Source: NDRC

Following the issuance of the Guiding Opinions on Regulating the Implementation of the New Mechanism for Government-Social Capital Cooperation in November 2023, the NDRC recently issued the Outline for Preparation of Concession Programmes for Government-Social Capital Cooperation Projects (2024 Trial Version) (hereinafter referred to as the "Preparation Outline").

The Preparation Outline starts from project feasibility, feasibility demonstration of concession mode, and main content of concession, etc. From the Preparation Outline, it can be seen that this content is a continuous supplement to the concession mode from the reduction of local hidden debt, return to the user-payment mechanism, and strengthen the participation of private enterprises, etc. following the No.115 document. (Better with reading: PPP3.0 new policy: PFI end concession return to the position, to force private enterprises to re-innovation)

The third part of the Preparation Outline is the project feasibility demonstration, which analyses seven aspects, namely, project attributes, project fee channels and methods, project profitability, comparative advantages, willingness to participate, legal compliance, and franchise risks.

01 Policy content franchise project attributes analysis:

Analyse whether the project belongs to projects with certain public welfare and the existence of operating income. Commercial and industrial projects with a high degree of marketisation, as well as public welfare projects with no operating income, shall not adopt the franchising mode; the above types of unrelated projects shall not be "bundled" with each other, or "bundled" with projects suitable for adopting the franchising mode. "The government and social capital co-operation shall be carried out.

Domestic waste collection and treatment integration, plant network integration of sewage pipeline network, heating pipeline network, water supply pipeline network and other projects, integrated transport multimodal transport projects such as public-water intermodal transport, public-rail intermodal transport, as well as relying on the project to carry out their own diversified development of infrastructure and public utilities projects can be a comprehensive balance of the benefits of the project, to carry out the government and social capital co-operation. For franchised new (including expansion) projects, the requirements for private enterprise shareholding or participation should be clarified with reference to the List of Franchised New (Including Expansion) Projects Supporting the Participation of Private Enterprises.

Analysis of project charging channels and methods:

Define project charging channels and methods (including potential charging channels and methods), explain the basis for charging, demonstrate the legal compliance of charging channels and methods, evaluate the user's willingness to pay, ability to pay and stability of revenue, conduct a preliminary analysis of the project's operating costs, project charging, and existing financial operating subsidy policies in the field to which the project belongs, and make clear whether the project exists in the situation of subsidised operation according to the regulations, and make clear whether the project is not subsidised for any additional cost due to the adoption of the government and social capital cooperation mode. Adopting government and social capital co-operation mode to additionally increase the future expenditure responsibility of the local government, not to increase the hidden debt of the local government in any way, and to ensure that the project complies with the user-payment requirement. If the project fee belongs to government pricing or guiding price, the price or fee policy formulated by the relevant pricing authority shall be implemented; if it does not belong to government pricing or guiding price, the pricing mechanism and price adjustment mechanism shall be clarified.

Project profitability analysis:

To study the stability and growth of user-paid revenue, and in the case where all investment in the project is equity funds, to examine the cash inflow (including operating subsidies enjoyed in accordance with the regulations) and outflow of the project over its entire life cycle, and to calculate the financial internal rate of return based on the cash flow statement of the project's investment, the cash flow statement of the concessionaire's own funds, and other profitability indicators, respectively. For projects with insufficient profitability, study and analyse the feasibility of enhancing the overall profitability of the project through various means, mainly including the reasonable determination of the concession period, the provision of investment support by the government during the construction period, the reasonable adjustment of the planned use of the land and the intensity of development in accordance with laws and regulations, and the provision of compensation for resources reasonably related to the project. If government investment support is required, the specific method, amount and time point of government investment support shall be stated. If necessary, sensitivity analysis and break-even analysis should be conducted for profitability indicators.

From the perspective of profitability, analyse whether it is suitable to adopt the franchising mode. If the profitability is still insufficient after adopting a variety of methods, the franchise mode should not be adopted.

Comparative advantage analysis:

From the aspects of project life cycle cost, output or service effect, construction and operation efficiency, risk prevention and control, etc., make a comparative analysis of the input and output, economic and social benefits of adopting the franchise mode and the traditional government investment mode, and argue whether the project is suitable for adopting the franchise mode.

Participation willingness analysis:

Analyse and explain the willingness of social capital and financial institutions to participate in the project; if necessary, conduct market tests for social capital and financial institutions on the key conditions of the project, and explain the results of the market tests.

Analysis of legal compliance:

Comprehensively analyse the above analysis and explain whether the above franchise arrangement is in violation of laws, regulations and the spirit of policy documents, including but not limited to unclear definition of the scope of franchise or output, lack of exclusivity agreement within a certain area or period, and the use of financial funds to make up for the project construction and operation costs by means of feasibility gap subsidy, commitment to guaranteed rate of return, availability payment and other means. Where the participation of foreign-invested enterprises is involved, state whether it is in line with the relevant provisions on foreign investment management.

Franchise risk analysis:

From the perspective of franchising, explain the adoption of