Source: National Development and Reform Commission (NDRC)

Following the release of the Guiding Opinions on Standardizing the Implementation of the New Public-Private Partnership (PPP) Mechanism in November 2023, the NDRC has recently issued the Outline for Compiling Concession Operation Plans for Public-Private Partnership Projects (Trial Version 2024) (hereinafter referred to as the "Compilation Outline").

The Compilation Outline covers aspects including project feasibility, feasibility demonstration of the concession operation model, and key contents of concession operations. It can be seen from the Compilation Outline that, following Document No. 115, this content is a continuous supplement to the concession operation model in terms of reducing local implicit debts, returning to the user-pays mechanism, and strengthening private enterprise participation. (For better reading: New PPP 3.0 Policy: Termination of PFI, Return to Concession Essence, and Strong Promotion of Private Enterprise Participation & Innovation)

The third part of the Compilation Outline focuses on project feasibility demonstration, analyzing seven aspects: project attributes, project charging channels and methods, project profitability, comparative advantages, participation willingness, compliance with laws and regulations, and concession operation risks.

01 Policy Content: Analysis of Concession Project Attributes

Analyze whether the project is a public welfare-oriented project with operating income. Commercial projects and industrial projects with a high degree of marketization, as well as public welfare projects without operating income, shall not adopt the concession operation model. Projects of the above types that are unrelated shall not be "bundled" with each other, nor shall they be "bundled" with projects suitable for the concession operation model to carry out PPP cooperation.

Projects such as integrated domestic waste collection, transportation and treatment; sewage pipe networks, heating pipe networks, and water supply pipe networks with integrated plant-network operations; projects of comprehensive transportation intermodal transportation such as road-water intermodal transportation and road-rail intermodal transportation; and infrastructure and public utility projects that carry out diversified development based on the projects themselves can balance project benefits in a comprehensive manner and carry out PPP cooperation. For new (including reconstruction and expansion) concession projects, reference shall be made to the List of New (Including Reconstruction and Expansion) Concession Projects Supported for Private Enterprise Participation, and the shareholding requirements or participation methods for private enterprises shall be clarified.

Analysis of Project Charging Channels and Methods

Clarify the project’s charging channels and methods (including potential charging channels and methods), explain the basis for charging, demonstrate the compliance of charging channels and methods with laws and regulations, evaluate users’ willingness and ability to pay as well as revenue stability, conduct a preliminary analysis of the project’s operating costs, charging status, and existing fiscal operation subsidy policies in the field to which the project belongs, clarify whether the project is eligible for operating subsidies in accordance with regulations, confirm that the adoption of the PPP model will not add additional future fiscal expenditure obligations for local governments, and ensure no new local government implicit debts are incurred in any form, so as to meet the user-pays requirement. If the project charging is subject to government-set prices or guided prices, the prices or charging policies formulated by the relevant pricing authorities shall be implemented; if not, the pricing mechanism and price adjustment mechanism shall be clearly defined.

Analysis of Project Profitability

Study the stability and growth potential of user-pays income. Under the scenario where the project’s total investment is equity capital, examine the cash inflows (including operating subsidies enjoyed in accordance with regulations) and outflows throughout the project’s full life cycle, and calculate profitability indicators such as the financial internal rate of return (FIRR) based on the project investment cash flow statement and the concessionaire’s own capital cash flow statement respectively. For projects with insufficient profitability, study and analyze the feasibility of improving the project’s overall profitability through multiple methods, mainly including reasonably determining the concession period, government providing investment support during the construction period, legally and reasonably adjusting land planning uses and development intensity, and providing resource compensation reasonably related to the project. If government investment support is required, the specific method, amount, and time node of such support shall be explained. When necessary, sensitivity analysis and break-even analysis of profitability indicators shall be conducted.

Analyze whether the concession operation model is suitable from the perspective of profitability. If profitability remains insufficient after adopting multiple measures, the concession operation model shall not be used.

Analysis of Comparative Advantages

Conduct a comparative analysis of the input-output, economic and social benefits of the concession operation model and the traditional government investment model from the perspectives of the project’s full-life-cycle costs, output or service effects, construction and operation efficiency, and risk prevention and control, so as to demonstrate whether the project is suitable for the concession operation model.

Analysis of Participation Willingness

Analyze and explain the willingness of social capital and financial institutions to participate; when necessary, market tests on key project conditions may be conducted among social capital and financial institutions, and the results of such tests shall be explained.

Analysis of Compliance with Laws and Regulations

Based on the above analysis, explain whether the aforementioned concession arrangements violate laws, regulations, or the spirit of policy documents, including but not limited to unclear definition of the scope or output of concession operations, lack of exclusive agreements within a certain region or period, and the use of fiscal funds to cover project construction and operation costs through methods such as viability gap funding (VGF), commitment to minimum return rates, or availability payments. For projects involving the participation of foreign-invested enterprises, explain whether they comply with the relevant provisions on foreign investment management.

Analysis of Concession Operation Risks

From the perspective of concession operations, explain the main risks that may arise from the adoption of the concession operation model.

The fourth part of the Compilation Outline focuses on the key contents of concession operations, covering aspects including the scope of concession operations, implementation methods, term and asset ownership, key principles and cooperation boundaries, selection of concessionaires, transaction structure and investment-financing structure, supervision and management as well as operation evaluation, risk management and control, and government commitments and guarantees.

02 Policy Content

I. Scope of Concession Operations

Clarify the requirements for the construction content, operation content, and service scope of the project to be implemented under the concession operation model, as well as the concessionaire’s responsibilities for each link of the project cycle. For projects involving the revitalization of existing assets, the methods and procedures for asset disposal, as well as requirements for handling existing debts and resettling employees, shall be specified.

