[Weekly Early Read] Massive Delays and Potential Abandonment in PPP Projects: Where to Begin Risk Mitigation? (AI Translation)

【周刊提前读】PPP项目巨额拖欠或面临烂尾 风险化解何处着手？

Zhonglin Corp., a company with extensive experience in ecological environment construction, brought attention to the current challenges faced by existing Public-Private Partnership (PPP) projects. In September 2023, a subsidiary of Zhonglin Corp. filed a lawsuit against the Laiyang Municipal Government for failing to provide land and not processing necessary procedures, leading to the premature termination of a PPP project. Another case in November involved its subsidiary encountering government-requested changes to a project in Haikou and facing unpaid service fees for six years.[para. 1]

The surge in PPP projects began in 2014 alongside regulatory changes like the Budget Law revision. The model aimed to innovate urbanization financing, improve governance, and relieve local government debt. Yet, PPP projects became vehicles for illegal local government borrowing, often increasing local debt rather than mitigating it. By 2023, decision-makers began auditing existing PPP projects, leading to a new mechanism that adopts a concession model focused on user responsibility for payments.[para. 3]

As of October 2022, the Ministry of Finance PPP project library contained 10,332 projects with a 16.6 trillion yuan investment, but around 80% of this involved debt financing. Mismanagement and delayed government payments have resulted in financial stress across ongoing projects, creating risks of banks cutting off loans and abandoned projects. [para. 3][para. 10]

In November 2024, a significant local debt restructuring plan was initiated, increasing debt resources by 10 trillion yuan and issuing local special bonds to address implicit debts. However, few PPP projects are included in the debt coverage. Effective management of existing PPP projects is crucial and requires not just financial resources but also regulatory clarity. Overall, clarification of project categorization, compliance, and guidelines for ongoing PPP projects are essential to resolve the challenges faced by these projects.[para. 3]

The merger of responsibilities between the Ministry of Finance and the National Development and Reform Commission (NDRC) over PPP projects led to confusion, because the former withdrew from its role and dismantled management regulations. This has left local authorities without guidance, causing widespread project mismanagement. Although some projects have been categorized and disposed of, many regions remain inactive.[para. 5][para. 10]

Local governments now bear the primary responsibility for handling PPP projects, including identifying debts and ensuring projects are adequately budgeted. Compliance remains a significant issue for many existing PPP projects, hindering loan extensions from financial institutions. Without compliance guarantees, projects face financial, regulatory, and operational risks, which could escalate into larger financial crises across local governments. [para. 3]

The existing PPP projects face growing delinquency, with over 1.28 trillion yuan in local government arrears. Payment deferments and unsettled debts create cash flow issues for construction companies and infrastructure service providers, thus threatening employment stability and governmental credibility.[para. 6][para. 12]

Significant challenges exist in aligning existing PPP projects with current financial policies and practice, especially given that 94% of projects involve substantial government funding due to their viability gap. Researchers suggest establishing a "whitelist" system, facilitating financial support for compliance-compliant projects, and relieving potential funding gaps.[para. 10][para. 14]

Clarifying the current actual regulatory guidelines is imperative given the challenges faced by PPP projects. Introducing normative policies for existing PPP projects and ensuring financial accountability at local government levels are critical steps. Until the governance framework stabilizes, these projects remain marred by regulatory uncertainty and operational challenges.[para. 14][para. 16]

The escalation of disputes to legal avenues points to the urgent need for additional guidelines and conflict resolution mechanisms, particularly considering the significant financial and public service-oriented stakes involved in PPP projects.[para. 20]