Chizhou deal expected to open the PPP floodgates

Anhui project could blaze new trail for infrastructure financing in China, reports Zheng Yangpeng.

The government of Chizhou in Anhui province signed an agreement on Monday with Shenzhen Water Group Co to give the company control of the city's sewage treatment plants and its sewer system－a deal which marks a significant shift in how the city's public utilities might be run in the future.

But for the country, the contract represents what could become a much broader policy.

The contracting out of Chizhou's vital public services could now be replicated across the country, as local governments continue to struggle with spiralling debt levels.

And as in the case of Chizhou, such a public-private partnership could be key to China's ability to pay for its growing future infrastructure demands.

On Dec 5, the Ministry of Finance unveiled 30 "exemplary projects" earmarked for similar PPP－including those for sewer systems, water and heating supplies, garbage disposal, medical care, sports facilities－amounting to 180 billion yuan ($28.9 billion), including the Chizhou contract, which is the first to be officially announced.

The government in Chizhou offered to sell at the start of this month 26 years of ownership and operational rights to its sewage plants and sewer system.

In winning the bid, SWG has now agreed to take over the facilities previously owned and run by the government, for 712 million yuan.

In exchange, the government has promised to pay a fixed price (22.5 million yuan per year) for the services the company provides. In other words, the government has unloaded its assets and turned itself into a service buyer.

The work will be carried out as a joint venture between the two sides via a special purpose vehicle, 80 percent owned by SWG, and 20 percent by the government. The SPV has promised to invest another 1.34 billion yuan on building new facilities.

Zheng Qingzhang, a senior executive with SWG, said the SPV already has paid-up capital of 217 million yuan, with the remaining 499 million yuan expected to come from bank loans.

It has already been given "high-level official endorsement" of its financing model, said Zheng, with around 10 banks interested in providing the funds.

In Western markets, PPP generally refers to long-term cooperation between governments and private companies on infrastructure or public service projects. The public sector side grants the SPV long-term operating and earning rights, relieving it of future investment responsibilities.

In China, the partnership is more loosely defined as one between government and any entities beyond government, for example State-owned enterprises.