Norms, Norms, and Re-Norms-Understanding and Understanding of Caijin (2019) No.10 Document

On March 8, the Ministry of Finance issued the "Implementation Opinions on Promoting the Standardized Development of Government and Social Capital Cooperation" (Caijin [2019] No. 10), which caused a fierce response in the industry. Combined with the recent project consulting practice, we will talk about the knowledge and understanding of Caijin [2019] No. 10 from the perspective of the relevant specific issues involved in the No. 10 document, in order to entertain the industry and look forward to joint discussion.

1. Aims and Purposes
 

"Preventing and resolving major risks" is one of the three major battles proposed by the 19th National Congress of the Communist Party of China. In order to standardize the promotion of PPP and prevent and control the hidden debt risks caused by irregular operations, since the second half of 2017, the Ministry of Finance has issued a number of documents with "normative" requirements, putting forward normative opinions on PPP from different angles, and the leaders of the Ministry of Finance have also put forward clear requirements for the implementation of PPP norms on many occasions.

Document No. 10 has repeatedly mentioned "government hidden debt", "effective prevention and control of local government hidden debt risks", "effective prevention and control of local government hidden debt risks, and resolutely fight the battle to prevent and resolve major risks". It can be considered that Document No. 10 systematically puts forward specific opinions on the standardized development of PPP on the basis of multiple PPP standardized development documents in the early stage and combined with the problems that have occurred in the process of PPP promotion over the past few years, the aim is to further strengthen the implementation of PPP norms, promote the development of PPP norms, and at the same time prevent and control the hidden debt risk of local governments due to PPP alienation operations, and serve the "battle to prevent and resolve major risks".

2. PPP and Implicit Debt
 

Throughout the document, No. 10 discusses the issues related to PPP and hidden local government debt in five dimensions:

First, the document proposes to "effectively prevent and control the risk of hidden debts of local governments" and "effectively prevent and control the increase of hidden debts of local governments in the name of PPP", that is, to oppose and prohibit the increase of hidden debts of local governments in the name of PPP.

Second, the document makes it clear that "government expenditure items formed by eligible PPP projects are paid on the basis of the public's enjoyment of public services that meet the agreed conditions, and are recurrent expenditures formed by the government's provision of operating subsidies for the public's enjoyment of public services". Accordingly, we can argue that government expenditures resulting from eligible, regulated implementation of PPP projects are not hidden debts (but there is no direct and explicit statement in No. 10).

Third, the document stipulates that PPP projects "have a government or government-funded representative to buy back the principal of the investment from social capital, promise a fixed return or guarantee a minimum return. Through the signing of yin and yang contracts, or by the government or government-funded representatives for the project financing to provide various forms of guarantees, repayment commitments, etc., by the government actually underwrite the project investment and construction operation risks", should be returned to the bank, the formation of financial expenditure responsibility, belongs to the local government hidden debt, accountability in accordance with the law.

Fourth, the document stipulates that if the state-owned enterprises with financing platform companies and platform companies affiliated to the government at the same level participate in the PPP project as social capital and have a substantial impact on their business activities, social capital only participates in the construction and does not assume operational responsibilities, government expenditure is decoupled from output performance, and the project fails to carry out two demonstrations as required or evades the 10% red line of financial affordability and implements it in the name of PPP, debt funds used as project capital, failure to disclose project information and other circumstances in accordance with the provisions, should be rectified, otherwise should be returned to the treasury, involving an increase in the hidden debt of local governments, accountability in accordance with the law.

Fifth, the document stipulates that consultants and experts who "increase the risk of hidden debt for non-standard PPP projects" shall be held accountable in accordance with the regulations. This requires consultants and experts to strictly abide by the relevant regulations when providing PPP consulting services to avoid illegal packaging of PPP projects.

3. Understanding of PPP Project Library
 

Regarding the national PPP integrated information platform project library, the opinions expressed in document 10 are:

First, inclusion in the project library is one of the conditions that a standardized PPP project must meet, I .e., the PPP project must be "stocked". "Storage" means that in accordance with the requirements of the storage to perform the procedures, to carry out two arguments, the purpose is still through the "storage review" to check the PPP project, to ensure the project specifications. "Storage" is also to prevent local governments from implementing in the name of PPP on their own, away from management and supervision, and increasing the risk of hidden debt.

Second, the project library is the main vehicle for the "open and transparent" implementation of PPP projects. Document No. 10 requires "making good use of the national PPP comprehensive information platform, fully disclosing the whole life cycle information of PPP projects, ensuring the public's right to know, and forming effective supervision and restraint on all parties involved". At the same time, it emphasizes that financial departments at all levels "fail to fully disclose project information or disclose false project information in a timely manner according to regulations, which seriously affects the exercise of the public's right to know and social supervision", and those who cannot be rectified within a deadline, if it involves increasing the hidden debt of local governments, they shall be held accountable in accordance with the law.

