In Depth: China Tackles Risks in Legacy PPP Projects

1. In late December, M-Grass Ecology And Environment (Group) Co. Ltd., a company listed in Shenzhen, announced the early termination of four public-private partnership (PPP) projects and initiated debt restructuring. This move offered insight into the broader, ongoing Chinese government effort to manage risks associated with a large portfolio of legacy PPP projects, many of which are under financial strain due to delayed government payments and reluctant lenders. By the end of 2024, concerns about financial risk and potential funding cuts grew as the total outstanding value of such projects exceeded 10 trillion yuan (approximately $1.4 trillion) [para. 1][para. 2][para. 3].

2. To address these risks, the Chinese central government introduced a major new policy in August called Guideline 84, which aims to prevent these legacy PPP projects—numbering over 10,000—from becoming a systemic financial issue. This blueprint instructs banks to continue financing ongoing projects, allows local governments to use funds from both general and special-purpose bonds (SPBs), and encourages negotiations among government authorities, private partners, and lenders to restructure contracts, interest rates, and project duration [para. 4][para. 5][para. 6][para. 7][para. 8][para. 9].

3. Guideline 84 offers local officials a compliant approach to resolving PPP challenges, including ways to adjust user fees and to reduce officials’ fear of being penalized for state asset losses. The policy has already spurred market activity: since its release, local governments and companies have begun renegotiations and are re-evaluating the potential for other organizations to take over struggling PPP projects [para. 10][para. 11].

4. While the central policy provides strategic direction, implementation is left to provincial governments, and provinces such as Yunnan and Gansu are leading with tailored approaches. Yunnan, host to China’s largest PPP investment value (513 projects worth 1.34 trillion yuan from 2016 to 2020, mostly in highways), has created an innovative exit by reclassifying non-core PPPs as direct government investments. For private sector players—many of whom never intended to operate these projects long term—this offers critical relief, particularly for those with cash flow problems [para. 12][para. 13][para. 14][para. 15][para. 16].

5. The early termination of M-Grass projects highlights how companies can leverage new debt-resolution policies to recover cash quickly, including having some debt forgiven as part of restructuring. Since Guideline 84’s announcement, some provinces, notably Yunnan, are using SPBs to cover government arrears or completely refinance PPP projects, essentially converting them into SPB-funded projects [para. 17][para. 18][para. 19].

6. Challenges remain due to legal ambiguities and limited SPB resources. Many local authorities are unsure how to apply for SPBs and whether funds can be used for purposes like termination compensation. With more than 10 trillion yuan in PPP projects and only a 4.4 trillion yuan SPB quota for 2025, not all demands can be met, since SPBs must also address other financial priorities [para. 20][para. 21].

7. Contract renegotiation is another significant element. Many PPP contracts signed during the sector’s boom (2015–2018) promised high returns and interest rates, which are now impractical. Although Guideline 84 supports cost reductions, the process is complicated by the legally binding nature of existing contracts, making negotiations delicate [para. 22][para. 23][para. 24].

8. Nevertheless, progress is occurring, with some projects now securing financing below benchmark rates and commercial banks showing willingness for loan extensions and rate cuts. However, policy banks remain more conservative, and legacy projects typically still carry higher rates than new ones. There is also newfound pressure on private partners to innovate to improve project viability, but many projects overestimated potential revenues or have encountered obstacles in actual revenue collection [para. 25][para. 26][para. 27][para. 28].

9. Despite active policy development and localized implementation, many provinces are still reviewing their legacy PPP portfolios. Only once this thorough assessment is complete will a broader renegotiation and cost reduction phase proceed [para. 29].