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New Financing Channels for Urbanization

04-23 09:34 Caijing
The end goal of the development of the municipal bond market and promotion of the PPP model is to build a long-term funding supply mechanism for urbanization.

By staff reporter Wang Peicheng

China’s State Council unveiled the “National New-type Urbanization Plan" in mid-March, but the accompanying special program for providing fund guarantees has yet to be released.

A director at the National Development and Reform Commission (NDRC) told Caijingthe new urbanization plan is all-encompassing and covers areas of investment at all levels, including financial, fiscal, social capital, foreign investment as well as other types of investments. As for market financing means, such as bonds, stocks and bank loans, etc., the plan only states the general direction with raising any specific measures, though the bond market is recognized as a key development direction.

So far no one authority has given a clear idea of the plan’s total investment scale. The Development Research Center of the State Council predicts that by 2020, urbanization will bring 42 trillion yuan in investment demand. An authority at the Ministry of Finance (MOF) thinks that if this investment is split between economic infrastructure (water, transport, energy, etc.) and social infrastructure (social security, pensions, household registration management, etc.), the two categories will each receive approximately 50 percent.

Caijing learned that authorities are considering implementing major reforms in the introduction of social capital in the field of urban public infrastructure and the building of a multi-level bond market. This “two-engine” financing pattern will guide innovation in financing new urbanization going forward.

Relevant institutional framework has not yet been introduced, but financing model innovation in urban infrastructure is already in practice.

Beijing Subway Line 16 has a total planned investment of 53.7 billion yuan. Beijing Infrastructure Investment Co., Ltd. (Beijing Investment Co.), which has undertaken the project’s planning and construction, has divided the Line 16 project into investment and construction (PartA) and operations and management (Part B). Part A will introduce an equity investment of 12 billion yuan from China Reinsurance (Group) Corporation (China Reinsurance). It is expected Beijing MTR Corporation Ltd. (BJ MTR) will be introduced as a franchise partner in Part B, which will inject another 15 billion yuan in capital. Using only 3.2 billion yuan in capital, Beijing Investment Co. can leverage 27 billion yuan in social capital and 23.5 billion yuan in debt financing to greatly ease its financial pressure for the project.

The franchising model Beijing Investment Co. has adopted for the Line 16 project can be called a Public Private Partnership (PPP). PPP, which are relatively popular overseas, are government services or private ventures which are funded and operated through both public and private participation. PPP experienced rapid development worldwide after the 2008 financial crisis and the subsequent banking and financial credit crunch. However, over the same period, bank credit expanded in China, and the scale of social investment in infrastructure contracted.

Ren Bin of the World Bank thinks there is a clear mismatch between the scale of social capital investment in infrastructure and China's economy andinfrastructure investment needs. China’s MOF, NDRC and other relevant departments have been aware of this problem and are actively attempting to promote the development of the PPP model in China. Local governments’ enthusiasm for social capital is high. It is reported that a number of provinces across the country are considering establishing PPP Centers, with Zhejiang Province expected to become the first.

It should be noted that though the PPP model can offer much-needed aide in infrastructure financing, it also has the potential to introduce new risks. Some worry that if things go awry in the process of promoting PPP and regulatory mechanisms are not in place, PPP may become a new area of debt exposure for local governments.

An MOF official said that the PPP model in China will be subject to certain restrictions, adding that public projects in the field of public facilities should be undertaken by the government, mainly through the issuance of municipal bonds; in addition, projects with a certain income or earnings that can cover the cost of the project can be financed through the bond market. If a priority market is selected, [investors and operators] can select the PPP mode.

The end goal of the development of the municipal bond market and promotion of the PPP model is to build a long-term funding supply mechanism for urbanization. The effectiveness of these two reform initiatives to a large extent is related to the implementation effects of China’s new-type urbanization plan.

Full article in Chinese: http://magazine.caijing.com.cn/2014-04-19/114113940.html

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