Detailed explanation of PPP project financing methods

Detailed explanation of PPP project financing methods

Most people are not unfamiliar with "financing", such as house leasing, car leasing, etc., but these usually do not have ownership transfer issues. Classified as traditional leasing. Financial leasing is a representative of the modern leasing industry and is essentially a financial means alongside bank credit and insurance. Below is a detailed explanation of PPP project financing methods that I have compiled. Everyone is welcome to share.

Detailed explanation of PPP project financing methods

According to the introduction of social capital investment in infrastructure and public utility projects announced by various places this year, Hebei Province launched 32 projects with an investment of 133 billion yuan; Fujian Province launched 28 projects with an investment of 147.8 billion yuan; Sichuan launched 264 projects with an investment of 253.4 billion yuan; Jiangxi Province launched 156 projects with an investment of 318.5 billion yuan; Hubei Province launched 235 projects with an investment of 370 billion yuan. According to the latest data, Hunan Province has launched 82 projects this year, with a cumulative investment of 135.1 billion yuan. The National Development and Reform Commission previously announced the first batch of 1,043 PPP projects with a total investment of 1.97 trillion yuan. Faced with such a large demand for funds, how will these funds be raised? The following is a detailed explanation:

1. The connotation of PPP projects

Generally speaking, the PPP model is a collective term for various public-private partnership models, and is mainly used in public projects such as infrastructure. First, the government charters a new project company for a specific project and provides it with support measures. Then, the project company is responsible for the financing and construction of the project. The financing sources include project capital and loans; after the project is completed, the government-licensed enterprise will carry out the project. The development and operation of the project, and the lender can not only obtain direct benefits from project operation, but also obtain benefits transformed through government support.

After the 1990s, the PPP model (Public-Private-Partnership, that is, the "public sector-private enterprise-cooperation" model) first became popular in the West, especially in Europe. ***Infrastructure plays an important role, especially in the construction of large-scale, one-time projects such as roads, railways, subways, etc.

The PPP model is an optimized project financing and implementation model that takes "win-win" or "multi-win" for all participants as the basic concept of cooperation. Its typical structure is: government departments or local governments Through government procurement, a concession contract is signed with a special company established by the winning bidder, and the special company is responsible for financing, construction and operation. The government usually reaches a direct agreement with the financial institution that provides the loan. This agreement is not an agreement to guarantee the project, but an agreement that promises the lending institution to pay the relevant fees according to the contract signed with the special purpose company. This agreement makes the special purpose company The target company can obtain loans from financial institutions relatively smoothly. The essence of using this form of financing is that the government speeds up infrastructure construction and efficient operations by granting private companies long-term franchise rights and income rights. The connotation of the PPP model mainly includes the following three aspects:

First, PPP is a new type of project financing model. PPP financing is a project-based financing activity and a form of project financing. Financing is mainly arranged based on the expected income, assets and government support of the project rather than the credit of the project investor or sponsor. The direct income from project operations and the benefits transformed through government support are the source of funds for repaying the loan. The assets of the project company and the limited commitment given by the government are the security guarantee of the loan.

Second, the PPP financing model can enable more private capital to participate in the project to improve efficiency and reduce risks. The government's public sector departments and private enterprises cooperate throughout the entire process based on concession agreements, and both parties are jointly responsible for the entire cycle of project operation. The operating rules of the PPP financing model enable private enterprises to participate in the preliminary work such as the confirmation, design and feasibility study of urban rail transit projects. This not only reduces the investment risks of private enterprises, but also integrates the management methods and technologies of private enterprises. Introducing it into the project can also effectively control the construction and operation of the project, which will help reduce the risks of project construction investment and better protect the interests of the state and private enterprises. This has practical significance that is worthy of recognition for shortening the project construction cycle, reducing project operation costs and even the asset-liability ratio.

Third, the PPP model can guarantee the profits of private capital to a certain extent. The investment goal of the private sector is to seek projects that can both repay loans and provide a return on investment. Unprofitable infrastructure projects will not attract private capital investment. With the PPP model, the government can provide corresponding policy support to private investors as compensation, such as tax incentives, loan guarantees, and priority development rights for land along the route to private enterprises. The implementation of these policies can increase the enthusiasm of private capital to invest in infrastructure construction.

The PPP model is a complete project financing concept, but it is not a complete change to project financing, but a new model for the organizational setup during the project life cycle.

