The Practice of PPP Model in Financing Subway Construction

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Abstract：The PPP model is also called the public-private partnership model. Due to the characteristics of government participation in the whole process of operation, the model of PPP has received extensive attention. PPP has transferred some governmental responsibilities to social subjects (enterprises) in form of franchise. As a consequence, government and social subjects establish a community relationship of "sharing interests, sharing risks, cooperating in the whole process", which lessen financial burden of the government and the investment risks of social subjects.

There are also a number of Beijing metro lines using PPP model for financing. The Urban Rail Transit team of Beijing Docvit Law Firm will analyse the operation of PPP model in the financing of Beijing metro lines.

1

Beijing Metro Line 4——the first PPP project of urban rail transit

At that time, in order to relieve the fund-raising pressure on Beijing Municipal Government's investment in subway construction, and to realize the diversified breakthrough in investment and operating entities, Beijing Metro Line 4 became the first PPP project in China's urban rail transit industry. From 2009 to now, the application of PPP model in investment and construction of Metro Line 4 has been successful. The project has achieved good results and is of good reference value.

Therefore, we can draw lessons from the PPP project model of Beijing Metro Line 4 from three levels. Firstly, establishing a strong policy guarantee. The successful implementation of Beijing Metro Line 4 PPP project has benefited from the active coordination of the government who provided a comprehensive guarantee for the project promotion. In the course of the implementation of the whole item, the government role has changed from a leader to a full participant and an all-out guarantee. Secondly, a reasonable profits distribution and risk sharing mechanism is constructed. The PPP project of Beijing Metro Line 4 improves the management and service efficiency in the field of rail transit through the smart design of ticket pricing mechanism and passenger flow mechanism. Thirdly, establishing a full-coverage PPP project supervision system. Thanks to its relatively complete regulatory system, the PPP project of Beijing Metro Line 4 continues to run well. Clearly defining the boundary between the government and the market along with designing the corresponding supervision mechanism in detail, plays an essential role in government supervision under the PPP model.

2

Beijing Metro Line 14 (PPP Project)

Beijing Metro Line 14 has also adopted the PPP model to bring in outside investors. The market-oriented capital scale is 15 billion yuan. Beijing Municipal Infrastructure Investment Co., Ltd. (hereinafter referred to as “Beijing Investment Company”), a wholly state-owned company in Beijing, undertakes functions of investing and financing of infrastructure projects in Beijing. Beijing Investment Company is specifically responsible for the introduction of investment on Beijing Metro Line 14.

Metro Line 14 is similar to Metro Line 4. According to the main responsibility of investors, the project entity is divided into two parts. Part A, taken by the government, is responsible for investment and construction which mainly includes civil engineering such as tunnel body, stations and so on, as well as land requisition and relocation of projects. Part B is the responsibility of social investors and mainly includes vehicles, communications and signals. Through engineering division and interface coordination mechanism, the scope and responsibility of government and social investors are clarified. Compared with the PPP model of Metro Line 4, in the Metro Line 14 project, the rail project which is closely related to the operation is also assigned to the investors, and the division of the project investment responsibility is more suitable for the project operation characteristics.

According to the Franchise Agreement, the selected investor, Beijing MTR Corporation, is responsible for the investment and construction tasks of part B of Metro Line 14 during the construction period, and the operation and management of Metro Line 14 during the 30-year franchise period. After the franchise period, Beijing MTR Corporation will transfer the project to Beijing Municipal Government free of charge. Beijing MTR Corporation realizes the return of investment and obtains reasonable commercial return by three ways: the income of passenger tickets during the period of franchise, the operating income of non-ticketing business within the authorized scope, and the government subsidy.

For the part A project assets that the government is responsible for investing, after the completion of construction, the franchise firm is able to use and responsible for management and maintenance by leasing. Considering the present situation of passenger fares, the annual basic rental is reduced to a symbolistic 10,000 yuan compared with Metro Line 4 in order to reduce the burden of the franchise firm.

Beijing Metro Line 4 and Metro Line 14 both adopt the traditional PPP model, introducing outside investors through franchising, who are responsible for the investment of certain projects and the operation during a certain period of time. To some extent, these investors alleviate the government's current investing pressure and play an important role in ensuring the timely supply of rail transit construction funds.

3

Introduction of PPP Model to Beijing Metro Line 16

According to certain principle and proportion, the PPP project of Metro Line 16 divides the total investment into two parts. Part A introduces China Re Asset Management Company Ltd. (hereinafter referred to as "China Re Asset") through equity financing, about 12 billion yuan of insurance funds. Part B introduces Beijing MTR Corporation through franchising with 15 billion yuan. The total social capital is 27 billion yuan.

1.The main contents of equity financing

Part A of Metro Line 16 is directly invested by Line 16 Metro Company (a wholly owned subsidiary of Beijing Investment Company). The total investment is about 32.4 billion yuan, of which the project capital is about 13 billion yuan. Equity investors raised funds through an insurance fund equity investment plan or other feasible means to participate in 12 billion yuan, with the remaining capital invested by Beijing Investment Company.

All shares hold by equity investors are entrusted to Beijing Investment Company, and equity investors do not participate in the management of Metro Line 16. Also, equity investors are not allowed to transfer their shares to any other third parties. The period of equity investment is not more than 20 years, and at the end of the term, Beijing Investment Company repurchases the equity investors' shares by original value.

2. The main contents of franchise ( based on PPP mode)

During the construction period, Beijing MTR Corporation is responsible for the investment and construction tasks of Metro Line 16 Part B. And it is also responsible for the operation, management, maintenance of all facilities (including part A and part B), asset upgrading (excluding tunnel body) and additional investment of Metro Line 16 during the 30-year franchise period. After that period, Beijing MTR Corporation will transfer the project to Line 16 Metro Company or the designated department of Beijing Municipal Government free of charge. Beijing MTR Corporation realizes the return of investment and obtains reasonable commercial return by three ways: the income of passenger tickets during the period of franchise, the operating income of non-ticketing business within the authorized scope, and the government subsidy. For part A, after its final acceptance of construction, Beijing MTR Corporation and Metro Company of Line 16 will sign an assets lease agreement, and Beijing MTR Corporation obtains the right to use its assets.

4

Conclusion

In summary, the Urban Rail Transit team of Beijing Docvit Law Firm believes that the PPP model is an important option for public project investment and financing. In the process of economic transformation and development, it can solve the problem of local debt. Also, the PPP model provides basic livelihood protection, Beijing Metro lines may introduce more PPP projects in the future for financing.

Disclaimer

While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. The professional articles of Docvit Law Firm WeChat Official Account are all original to our lawyers team.If you need to reprint, please leave a message on our WeChat background.Please do not reprint without authorization.

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