The legal observation (I) of government investment and financing. On the dilemma and adjustment path of PPP development.

Since 2014, with the introduction of a series of PPP promotion policy documents by the State Council, the Ministry of Finance and the National Development and Reform Commission, the local government has ushered in a period of vigorous development of PPP. Since the strengthening of PPP normative management in 2019 (represented by the document "Implementation Opinions on Promoting the Normative Development of Government and Social Capital Cooperation" (Caijin [2019] No. 10)), PPP development has entered a relatively quiet period. Although the new warehousing projects can still maintain hundreds of net growth every year-according to the monthly report data of the national PPP comprehensive information platform project management database from January to may 2021, there are 270 new warehousing projects, 249 contracted landing projects, 174 construction projects, 149 returned projects and 121 net increase projects-on the surface, local PPP is still in a state of steady development, however, many problems are hidden under the calm appearance: on the one hand, the project has actually been terminated ahead of schedule, but there are many projects that have not been returned due to the failure to reach a compensation plan and other reasons, and these projects have not been counted in the return data; On the other hand, due to insufficient feasibility study and imperfect error correction mechanism in the early stage, the implementation stage of new warehousing projects is facing adjustment difficulties.

If it is not appropriate to describe the current situation of PPP as "in trouble", it should not cause much controversy to describe it as "in an awkward situation.

Let's first look at some of the problems encountered during the implementation phase of the stock project, which, while not necessarily universal, are clearly not limited to individual cases, but have class or geographical commonalities. According to the existing policy, some problems have led to the operation of the project is not standardized.

(I) government payment is not timely

Government payment is not timely has become a common phenomenon of PPP projects. The apparent reason is that the government has no money, and local governments are usually not shy about it. The financial ability of local governments to pay is the main reason that affects government payments, but things are not as simple as they seem. Whether it is local governments or social capital, the reason why they prefer to simply attribute the reason to money, in a sense, is nothing more than not wanting to touch the pain point of PPP projects-normative issues. So, what are the pain points behind the government's untimely payment?

1. Project completion settlement and project completion financial accounts are not timely

On the surface, the reason for the delay is efficiency, but the following factors may also be involved:

(1) The EPC general contractor, especially the fixed total price general contractor, has not made a project budget;

(2) There are differences between the government and the social capital on the claims caused by the delay of the construction period.

(3) The government and social capital parties cannot agree on the calculation of interest during the construction period of the project, especially in projects where the use of funds by the project company is not standardized (e. g. social capital is collected and used by the project company funds, social capital is not standardized to lead to financing, etc.);

(4) The government side and the social capital side cannot reach a consensus on the process of the project completion settlement audit, the government side directly to the project settlement audit, or on the basis of the project company and the construction party settlement audit to review and decide whether to re-audit as appropriate;

(5) the project content change procedures are not complete;

(6) the project construction information is not perfect, etc.

Without the final financial accounts of the project, the total investment of the project cannot be determined, and the uncertainty of the total investment will inevitably affect the government's payment.

2. Project operation and maintenance costs are unaudited

If the social capital party has not budgeted the project operation and maintenance costs in advance and has not been audited afterwards, or if the project operation and maintenance content has changed significantly and the social capital party still applies for payment under the project contract, it is obviously difficult for the government party to fully pay the contract.

3. The project did not do performance evaluation

The government did not organize the performance evaluation of the project operation and maintenance in a timely manner. Given that performance evaluation is the basis of project payments, I .e., PPP projects need to strictly implement the pay-for-performance principle, there are procedural obstacles to project payments without performance evaluation.

