Special Debt and PPP
"China News Weekly" reporter / He Bin
Issued at 2020.12.7, Issue 975 of "China News Weekly"
The industry has been discussing for a long time and controversial about the combination of special debt and PPP, and finally there is an official conclusion.
Not long ago, when the Ministry of Finance responded to the suggestions of eight NPC deputies including Tang Xiaoming and the proposal of Wang Xin, a member of the National Committee of the Chinese People’s Political Consultative Conference, it rejected the feasibility of using special bonds as capital and debt funds for PPP projects.
The two replies from the Ministry of Finance were written by the Budget Department in charge of local debt and the Finance Department in charge of PPP.
The Budget Department’s response is clear and concise, saying that using special bonds as the capital of PPP projects, “Although this model is conducive to driving large-scale investment, it is prone to financial expectations, layers of leverage, and relatively high risks; and there are operational aspects. More challenges".
In addition, in accordance with the "Implementation Opinions of the Ministry of Finance on Promoting the Development of Standardized Cooperation between Government and Social Capital" (Caijin [2019] No. 10), "PPP projects must not use debt funds as capital."
Regarding the use of special bonds as PPP project capital or debt funds, the Department of Finance believes that there are certain hidden risks that require further demonstration.
Because the special debt is used as the capital of the PPP project, "the project financing leverage will be enlarged, the pressure on fiscal expenditure and the medium and long-term fiscal risks will be increased."
As for the use of special bonds as debt funds for PPP projects, the Department of Finance believes that “in fact, the funds of special bonds are used for project operation subsidies, which is a regular expenditure, which does not comply with the budget law.'Local government bond funds shall not be used for regular expenditures' It also does not meet the requirements of PPP projects “no operating subsidy expenditures should be arranged through government fund budgets”, and there is a risk of illegal operation.” At the same time, it will weaken social capital financing responsibilities, strengthen government expectations, and intensify social capital Operational tendency affects the long-term stable cooperation of PPP projects.
Combined confusion
Since the implementation of the new budget law in 2015, local government bonds have become the only legal borrowing channel for local governments.
How to combine special bonds with PPP (government and social capital cooperation) and other investment and financing methods has attracted the attention of local governments in recent years.
In June last year, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council issued the "Notice on Doing a Good Job in Local Government Special Bond Issuance and Project Supporting Financing" (Circular 33), allowing special bonds to be used as capital for eligible 4 types of projects.
On September 4, 2019, the executive meeting of the State Council further clarified that the scope of projects in which special bonds can be used as capital was expanded to 10 major areas, involving public service products such as infrastructure construction and people's livelihood projects.
In October 2019, Vice Minister of Finance Zou Jiayi stated at the "2019 Fifth China PPP Development (Financing) Forum" hosted by the Ministry of Finance Government and Social Capital Cooperation Center, that it is necessary to explore the combination of PPP and special debt to stimulate social investment , To give play to the synergy effect and innovate diversified financing models.
This statement was regarded as the acquiescence of the functional departments for the combination of the two.
One year later, the Ministry of Finance denied the feasibility of combining special debt and PPP with two replies.
In practice, successful cases of compliance are also extremely rare.
Zhou Qin, a PPP expert from the Ministry of Finance and general manager of the government business department of China International Economic Consulting Co., Ltd., after investigating multiple cases, found that there are many obstacles that cannot be combined. The two biggest obstacles are that debt funds cannot be used as PPP. The limitation of project capital, the impulsive issuance rhythm of special debt itself and the long-term, refined, and systematic problems of PPP are difficult to match.
Responsible for the mission of implementing a proactive fiscal policy. "Fast" is a significant feature of special bonds. From the determination of the project issuance quota to the external payment of funds, it usually does not exceed 6 months. If the project social investor procurement work cannot be completed here , It is likely to cause precipitation of special bond funds.
The PPP project is different. Before entering the implementation stage, it needs to go through the three stages of identification, preparation and procurement. It usually takes a year or even longer to complete these preliminary work.
"According to the incomplete information we have, real special debt can become a case of project capital. In recent years, the total number has been around 100 nationwide, which is very sporadic." PPP expert of the Ministry of Finance, Central University of Finance and Economics Zhongcai-CSI Wen Laicheng, executive director of the Pengyuan Local Finance Investment and Financing Research Institute, believes that the main problem is that the management authority of PPP projects is being advanced in parallel between the finance and development and reform departments, although there are some overlaps in the provincial-level competent departments, such as joint review. Wait, but there are still some problems in the top-level design and policy coordination of the upper level.