It is a form of mutual cooperation between the government, for-profit enterprises and non-profit enterprises based on a certain project with the concept of "win-win" or "multi-win". All parties involved can achieve more favorable results than expected by acting alone. , its operation idea is shown in the figure. Although the participating parties have not achieved their ideal maximum interests, the total benefits, that is, social benefits, are the largest, which is obviously more in line with the purpose of public infrastructure construction.

2. PPP model case

The construction of urban complex in Area 3 of Shuangpai County is a key project determined by the county committee and government of the county, and it is also the cooperation between Shuangpai County and our company. For the PPP project, our company obtains the sales, operation and development rights of the residential area of ??the project. This project is located in the main urban area of ??the county. It covers an overall area of ??4,470 square meters, is 27 stories high, has a 5-story podium above the ground, and is a boutique residential building from the 6th to 27th floors. The total construction area is more than 40,000 square meters, and the investment is about 147 million yuan. Among the people's livelihood construction projects approved by the National Development and Reform Commission, the Shuangpai County employment and social security service platform is also included. After completion, it will become a comprehensive integration of county government services, talent exchanges, employment services, vocational training, job recruitment, social security payment, labor The mass service center that integrates rights protection plays an extremely important role in promoting the construction of a serving and efficient government and better serving the economic development of the county and district. A circular fire road is formed around it, making transportation convenient. For the residential part, two high-rise residential buildings are arranged on the south and north sides of the land to provide tranquility amidst the bustle to improve the quality of living and become the first benchmark for urban residential living in Shuangpai County and the first benchmark for urban human settlements.

According to the agreement signed between our company and the Shuangpai County Government, our company established a project company in Shuangpai to invest in the construction of the urban complex in Area 3 of Shuangpai County in a BOT manner. Our company has the right to operate the residential housing and infrastructure projects in the area. During the entire construction and operation period, the project company is absolutely controlled by our company and operates independently and is responsible for its own profits and losses.

III. Full explanation of PPP project financing methods

(1) Equity investment

Equity investment means that the shareholders of the PPP project company contribute funds to complete the PPP project of business turnover. Generally speaking, as a shareholder of a PPP project company, its special advantage is that it can obtain project operation income. By participating in or controlling the overall operation of the company, it can control the size of its income. The more work you do, the more you get. In addition, if shareholders are also service providers or goods suppliers of the project company, they can also obtain more favorable business opportunities. However, compared with other creditor investors, the disadvantage is that shareholders have the weakest priority in the distribution of company property income. They can only obtain the income from their equity investment when the creditors' rights are satisfied. In general, using equity investment has the greatest risks and the greatest returns. Common shareholders are project participants, local investors, governments, concessionaires, institutional investors, bilateral or multilateral organizations, etc.

For creditors, there are generally three ways to reduce their investment risks: first, obtain a guarantee from a bank or a third party; second, try to pay a certain proportion in advance or pay the investment amount in stages according to a proportion. It retains its own capital buffer; thirdly, it chooses to break through the liability limits of the limited liability company and pursue the company's debts from shareholders. To achieve this purpose, it generally only requires special commitments from shareholders, and its essence is nothing more than a third-party guarantee. This situation mainly occurs when the risk of a certain link in the project is too high and it is difficult to obtain investment. As the owner of the project company, shareholders are more willing to bear additional guarantee responsibilities for this link.

(2) Debt investment

Compared with equity investment, the advantage of the borrower is mainly reflected in the priority distribution of interests before the shareholders are paid, while the disadvantage is that the income is limited. Generally speaking, debt repayments are often based on fixed or floating interest rates and are paid periodically by the debtor. In addition, when selecting borrowers, special attention should be paid to the following issues:

Multilateral organizations and export credit agencies: A package of loans obtained through this channel can avoid certain political risks and obtain The host country government provides preferential policies in terms of loan repayment. However, due to the strict restrictions and requirements of such loans, it is generally difficult to obtain them.

Commercial banks: For long-term loans, commercial banks are a common choice. Compared with issuing bonds, the advantage of commercial bank loans is that it gives the borrower a certain room for negotiation, and gives the debtor more room for adjustment when the project cycle is long and future risks are difficult to predict;

Equipment providers, financial lease lessors, etc.: In order to obtain business opportunities and be more beneficial to the sale of their products, equipment or service providers for some projects will also agree to provide loans; financial lease lessors and equipment providers are at this point Similarly, it is willing to provide more competitive financing terms in order to be more beneficial to leasing its products.