4. The design of the project payment (return) mechanism is unreasonable.

The design of the project implementation plan and the project contract's payment (return) mechanism for the project is not in line with the actual project. For example, the project return mechanism designed by some urban-rural sanitation integration or urban-rural sewage treatment integration projects is feasibility gap subsidy. As the user payment part (garbage disposal fee or sewage treatment fee) has the nature of similar administrative charges, the implementation plan is usually designed to be collected by relevant government departments. If the user payment income actually collected by relevant government departments is insufficient, the government budget only includes the gap subsidy part because the project return mechanism is feasibility gap subsidy, therefore, even if the government is willing to make up the shortfall in user-paid income, it cannot be included in the budget due to the project return mechanism.

For example, some packaging projects are designed to be paid by the government only after all the projects enter the operation and maintenance period, but some sub-projects will be completed ahead of schedule and enter the operation and maintenance period. For example, each road in the municipal road project will be completed, accepted and put into use one after another. In this case, even if the government is willing to pay according to the actual situation, the government payment cannot be included in the annual budget due to project design reasons. However, if the government does not pay according to the actual operation and maintenance, then the relevant operation and maintenance costs can only be included in the construction cost, which may lead to the total investment of the project is over-estimated.

Total investment of (II) projects

The total investment of the project is a common phenomenon in PPP projects.

There may be many reasons for the over-generalization of the total investment of the project, among which the social capital is usually caused by poor project organization and management, such as unqualified quality rework, material and labor cost increase caused by construction delay and other factors; the government is usually caused by project content adjustment or design change and other factors; in addition, as mentioned above, there may be cases where the sub-project of the packaged project is completed and accepted in advance and enters the operation and maintenance period, and the government cannot pay for the operation and maintenance, the relevant operation and maintenance fees can only be included in the construction cost resulting in the total investment of the project over-generalization.

If the responsibility for over-generalization of the total investment of the project can be solved according to the project contract, the normative problems of the project caused by the change of the total investment of the project may affect the subsequent operation of the project. According to the Ministry of Finance "on further strengthening the government and social capital cooperation (PPP) demonstration project standard management notice" (financial [2018] 54) requirements, for the demonstration project of the total investment of major changes, to deal with the project implementation plan, value for money evaluation report, financial affordability demonstration report, procurement documents, project contracts and other corresponding adjustments and changes. Although the notice is aimed at demonstration projects, according to its basic spirit, it should by extension be applicable to all PPP projects.

However, the problem is that because the above notice does not further explain the "significant change", different understandings may lead to different results. Some local documents require that the project should withdraw from the project management database if the feasibility study report, project approval, implementation plan, value for money evaluation report, financial affordability demonstration report, procurement documents, project contract, etc. are adjusted and changed accordingly due to major changes in the core boundary conditions such as cooperation content and total investment. However, due to uncertainty as to what is meant by "major changes", many over-the-top projects can only be put on hold at present.

No operation and maintenance content for (III) project

Some PPP projects actually have no operational content. Such as shed reform resettlement houses, museums, archives, party history museums, exhibition halls, libraries, public hospitals, public schools, government affairs centers and other projects, the "Implementation Plan" usually takes property management services as the content of project operation and maintenance, but according to my country According to the "Property Management Regulations", the main body of property management services should be determined by the owner, so the social capital is not naturally the main body of project operation and maintenance. Moreover, the actual operation and maintenance subject of most projects is indeed not the social capital side.

In the event that the social capital party is unable to participate in the property management services of the above-mentioned project, the project lacks other elements that can be operated and maintained by the social capital party, so the above-mentioned project actually has no operation and maintenance elements.

Insufficient revenue from user fees for (IV) projects

In the early storage of the local integrated pipe corridor project, due to the lack of underground penetration capacity of the pipe corridor within a certain geographical area and the high cost of entering the corridor, the pipe corridor was not actually put into use after it was built, that is, there was no corresponding pipe network into the corridor. However, in order to maintain the sustainable and daily safety of the pipe gallery throughout its life cycle, the social capital side also needs to maintain it on a daily basis. This would result in only maintenance costs and no corresponding operating income, I .e., zero user fee income for the project. Since the project implementation plan usually designs a considerable user fee income for the utility tunnel, the project will not be sustainable due to the imbalance of income and expenditure unless the project payment mechanism is adjusted or the utility tunnel project is adjusted out of the project package (in the case of packaging).

