Preface Since 2019, influenced by policy environments such as requirements for rectification and cleanup, government oversight of implicit debt, and profit-sharing arrangements for special-purpose bonds, coupled with macroeconomic factors like the pandemic and economic downturn, voices predicting the decline of PPP have been growing louder.

Recently, the Ministry of Finance issued the “Notice on Further Promoting the Standardized Development and Transparent Operation of Public-Private Partnerships (PPP)” (Document No. 119 [2022] of the Ministry of Finance and Treasury, hereinafter referred to as “Document No. 119”), which came at a critical juncture for revitalizing infrastructure investment. Although the document’s emphasis on “standardized development and transparent operation” may seem somewhat opportunistic, for PPPs that have finally weathered the “three-year period of hardship,” it can be seen as a form of compensation. At the same time, it’s important to recognize that Document No. 119 largely reiterates and refines previous regulations without introducing any substantive breakthroughs. Therefore, ongoing discussions about PPPs today must return to focusing on their intrinsic nature.

This article unfolds its discussion at the level indicated by the title, focusing on the future of PPP.

• The overall orientation of the PPP has shifted to being steady and pragmatic, as well as proactive yet cautious.

Following Document No. 10 of 2019 issued by the Ministry of Finance and the National Development and Reform Commission, PPP support policies became scattered across documents issued by non-leading industry ministries and local authorities, leading to a slump in PPP application. The issuance of Document No. 119, which emphasizes “refining rules and ensuring openness and transparency,” marks the official entry of PPP into a mature and stable phase, with market share returning to a reasonable range. Subsequent PPP policies are unlikely to undergo significant adjustments, nor can we expect any major favorable developments in the future.

Meanwhile, given the spillover effects of the reform of the investment and financing system and the positive impact of PPP on overall infrastructure investment, in the long run, PPP will focus on non-governmental public construction and public-operated sectors that feature “market-oriented approach, emphasis on operations, stable returns, and long-term tenures.” Document No. 119 to some extent reflects this trend as well.

• The transformation of platform companies amplifies the impact on PPPs.

Taking as an example the Ministry of Finance’s suspension in mid-last year of the TOT review process for the PPP project database: At that time, it was discovered that some local governments and their affiliated platform companies were using the TOT model to engage in “left-hand-to-right-hand” transactions, artificially inflating fiscal revenues and guarantee yields. As a result, the Ministry of Finance was compelled to suspend the review process.

However, suspending the review ultimately proves unsustainable in the long run. Document No. 119 has now reopened the door to TOT reviews and is focusing on three key areas to prevent similar risks:

First, it should be emphasized that the social capital entities prohibited from participating in PPP projects at this level are “state-owned enterprises actually controlled by local people’s governments at the prefectural and county-level (excluding listed companies).” This definition is clearer and easier to distinguish than the previous one—“platform companies plus state-owned enterprises that platform companies can substantially influence”—making it more difficult to engage in fraud or deception.

Second, strengthen the due diligence review of the qualifications of social capital partners to prevent insider trading and related-party transactions, unclear division of responsibilities between government and enterprises, and local protectionism.

Finally, let me reiterate that the TOT project must generate long-term, stable operating income (meeting the value-activation criteria), strictly comply with the asset valuation and transfer procedures for state-owned assets (to prevent the PPP process from being used to circumvent these asset-transfer procedures), and reasonably determine the transfer price (to avoid inflating fiscal revenue, preventing the loss of state-owned assets, and guarding against hidden debts).

The author believes that rigidly demanding that platform companies completely sever ties with the government is, in a sense, merely an empty rhetoric akin to “cutting off the father-son relationship.” It is recommended that we promptly draw on and integrate the rational elements of the ABO model. After platform companies have been carefully vetted and relieved of their role in financing government debt—and no longer assume government financing functions—official documents should formally recognize these platform companies as special-purpose entities dedicated to public welfare. This would enable the government to adopt a “direct authorization for operation” (or what might be termed “compliant ABO”) model, allowing the government to participate directly in infrastructure projects through these platforms. Such an approach would not only address the challenges faced by platform companies in distancing themselves from PPPs at their respective levels but also avoid crowding out opportunities for private-sector participants in PPPs.

