPP theories have been developed. In the following training session, we will hear from experts from Asian Development Bank, Research Institute for Fiscal Science of Ministry of Finance, China Investment Corporation and consulting agencies. I hope we can extensively listen to different ideas, think critically in combination of the actual situations to guide practice, and achieve the objectives of planning first with strict assessment and advancing steadily while ensuring real effects.

 Second, stick to the principle of authority with corresponding responsibility and handle properly the relations between the government and the market. Letting the market play a decisive role in resource allocation is one of the major theoretical innovations at the third plenary session of the 18th CPC Central Committee and is also the operation basis for PPP model. Properly handling the relations between the government and the market and strictly distinguishing the roles of the government and the market is the first question to be addressed in promoting the application of PPP model. That is to say, what should be under the authority of the government must be governed well and what should be done by the enterprises must be handed over to the enterprises with full freedom. And the government must conduct a sound overall PPP plan and specify the project types that apply to PPP and categorize relevant projects. The government and the social capital should establish cooperative relations on the basis of consultation on an equal footing and in accordance with laws and regulations. And PPP projects must open to public bidding. In the operation of PPP projects, we must stick to market operation and ensure project quality while reduction project cost. Particularly, the government should fully implement the supervision functions and spot and resolve problems in a timely manner and mustn’t make random changes and shirk responsibilities.

 Third, adhere to the principle of scientific decision making to guarantee Value for Money of the projects. In selecting PPP projects, we should conduct adequate project assessment and compare the advantages and disadvantages of PPP model and the traditional government construction and management model in order to improve the soundness of the decisions. In international experiences, the Value for Money assessment method is mostly adopted. In domestic practices, due to lack of efficient assessment methods, the understanding of the applicable PPP project types is unclear and there is a certain extent of blindness in selecting PPP projects, which are also the reasons why many PPP projects have failed. Therefore, financial departments at all levels should work with relevant parties and learn from the Value for Money Method to conduct comprehensive assessment in selecting projects and conduct overall analyses on the capital structure, operation cost and attainable profits of different procurement methods. Meanwhile, we should also take into consideration the tangible value of quality and public satisfaction enhancement as well as the intangible value of enhanced participation and organizing abilities of the interested parties and the extended development goals in order to decide on the feasibility of applying PPP model to the projects.

 Fourth, adhere to the principle of incentive compatibility to stimulate vigor and efficiency of the social capital. The PPP model has a relatively high requirement for the managing, implementing and funding abilities of the social capital, and need to take advantage of the income distribution system and performance evaluation system with the incentive plus restraints mechanism at the core to fully mobilize the social capital to participate in PPP projects. On the one hand, we need to establish the dynamically adjustive charging and pricing or government subsidy mechanism to create enough attraction to the social capital as well as the expectation of long-term and stable return on investment. On the other hand, we should establish a strict performance evaluation mechanism to conduct comprehensive examinations and evaluations of the project operation, the quality of public services and the fund usage efficiency in order to ensure the expected performance.

 Fifth, stick to the principle of maximizing the public interest to effectively balance the economic and social benefits. As a new way of providing public services, PPP integrates the economic benefits of the government and the social capital, as well as the social benefits of the government and the public. We should avoid unreasonably high profits for the social capital which can lead to dissatisfaction of the public because of high prices of public services, and at the same time ensure the reasonable long-term return on investment of the social capital so as to ensure the sustainable operation of the projects. It’s very important to maintain a proper balance. Therefore, in project designing, we should adopt the PPP model that increases both the economic and social benefits of the project. Projects of relatively high social benefits and low economic benefits can be given a certain amount of fiscal subsidiaries. Besides, we should also effectively conduct supervision and management of social capital behaviors to safeguard the interests of the public.

 Comrades, as the blueprint and the pathway have been made, financial departments at all levels and relevant enterprises must follow the guidance of the third plenary session of the 18th CPC Central Committee and the requirements of “seeking truth in learning knowledge, digging profoundly in understanding and being realistic in implementation”, combine the actual situations of local places and make innovations to turn the deployment of the central government into specific activities, plans and measures. We must uphold the high political responsibility and historical mission, unite with one heart and one mind, focus on implementation and forge ahead to improve the public service level of the government in an all round way and create a new chapter in PPP development!

 Thank you!

 


From : Ministry of Finance

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