In addition, as mentioned above, in the project of integration of urban and rural sanitation or integration of urban and rural sewage treatment, if the project return mechanism is designed as feasibility gap subsidy, then the user's paid part such as garbage treatment fee, sewage treatment fee, etc. will usually have insufficient income-the reasons may include inaccurate financial calculation, adjustment or cancellation of charging items or standards, etc, I won't repeat it here-and this risk obviously cannot be simply allocated to the social capital side.

In this way, the above situation will lead to the same situation as the above-mentioned total investment of the project, that is, the project should be adjusted or returned to the warehouse or temporarily put on hold.

(V) project performance management is not standardized

Performance management includes the design and adjustment of performance evaluation indicators, the preparation of performance evaluation work programs, performance monitoring, performance evaluation, and the application of performance evaluation results, rather than simply performance evaluation and application of results.

The performance evaluation indicators of some projects are seriously divorced from the actual situation of the project but are not adjusted, resulting in a mere formality of performance evaluation.

Some projects have introduced an expert review mechanism in the performance evaluation work plan when the performance evaluation results are opposed, but they have not further clarified the expert selection mechanism and review organization process, resulting in the expert review mechanism being useless. However, setting the expert review mechanism as the pre-procedure of the above-mentioned dispute resolution mechanism affects the timely making of project performance evaluation results.

Some local governments have a one-sided understanding of the basic principle of project payment according to efficiency, believing that there is no need for performance evaluation if the project does not pay, so they openly do not evaluate the project performance on the grounds that the project does not pay (as mentioned above, there is a situation that the government does not pay in time for PPP projects). Other local governments use the reason of saving expenses related to performance evaluation, under the condition that the government pays quarterly in the project contract, the performance evaluation is organized every six months or once a year. The performance evaluation cycle does not match the payment cycle, and the payment according to the efficiency cannot be effectively implemented.

(VI) project information is not perfect

The standardized operation of the project is the basis for the improvement of project storage information. As mentioned earlier, there will be inconsistencies between the total project investment, project operation and maintenance content, project return mechanism, etc. in the actual implementation of the project and the information in the preparation phase. According to the existing policies, major changes in the project need to be regulated through adjustment or treated as returned to the warehouse. However, the existing policy is not further clarified as to what constitutes a major change; therefore, many of the projects with the above problems are currently on hold, neither adjusted nor treated as returned. Based on this, the project storage information can only be temporarily shelved and cannot be improved in time.

(I) timely specification rectification

According to the existing policy can regulate the rectification timely organization rectification. For example, if the project performance management is not standardized, it should be organized and carried out in a timely and standardized manner. If the government does not pay in time, it should improve the necessary procedures in time and fulfill the payment obligation according to the contract.

If rectification cannot be regulated according to existing policies, rectification shall be made on the basis of adjusting existing policies or introducing new policies. For example, if the project construction content is changed, the total project investment is over-generalized, the project operation and maintenance content is adjusted, and the project return mechanism does not conform to the actual project, etc., through adjusting the existing policies or issuing new policies, it is clear under what circumstances can be rectified and under what circumstances should be returned to the warehouse. For the timely adjustment of receipt information that can be rectified by adjusting receipt information, rectification is completed.

(II) decisively return to the warehouse

If it violates the basic principles of PPP and cannot be rectified, it shall be directly returned to the warehouse. For example, projects (sub-projects) without actual operation and maintenance content, such as shed reform resettlement houses, museums, archives, party history museums, exhibition halls, libraries, public hospitals, public schools, and government affairs centers, belong to BT projects. If the above items are operated separately, they will be processed directly as warehouse return; if they are packaged, the relevant sub-items will be adjusted to warehouse-out on the basis of adjusting the project warehouse-in information.