Syndicated loans: The loans provided by each bank in the syndicate are independent and have independent rights and obligations, so they basically do not endorse other banks. As an intermediary, the agent bank proposes conditions to the borrower on behalf of the syndicate, verifies whether the borrower finally meets the requirements, receives the loan from the syndicate, and calculates the interest rate. This method is often suitable for projects with larger amounts due to its complex structure.

(3) Bank letters of credit and letters of guarantee

These methods essentially reduce the project company’s capital share and improve capital liquidity. Most of the types are consistent documents and visible documents. The payment is payable on demand. In some cases, it may be necessary to obtain a court judgment or arbitration award to prove the relevant breach of contract before payment can be obtained. When banks issue these bills or provide guarantees, they will basically require the entrusting party to provide a counter-guarantee of the same amount as the guarantee amount, usually a higher amount. When the conditions are met, the bank has the right to convert the price payable by the project company under the counter-guarantee into Its loans require the signing of a creditor agreement to ensure its property rights to the project company.

(4) Bond/Capital Market Financing

This method allows borrowers to obtain loans directly from individuals and institutions without going through an intermediary such as a bank. Generally speaking, The advantages of this method include low interest rates, long repayment period and strong liquidity. However, its disadvantage is that it involves multiple links and qualification requirements such as endorsement, underwriting, trust, bond rating, etc., resulting in multiple approvals, long time, and The procedures are complex, flexible and risky. Generally speaking, this financing method will not be used in the early stages of a project, but generally after the project has passed the construction period and the project risks have been reduced to a large extent, this method can still be used for project refinancing.

(5) Mezzanine Financing

Mezzanine financing is also called standby funds, because it is between equity investment and debt investment, and its priority of payment is also between the two. In between, that is, receiving compensation or receiving income distribution later than creditors and earlier than shareholders. Typical methods of mezzanine financing include the provision of subordinated loans and the issuance of preferred shares. The former means that they will be paid later than ordinary borrowers, and the latter means that they can receive project income distribution but cannot participate in the company's operations. The motivation for general project companies to use this method is to control their asset/debt ratio, especially when the project has unbudgeted overruns (within 10%), in order to obtain funds as soon as possible, this method is used for financing.

However, the characteristic of this financing method is that the cost is higher than that of ordinary loans. Since investors under mezzanine financing will receive income distribution later than ordinary creditors, in order to make up for the risks they bear, project companies generally choose Providing it with higher interest than ordinary loans or distributing project company income to it (in the form of providing it with options, convertible bonds, etc.) will generally be arranged through a trust.

(6) Creditor Agreement

Creditor Agreement means that in order to determine the distribution of interests between different creditors, creditors can reach some special agreements on issues related to the impact of compensation. , including establishing the order of fund withdrawal, debt maturity arrangements, creditor rights allocation methods, security rights arrangements, payment management, resolution methods, insurance fund management, technical consultant management, etc., which plays a core role in coordinating PPP project financing management.

Hunan Yuna Investment Management Co., Ltd. specializes in PPP project investment and financing consulting and operation management, and PPP management consulting. At present, our company has participated in 5 preliminary research and bidding projects and 1 implemented physical project. We have professional engineering experts, financial experts, investment and financing experts. The company's business scope includes infrastructure investment and financing consulting, infrastructure enterprise restructuring and management consulting, investment, financing and management consulting for the construction of new cities and development zones, policy research consulting, and dealer debt restructuring plan research consulting. Service areas include water supply and drainage, garbage disposal, gas heat, power generation, rail transit, primary land development, new cities, development zones and large-scale comprehensive development projects.

The main functions of the PPP channel

The PPP channel can be divided into financing and non-financing. The PPP project contract is entered into by the government and the social capital party in accordance with the law for PPP project cooperation. contract.

The purpose is to reasonably allocate project risks between the government and social capital, clarify the rights and obligations of both parties, ensure that both parties can reasonably assert their rights in accordance with the contract, properly perform their obligations, and ensure that the entire life cycle of the project of smooth implementation.

Non-financing PPP approaches:

(1) Transfer, operation, transfer (TOT)

Government departments transfer owned facilities to private organizations For operation, private institutions usually need to pay a transfer fee, and then hand over the facilities to the government for free after the expiration of the term.

(2) Operation outsourcing

The government or government-owned companies entrust certain operational and auxiliary tasks to external enterprises/individuals to undertake and complete them by signing outsourcing contracts. In order to achieve the purpose of concentrating resources and attention on one's core affairs. Generally, the government pays the party responsible for the operation

(3) Operation and maintenance contract (O&M)

The private sector partner operates the public property within a specific period of time according to the contract. assets. Public partners retain ownership of the assets.

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