Another approach is that platform companies could, in the future, primarily invest in quasi-operational non-industrial projects or undertake construction on behalf of government investment projects. These two types of projects are, by their nature, better suited to platform companies undergoing transformation.

• The boundaries between public and infrastructure investment and financing are becoming increasingly clear.

Based on current practices and supporting policies, the author believes that infrastructure investment and financing will broadly follow a “three-three” trend: involving three main actors (the government, platform companies, and social forces); three financing models (government investment, PPP, and corporate investment); and three types of projects (non-operational, quasi-operational, and operational), which intersect to delineate the boundaries of investment and financing in the public and infrastructure sectors. In brief:

• Government

Investment in non-operational projects includes projects funded by government investment and government-invested projects. Under the condition of securing fiscal funding, platform companies may undertake construction on behalf of the client; in such cases, the "construction-on-behalf" approach represents a construction management model rather than an investment-and-construction model.

• Platform company

Primarily invest in municipally-owned operational and quasi-operational projects that lack robust market mechanisms, and provide support for the implementation of government non-operational projects.

• Social capital

Investment projects—whether operational, quasi-operational, or non-operational public projects—that feature well-established market mechanisms and possess industrial-economic characteristics (carefully select government-payment/subsidy-based projects; PPP projects must include operational components).

For areas where investment boundaries overlap, the project leader should select an appropriate investment and construction model based on the specific realities of the project.

• PPP is converging with other financing models and tools.

In the public and infrastructure sectors, PPP cannot be universally applied due to inherent contradictions such as the tension between public responsibilities and commercial profit-seeking, the challenge of regulating implicit debt versus disguised financing, the balance between returns and fiscal affordability, and the trend of state-owned enterprises entering while private ones withdraw. Therefore, PPP needs—and indeed should—explore pathways for integration with other models and tools.

• PPP + EOD/TOD

EOD is a relatively complex model that combines guided development with integrated development—a model ideally suited for the expertise and experience of social capital. The PPP+EOD approach can enhance both the project’s financing viability and operational sustainability, enabling it to generate high levels of mutual benefit in terms of investment returns and public outcomes. Document No. 119 calls for “exploring the implementation of green governance (ESG) assessments... tapping into the potential economic, social, and environmental benefits of projects, and carefully accounting for the overall and long-term impacts.” In essence, this represents a pioneering effort through PPP to fully adopt the core principles of models such as EOD across the public and infrastructure sectors.

However, at present, some governments are reluctant to adopt PPP models in EOD projects—or they only opt for a split PPP approach. One of the reasons is that EOD projects can apply for special-purpose bonds, whereas PPP projects cannot. This is one of the negative consequences of the current inability to use PPP and special-purpose bonds simultaneously.

• PPP + Special Bonds

Following the release of the Ministry of Finance’s reply to Proposal No. 3856 submitted by members of the 13th National Committee of the Chinese People's Political Consultative Conference, the approach toward “PPP + Special Bonds” has shifted from the previous stance of “prohibited in principle but with room for flexibility” to “actively exploring and applying cautiously.” While this represents a certain degree of relaxation, underlying conflicts remain regarding the entities responsible for financing and repayment between special bonds and PPPs. As a result, relevant parties remain cautious, and it remains uncertain whether—or when—policy alignment will be fully achieved.

The author is not a staunch advocate of PPP-plus special bonds, but currently, special bonds do indeed face issues such as mismatches between their maturities and project funding needs, relatively low provincial-level quotas, and uncertain forecasts for repayment sources. If we can explore universally applicable approaches based on the few existing successful cases of combining special bonds with PPPs, there could be great potential for progress.

• PPP + Publicly Offered REITs

Since a significant portion of the underlying assets in REITs projects originate from PPP projects, after the transfer is completed, fund managers typically hand over these projects to the original private-sector partners for operation. Therefore, PPP and REITs have an inherent affinity.