Once combined with the special debt, the two departments will not be coordinated in the implementation of policies.
For example, when the Ministry of Finance issues special bonds, it clearly requires that the financing of the project and the income of the project can match. Before issuing bonds, it is necessary to make it clear whether the project can guarantee the repayment of the covered bonds in the future.
As for PPP projects, some have good returns and some have poor returns, even relying on government financial subsidies.
When issuing bonds, whether the project can meet the requirements of special bonds and whether its own income can guarantee the risk of debt repayment is a big problem.
In addition, the original intention of PPP was to absorb social capital for investment. Therefore, government investment accounted for a very small proportion of PPP projects, and could not occupy the largest shareholder, let alone control.
Its role is only to hope that when the project company is operating, in addition to the regular accounting statements and other information systems, the directors sent by the government can participate in the management of the project company and learn more about the internal situation of the project company. "If the government controls, It is no different from state-owned enterprises. Therefore, the internal equity structure of PPP projects objectively restricts the space for special debt funds to be used for government investment." Wen Laicheng said.
The contradictions between the systems also make the combination of PPP and special debt at a loss.
In the Ministry of Finance’s "Implementation Opinions on Promoting the Development of Government and Social Capital Cooperation Standards" (Caijin [2019] No. 10), it is required to "ensure the fiscal expenditure responsibilities of all PPP projects from the general public budget each year and this quarter. Not more than 10% of the general public budget expenditures for the current quarter."
In the "Notice on Regulating the Investment and Financing Behavior of Financial Enterprises to Local Governments and State-owned Enterprises" (Caijin [2018] No. 23), state-owned financial enterprises shall apply to state-owned enterprises participating in local construction (including local government financing platform companies). ) Or PPP projects provide financing, the capital review should be strengthened in accordance with the "penetration principle" to ensure that the source of capital of the financing entity is legal and compliant, and the financing project meets the required capital ratio requirements.
State-owned financial enterprises shall not provide financing if it is discovered that there is a problem of illegal or false capital contributions using "named stocks and real debts", shareholder loans, borrowed funds, and other methods such as public welfare assets and land reserves.
Previously, a certain city in the north wanted to build a convention and exhibition center and prepared to use less than 300 million yuan of local debt funds as the capital of the PPP project. A lot of preparation and demonstration work was also done before, but when the project was financed, the bank's approval department Considering that such a structure is not compliant, according to Circular 23, debt funds cannot be used as capital, and financial institutions must take responsibility for review.
Therefore, even if special debt funds are used to fund PPP projects, the government may find that hundreds of millions of special debts may block the next billions of financing channels, and the gains outweigh the losses.
"The No. 33 document was a breakthrough, but at the time of the breakthrough, it was not expanded to PPP. To achieve the combination of the two, the conflicting provisions in the No. 23 and No. 10 must be adjusted and modified to allow You can rest assured to combine the two tools, otherwise it will be easily identified as an illegal operation." Zhou Qin said.
"It is not just the risk of violations. In PPP projects, whether it is fiscal expenditure responsibility or special debt, it requires government expenditure and the government repays it. If the leverage is superimposed to far exceed the government's ability to pay, why should the local government bear this? Risk? How can you bear this risk? What's more, when debt expands indefinitely, or intergenerational transfer, the next generation will pay for it; or regional spillover, the country or other regions will pay for it." Development and Reform Commission PPP expert, Ministry of Finance debt Said Han Fengqin, a government debt consultant at the Center and a researcher at the Chinese Academy of Fiscal Sciences.
It is precisely because of various practical factors that restrict the realistic possibility of the government combining special debt with PPP.
Special debt risk control iteration
In recent years, China's new special bond quota has increased year by year. In 2020, the National People's Congress approved the arrangement of 3.75 trillion yuan in new special bond quotas, far exceeding last year's 2.15 trillion yuan.
However, the issue of idle funds for special bonds has also attracted widespread attention. In the State Council’s Audit Work Report on the Implementation of the Central Budget and Other Financial Revenues and Expenditures for 2019, published in June this year, the National Audit Office was auditing 18 provinces and 36 cities. The county found that due to unreasonable project arrangements or suspension of implementation, etc., 50.367 billion yuan of new special bond funds were not used, of which 13.23 billion yuan was idle for more than one year.
In Wen Laicheng’s view, this year, out of consideration of stimulating economic growth, a large number of special bonds have been issued. According to the requirements of the Ministry of Finance, this year’s bond issuance task must be completed by the end of October. According to this time schedule, various localities are vying to issue bonds quickly. , The project reserve is insufficient.