Third, the project library implements a dynamic adjustment mechanism of "being able to enter and exit". "Entering the library" does not mean that the project is necessarily compliant. According to the provisions of document No. 10, we believe that the management of the project library (warehousing review, withdrawal, information disclosure, etc.) is only the way and means for the financial department to perform PPP-related management responsibilities, I .e. the project library is only an internal management tool or platform, not an administrative license or approval. Therefore, warehousing only means that the materials reviewed by the Ministry of Finance at the time of warehousing meet the requirements, which does not mean that the project is necessarily compliant. There is no causal relationship between warehousing and the establishment and effectiveness of the project contract. The withdrawal of the project does not mean that the project contract is invalid. How to perform the project contract after the withdrawal and whether to continue to perform it are handled by the contract subject according to the legal provisions and contract agreements (this also highlights the importance of PPP project contract, which is not only the basis for project implementation, but also the basis for handling various problems in the later stage. All parties should attach great importance to PPP project contract). Social capital parties and financial institutions should not take "storage" as the criterion for judging the inevitable compliance of the project, and whether compliance, participation and investment should be comprehensively judged according to the project situation.

4. Governmental Fund Budget
 

Document No. 10 further emphasizes the 10% financial commitment red line, while making it clear that PPP fiscal expenditure is limited to the general public budget. The document requires "to ensure that the financial expenditure responsibility for all PPP projects at this level in each year from the general public budget does not exceed 10 percent of the general public budget expenditure at this level in that year. Newly contracted projects shall not arrange PPP project operating subsidy expenditures from governmental fund budgets or state-owned capital operating budgets."

The above provisions relate to how to identify and deal with "newly contracted projects". The document is limited to "newly signed" projects, which means "not retroactive". Even if the subsidy expenditure is arranged from the government fund budget and the state-owned capital operation budget, the relevant projects that have been signed can still be implemented without rectification. However, if the project has completed the procurement process, but the project contract has not been finally signed at the time of issuance of document 10, can the project continue to be implemented as originally designed (arranging subsidized expenditures from the government fund budget or the state capital operating budget)? If not, how should the completed procurement process (bidding, bidding, evaluation, negotiation, notification of winning bid, etc.) be identified and handled?

From the point of view of contract law, the issuance of a tender notice is an invitation to offer, the tender is an offer, the notice of winning the bid is a promise, and the contract is established when the promise takes effect. The contract has been established, but the key project return mechanism must be adjusted due to document No. 10, which requires a subversive redesign of the project and a substantial change in the original procurement conditions. Under the framework of the existing procurement system, this can only be achieved through re-procurement. On the one hand, it is necessary to re-invest energy and financial resources in procurement, on the other hand, the original winning social capital has the right to claim liability for contracting negligence from the purchaser (contrary to the principle of good faith).

Based on the above, we believe that, from the stability and seriousness of the procurement process, as well as the binding force of the procurement results, in order to avoid the impact on the completed procurement process, to limit the expenditure of PPP project operating subsidies from the government fund budget, it should be more appropriate to take the new storage project after the implementation of No. 10 as the starting point.

The Choice of 5. Social Capital
 

The first is to explicitly encourage and support private and foreign participation in PPP. Document No. 10 clearly proposes to encourage private and foreign participation, increase support for private enterprises and foreign-funded enterprises to participate in PPP projects, promote high-quality projects with good government credit and stable project income to private enterprises, and give priority support to private enterprises to participate in projects under the same conditions.

Second, the main body of the financing platform is explicitly prohibited from participating in PPP projects at this level as social capital. That is, "state-owned enterprises in which all kinds of financing platform companies and financing platform companies affiliated to the government at this level participate and can have a substantial impact on their business activities" cannot participate in PPP projects at this level as social capital of PPP projects at this level. The financing platform company itself undertakes the financing function of government investment projects (according to Guo Fa [2010] No. 19, the local government financing platform company refers to the local government and its departments and institutions through financial allocation or injection of land,EquitySuch as the establishment of assets, assume the financing function of government investment projects, and have independent.Legal personQualified economic entities), which participate in PPP projects at this level as social capital, will lose the relevant functions that PPP should have. Therefore, document No. 10 has made strict requirements on this, and expanded the scope to "state-owned enterprises in which financing platform companies participate in shares and can have a substantial impact on their business activities".

According to the requirements of document [2015] No. 42 issued by the State Council, financing platform companies "have established a modern enterprise system and realized market-oriented operation, on the premise that their local government debts have been included in the government budget, properly disposed of and clearly announced that they will no longer undertake the function of local government debt financing in the future", they can participate in local PPP projects as social capital.

In our view, No. 10 restricts only the financing platform class subject as the social capital of PPP projects at this level, but does not restrict the participation of state-owned enterprises that are not financing platform subjects in PPP projects at this level.