The main issue is that REITs impose stringent screening criteria on PPP projects, resulting in a low proportion of projects meeting the required asset standards. However, this very requirement is prompting some existing PPP projects to undergo thorough reviews and improvements. On the other hand, if a PPP project meets the screening criteria, there’s no doubt that REITs and PPPs will mutually empower each other and move forward in a deep and solid manner.

Other common infrastructure models such as F+EPC, ABO, and EPC+O either possess independent advantages, serve merely as conventional construction management models, or are limited in their application when combined with PPP. Therefore, they are not discussed in this article. The author will elaborate on the selection criteria, advantages, and disadvantages of these infrastructure models in other publications.

• PPP Enters the Era of “Full-Through” Regulation

Following the issuance of Document No. 23 [2018] by the Ministry of Finance and the State Administration of Taxation, which introduced a requirement for penetrating review of equity capital, Document No. 119 further proposed “penetrating management of the qualifications of social capital investors” and “standardized operations coupled with enhanced penetrating review of implicit local government debt.” As a result, PPP projects have now been brought under comprehensive, penetrating supervision—from the surface to the core.

At the project equity capital level, although Document No. 23 does not explicitly specify the level of penetration, in line with the objectives and practices of financial regulation in the construction sector, the focus typically extends only to the project company level; further penetrating down to the level of corporate or individual shareholders would not carry substantial meaning.

Compared to Document No. 23, the two “penetrations” mentioned in Document No. 119 still require accurate interpretation in practice:

At the qualification review stage, state-owned enterprises actually controlled by municipal and county-level governments are prohibited from serving as social capital partners in PPP projects at their own administrative levels. But what about local private enterprises that take small equity stakes in these state-owned enterprises (including platform companies)? If such participation is allowed, there could be internal transactions and local protectionism—where the government or state-owned enterprises effectively control local private firms to exclude out-of-town competitors from PPP projects. On the other hand, if such participation is not allowed, there is still no explicit prohibition. Furthermore, how should “actually controlling” be interpreted—should it be understood in a broad or narrow sense? Does it require actual shareholding, controlling interest, or indirect ownership, and if so, what percentage threshold must be met? Or would simply being influenced by the local government suffice to establish “control”?

At the level of standardized operations, it is important to note that in the original text—"Does any other circumstance exist that might affect the standardized operation of PPP projects or increase local governments’ implicit debt?"—the content before and after the comma is in a parallel relationship. From the Ministry of Finance’s strict interpretation, any circumstance discovered upon closer examination that affects “standardized operations” (including cases of merely non-standard commercial operations, even if no implicit-debt risk is involved) should not be included in the database. This approach clearly overcorrects and may warrant clarification from the relevant authorities.

Conclusion: The significance of Document No. 119 lies in its offering a glimpse, from the perspective of PPP, into the progress of China’s reform of infrastructure investment and financing systems, and in reaffirming that the PPP model is returning to its original essence of “positive cooperation, quality enhancement, and efficiency improvement.” Of course, this article only highlights a few key points regarding the current characteristics and future trends of PPP—and indeed, of infrastructure investment, construction, and operation models more broadly—serving merely as a starting point for further discussion on this vast and complex topic. There remains ample room for ongoing debate and exploration.

About the Author:

Han Tianfu

A practicing lawyer at Liaoning Tongfang Law Firm, specializing in public and infrastructure, environmental protection and new energy, and civil engineering. With many years of experience in leading domestic infrastructure teams, Attorney Han has spearheaded numerous projects in areas such as comprehensive wastewater and watershed management, new energy, transportation, and regional infrastructure development, as well as multiple real estate and construction-related projects and cases. His clients include government agencies such as the State-owned Assets Supervision and Administration Commission of the State Council and Xinhua News Agency, central state-owned enterprises and local state-owned enterprises including China Three Gorges Corporation and Beijing Capital Development Group, as well as private enterprise groups like Vivi Co., Ltd. and Jingpeng Huanyu Co., Ltd.

Email: hantianfu@tf-lawyer.com.cn