Most of the projects built with special bonds are government-invested projects, which must be approved by the development and reform department. At the beginning of the project, feasibility demonstration and project proposal approval must be carried out, and then land planning and urban construction must be approved. Work can only begin later.
In accordance with the proactive fiscal policy, the special bond funds must be started immediately to form the physical engineering volume of the year, so as to stimulate economic growth.
However, some projects have not done well in the preliminary work, and there are problems in the demonstration. When the project starts, some of the procedures for the start have not been completed, or various problems occurred during the construction of the project, the project cannot Advance.
In addition, there are now strict requirements for examination and approval, and a stricter accountability system is implemented for the funds of special bonds. Local governments would rather let the funds idle rather than start construction hastily, and there is a phenomenon of funds and other projects.
"To solve this problem, first of all, for government investment projects that use special bonds, we must strengthen the management of the project library, and make preparations in the early stage. Second, in the future, the scale of the issuance of special bonds should be appropriately controlled. Here, we must grasp the ratio of general bond and special bond issuance.” Wen Laicheng said that in the past two years, special bonds have grown rapidly. Another reason is that according to the current system, the issuance of general bonds must be included in the local fiscal deficit for assessment. Although special debts are also included in the management of debt limits, they are not counted as local fiscal deficits.
Therefore, some local governments have a preference for issuing additional special bonds. Some projects that have no or low returns and do not meet the requirements of special bonds may also be issued as special bonds after packaging, but there will be problems in repayment of principal and interest in the future. .
In order to cope with the increasingly prominent problem of fund precipitation of special bonds, in July this year, the Ministry of Finance issued the "Notice on Accelerating the Issuance and Use of Local Government Special Bonds" (Caiyu [2020] No. 94), requiring the implementation of special bond issuance and use. Through transparent, whole-process monitoring, dynamic monitoring of various participating entities such as local finance, relevant competent departments and project units, tracking progress one by one, grasping each level, and layering the responsibility of relevant entities, and it is necessary to supervise and accelerate the special bond funds Use the progress, form the physical workload as soon as possible, ensure the quality of the project, improve the performance of the use of bond funds, and never spend money randomly.
In November, the Ministry of Finance issued the "Opinions on Further Doing a Good Job in Local Government Bond Issuance" (Caiku [2020] No. 36), requesting local financial departments to strictly review and control the compliance of special bond projects and strengthen the The evaluation of bond issuance projects effectively guarantees the quality of the projects and strictly implements the requirements for the balance of payments.
"The risk control structure of the special debt itself has reached a time when it needs to be iterated." Zhou Qin said that this year's special audit and corresponding supervision are gradually increasing. At present, the main use of special debt is basically concentrated in the commissions and bureaus of local governments. At most, it will expand to government platform companies and state-owned enterprises. If PPP is added, the rigid obligations to the social capital side in the transaction structure will increase, and the responsibilities will become more intertwined, which will make it more difficult to dismantle and dispose of risks.
In Han Fengqin's view, neither the "funds and other projects" of special bonds or the "projects and other funds" of PPP will not exist under the implementation of regulations.
A PPP project is a long-term cooperative relationship established by the government and social capital in the field of infrastructure and public services.
This long-term cooperative relationship is protected by law.
To this end, each PPP project will determine the financial affordability, value for money, and preliminary implementation plan.
If it fails to pass the two evaluations, it is not a standardized PPP project.
And in the specific cooperation plan, the investor's capital financing plan and the local government's expenditure will be clearly explained.
"If there is a situation of'projects and other funds', it is either that the project unit does not perform well, or the local government is not strict in reviewing it. It is impossible for a real PPP project to wait for funds."
The same is true for special bonds. According to regulations, bonds can only be issued if there are projects that can generate income. There are special regulations for financing balance and financial evaluation. According to financial requirements, funds follow the project and cannot be idle.
In this case, "funds and other projects" are also not a policy issue, but are caused by insufficient preliminary demonstration of specific projects and deviations in project implementation.
"Therefore, now that I want to connect the two, I don’t look at it from a holistic perspective. Talking about funds on funds and projects on projects. It not only ignores the benefits and risks of the project itself, but also ignores the risks that the overall policy may bring. "Han Fengqin believes that neither special debt nor PPP can be swarmed, nor can it be given too much mission. "We must look at the law and from the perspective of common sense, and keep the truth from the false."
China News Weekly, Issue 45, 2020
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