6. performance appraisal
 

Document No. 10 proposes to "establish a payment mechanism that is completely linked to the output performance of the project, and shall not lock in or solidify the responsibility of government expenditure in advance by lowering the assessment standards", and this is one of the conditions that a standardized PPP project should meet. Cai Ban Jin (2017) No. 92 document stipulates that "the project construction cost does not participate in the performance appraisal, or the actual part linked to the performance appraisal results accounts for less than 30%, and the government expenditure responsibility is solidified" shall not be put into storage.

Judging from the above-mentioned statements on performance appraisal in No. 10 and No. 92, we believe that No. 10 puts forward higher standards of performance appraisal requirements. Document No. 92 requires that the proportion of project costs linked to performance appraisal should not be less than 30%, and Document No. 10 requires the establishment of a payment mechanism that is "completely" linked to project output performance. So, how to understand and achieve "complete" hook?

One is the hook object, that is, who is linked to whom? Document No. 10 requires that "payment" be linked to "output performance". Output performance (expressed as a payment coefficient or proportion calculated through specific assessment methods) should be set as an influencing factor in the project return mechanism, I .e. project output performance directly affects the level of payment. If the output performance reaches the assessment index, it will be paid on a contract basis. If it does not meet the standard, it will be paid less or not.

The second is linked content, that is, what to hang? Output performance is reflected by the assessment score of performance indicators, and corresponding performance targets should be set according to the specific attributes of the project and the output situation. At the beginning of PPP project design, the output content of the project should be clearly defined (the project construction output and operation output should be determined according to the actual situation and characteristics of the project), the performance target should be determined based on the output content, an objective and reasonable performance index system should be set up around the performance target, the performance performance of the project company should be determined according to the evaluation of the performance index system, and then the project payment should be linked.

The third is the proportion of linkage, that is, how much? Document No. 10 requires "complete" linkage, and "complete" means that the proportion of linkage is 100. The question is what is the base of 100? We think it should be the full payment of the project. For government-paid or feasibility gap subsidy projects, regardless of how the project return formula is designed and calculated, each payment (e. g., the Caijin (2015) No. 21 formula divides the project subsidy into construction costs and profits and operating costs and profits) must be fully (100 per cent) linked to the performance score.

Strict requirements for 7. government-paid projects
 

In addition to the conditions that a standardized PPP project should meet, No. 10 puts forward higher "prudential requirements" for government-paid projects ".

One is to strictly control the new government-paid projects. The document makes it clear that areas where fiscal expenditure responsibility accounts for more than 5% are not allowed to enter new government-paid projects, unless they are sewage, garbage treatment and other projects that are only formally paid by the government. This requires that areas with financial expenditure responsibility accounting for more than 5% can only have new feasibility gap subsidies or user-paid projects, and if it is a feasibility gap subsidy project, the user-paid proportion must not be less than 10%, the paid part of the project must be substantially related to the whole project, and it is forbidden to pay for additional user-paid content, projects that are not materially related (which can be understood as not necessarily related to each other in terms of construction, operation, output, use, etc.) are rigidly packaged and embedded into a project.

The second is to clarify that government-paid projects should adopt competitive procurement methods and restrict the application of "single-source procurement" procurement methods to such projects. "Single-source procurement" is the procurement method stipulated in the Government Procurement Law, which can be used when the corresponding applicable conditions are met. From the statement of the document, No. 10 only restricts the use of single-source procurement for government-paid projects, and does not deny its application as a statutory procurement method to feasibility gap subsidies and user-paid projects.

8. PPP Project Equity Transfer
 

Caijin (2014) No. 156 document puts forward that "in order to effectively control the change of the ownership structure of the project company, the terms restricting the change of equity will generally be agreed in the PPP project contract", and discusses the "consideration factors for restricting the change of equity", "the meaning and scope of the change of equity" and "the restriction of the change of equity" from the perspective of theoretical explanation and analysis, but it does not explicitly require certain restrictions on the change of the change of equity. Whether or not to allow social capital to transfer its stake in the project company is also different in the actual operation of PPP projects.

From the level of "increasing financing support", Document No. 10 clearly proposes "encouraging equity transfer" and other methods to "revitalize project stock assets and enrich social capital entry and exit channels".

We believe that due to the long cycle of PPP projects, changes in the project implementation environment, changes in social capital factors and other reasons, in order to ensure the smooth and smooth implementation of the project under the circumstances of financing needs and the inability of the original social capital to continue to implement the project, social capital can be agreed to transfer the equity of the project company held by social capital according to the spirit of document No. 10 to realize project financing or absorb capable social capital into the project. In the pre-design of the project, the conditions, circumstances, and operation methods of the project company's equity transfer can be set in accordance with the relevant provisions of the Company Law on equity transfer, so as to leave room for future social capital transfer of equity.