If it does not violate the basic principles of PPP, but should be returned to the warehouse according to the policy requirements, it shall be returned to the warehouse as required. For example, the above-mentioned major changes in the project, through the adjustment of existing policies or the introduction of new policies, still do not meet the requirements of the specification should be returned to the library, according to the return of processing.

(III) Improve Policy Guidelines

PPP is still in the stage of exploration and development in China, and many problems can only be gradually reflected through the practice of project operation, especially in the implementation stage. According to the foregoing, some problems are caused by the irregular operation of the project, while others are caused by the imperfection of existing policies. For example, Caijin [2018] No. 54 requires that projects with major changes such as the total investment of the project should be rectified by adjusting the corresponding storage information, but it is not clear what is meant by "major changes", resulting in some changes in the project can be rectified by adjusting the storage information or returned to the warehouse at a loss as to what to do; for another example, the Ministry of Finance's Guidelines for the Performance Management of Government-Social Capital Cooperation (PPP) Projects has introduced an expert review mechanism for objecting to the results of performance evaluation, but the selection mechanism of review experts, such as the number of expert groups, the professionalism and level of expert group members, and the allocation ratio of experts between the government and social capital, is not clear, in addition, the organization process of expert review, such as who can initiate expert review by the government and social capital, how to deal with it when the government does not initiate or select experts, the arrangement of expert review venues, the burden of expert review costs, etc., is not clear, resulting in the failure of the expert review mechanism to actually play a role.

Based on this, in the context of PPP-related laws and regulations have not yet been issued, the State Council and relevant departments need to sum up experience in a timely manner according to the operation practice of PPP projects, and constantly improve relevant policy guidelines to regulate the development of PPP.

(IV) unified ideological understanding

Some local governments simply believe that the PPP model needs to pay more financial expenditure than the traditional government direct investment model after the project enters the operation and maintenance period, so they passively perform their regulatory duties on PPP projects and even want to return them to the treasury. In essence, it still lacks a correct understanding of the PPP model or simply does not want (or is unable) to fulfill its regulatory responsibilities for PPP projects. Based on this, with policy guidance, it is also necessary for local governments to unify their thinking and regard PPP as a long-term work. In addition to fulfilling the project contract, they should also earnestly perform project supervision responsibilities. This is the key to ensuring the sustainable development of PPP.

(V) specification consulting service

Consistent with the initial development stage of PPP, PPP advisory services are only in the initial development stage. PPP pre-consultation (before the implementation phase) is usually aimed at project warehousing (social capital also lacks PPP professional knowledge, and project landing is usually not the focus of government and social capital consideration, which is also the reason why some private social capital is deeply affected by PPP projects). Therefore, it lacks knowledge or experience of problems that may be encountered in the implementation phase of the project, as a result, some project implementation plans and project contracts cannot be implemented or performed during the project execution phase. Some projects bear interest during the design and construction period, but the government cannot include the project interest in the construction period in the government's payment budget. Another example is that the performance deduction during the design and construction period of some projects is deducted from the construction performance bond, but the project has been transferred from the construction period to the operation and maintenance period when the performance evaluation results during the construction period are applied, and the construction performance bond has been replaced by the operation and maintenance performance bond. And so on. PPP pre-consultation is more of a vision, later consultation is related to the implementation. If the early stage of a PPP project (before the implementation stage) is likened to the gestation and birth stage of the project, then the later stage (implementation stage) can be considered its growth stage. The consultation at the growth stage is not only about the supervision of the project to make it standardized, but also about the sustainability of the project or the protection of the interests in the event of early termination. Based on this, on the basis of gradually standardizing PPP consulting services, the participation of relatively professional third-party consulting agencies (whether entrusted by the government or social capital (not limited to performance monitoring, will play a positive role in promoting the standardized operation of the project, especially in the implementation stage.