II. Implementation Methods

Determine the specific implementation method of the concession operation model. New projects may adopt methods such as BOT (Build-Operate-Transfer), BOOT (Build-Own-Operate-Transfer), DBFOT (Design-Build-Finance-Operate-Transfer), and BOO (Build-Own-Operate); reconstruction and expansion projects may adopt the ROT (Rehabilitate-Operate-Transfer) method; and the revitalization of existing assets may adopt methods such as TOT (Transfer-Operate-Transfer). Explain the main basis and considerations for the selection of the implementation method.

III. Concession Term and Asset Ownership

Clarify the concession term and explain the basis for determining the term. If the concession term is used as a bid evaluation criterion, the term finally determined through bidding shall prevail. Clarify the asset ownership during the concession term and after the expiration of the concession term.

IV. Key Principles and Cooperation Boundaries of Concession Operations

Clarify the pricing and price adjustment mechanisms and principles for user-pays, as well as the handling principles for various major changes during the period; define the rights, obligations, and responsibilities of the government, concessionaire, and project company at each stage of the concession operation; and specify the distribution principles for additional benefits obtained by the concessionaire or project company through strengthened management, cost reduction, efficiency improvement, and active innovation.

V. Selection of Concessionaires

(I) Basic Qualifications of Concessionaires

Define the basic qualifications of concessionaires in accordance with the following requirements: Except for acting as the government’s investor representative to participate in projects where local governments provide investment support through capital injection, state-owned sole proprietorship or state-controlled enterprises at the local level (including their sole proprietorship or controlled subsidiaries) shall not participate as bidders, joint bidders, or project company shareholders in any new (including reconstruction and expansion) PPP projects of the same level of government. When acting as the government’s investor representative, they shall, in principle, not hold a controlling stake in the project company.

(II) Methods for Selecting Concessionaires

The method for selecting the concessionaire shall be clearly defined. Public bidding is encouraged as the preferred method for selecting concessionaires; if public bidding is not adopted, the reasons and basis shall be specified.

(III) Criteria for Selecting Concessionaires

Put forward requirements for the qualifications that concessionaires shall possess, clearly specifying their required project management experience, professional operation capabilities, comprehensive corporate strength, and credit status. The project operation plan, charging unit price, concession term, and government support conditions shall be taken as important evaluation criteria for selecting concessionaires. For new (including reconstruction and expansion) concession projects, specific requirements for encouraging priority participation of private enterprises shall be clarified in accordance with the List of New (Including Reconstruction and Expansion) Concession Projects Supported for Private Enterprise Participation.

VI. Transaction Structure and Investment-Financing Structure

(I) Transaction Structure

Design and draw the transaction structure diagram of the concession project, supplemented by written explanations. Clarify the project authorization path, the concessionaire’s shareholding ratio, contract system, project management structure, asset formation and transfer, and government supervision structure; explain the responsibilities of promoting entities such as the implementing agency and the government’s investor representative (in case of government capital injection). Specify the minimum period during which the concessionaire shall not transfer the equity of the project company under normal operation.

(II) Investment-Financing Structure

Clarify the project capital ratio, shareholder contribution requirements, financing methods and restrictive conditions, the method and estimated amount or ratio of government investment support during the construction period, the government’s or government investor representative’s requirements for project company dividends, the requirements for distributing residual benefits after the project company’s liquidation, and the financing principles for bank loans, etc. For projects involving the revitalization of existing assets, if existing debts are involved, explain the debtor, debt scale, interest rate, term, and whether early repayment is required; if early repayment is required, explain the source of repayment funds and the specific repayment plan item by item.

VII. Supervision and Management, and Operation Evaluation

(I) Supervision and Management

Clarify the public supervision requirements of the implementing agency, in conjunction with relevant departments, for the preliminary work, construction and implementation, and daily operation of the concession project. Specify the content and requirements for disclosing relevant information to the public through the national online approval and supervision platform for investment projects, as well as the process audit during the construction and implementation stage and the audit during the operation stage.

(II) Operation Evaluation

Clarify the arrangements for the implementing agency to conduct monitoring and analysis of the project’s operation and regular operation evaluations. Evaluation indicators for operation standards and effects shall be proposed from the perspective of industry management; indicators for performance of agreements shall be proposed from the perspective of contract implementation; and indicators for direct effects, external impacts, and sustainability shall be proposed from the perspective of project effects. If fiscal funds are involved, performance evaluation indicators for the use of fiscal funds shall also be proposed in accordance with relevant regulations.

VIII. Risk Management and Control

In view of policy, economic, social, engineering, environmental, and financial risks at different stages of the project’s full life cycle, put forward risk response measures and suggestions, clarify the risk allocation principles among the implementing agency, concessionaire, and project company, and define the project risks borne by the government, those not borne by the government, and those jointly borne by the government and the concessionaire or project company.

IX. Government Commitments and Guarantees

Analyze and clarify the government’s commitments and guarantees regarding assistance in the project’s preliminary work, land (sea) use and resettlement compensation for immigrants, exclusive agreements, investment support, unified operating subsidies, and relevant supporting facilities and services. Clarify the guarantees for policies on income sources, pricing and price adjustment, and cost supervision and investigation under the user-pays mechanism, as well as the responsive guarantee mechanism for government-specific requirements that affect the project’s income sources.

X. Other Requirements for Adjustment, Change, etc.

Clarify requirements for contract modification and extension, price adjustment, subsidy adjustment, equity change of the project company, temporary government takeover and expropriation, project transfer or early exit, performance guarantees, liability for breach of contract, and dispute resolution.