2017 is the implementing year of PPP projects. The first PPP assets securitization project was rolled out recently. Industry insiders estimated that as the curtain of PPP assets securitization is raising, it will help break the three biggest bottlenecks restricting the development of PPP development: duration mismatch of capitals, obstruction of withdrawal and lack of standardization of projects, and fundamentally solve the problems of PPP development, encourage banks to extend more credit for PPP projects and once again drive the growth of the PPP sector.
Large scale PPP assets securitization to kick off
Xinshuiyuan PPP assets support special plan was successfully issued in the inter-institutional PE products quotation and service system. Ganquanbao Industrial Park sewage treatment PPP project, which was included in the underlying assets, is a project of Urumqi Kunlun Environmental Protection Group Limtied. Xinshuiyuan PPP assets support special plan has a total scale of 840 million yuan, and adopted multilayered design, including priority level of 800 million yuan and subprime level of 40 million yuan.
Since the National Development and Reform Commission (NDRC) and the China Securities Regulatory Commission (CSRC) jointly issued “notice on promoting assets securitization related works on PPP projects of traditional infrastructure area” at the end of last December and proposed asset securitization of PPP projects for the first time, the first project was soon launched one months later. Industry insider believes that the progress has far outpaced the market expectation.
The notice proposed to promote asset securitization of PPP projects in the traditional infrastructure sector with reasonable return mechanism, continuous and stable cash flow, and ongoing operational ability that has been built and operated for over two years, and whose original owner has sound credibility.
At the same time, the provincial branches of NDRC will introduce 1 to 3 assets securitization projects before Feb. 17 and submit to the State Council, and strive to issue asset securitization products of PPP projects as soon as possible. It means that the wave of PPP asset securitization is coming, and more projects will likely be implemented in the near future.
After the first project of asset securitization was implemented, PPP concept stocks stand out. Since Feb. 3, PPP index has been surging 3.96 percent. Inner Mongolia M-grass Ecology and Enviroment (Group) Co., Ltd. (300355.SZ) and Beijing Orient Landscape & Environment Co., Ltd. (002310.SZ) have increased by 24.65 percent and 9.73 percent during this period respectively.
Analyst of Everbright Securities is in the view that PPP asset securitization will bring channels to all parties of PPP projects for capital withdrawal, and form a business model closed-loop and break the bottlenecks restricting PPP development. Driven by asset securitization, the second wave of PPP development is around the corner.
He Yuanping, vice president of Beijing Originwater Technology Co., Ltd. indicated that most PPP projects are at the construction stage so far, and conditions for asset securitization are still immature. However, with the implementation of PPP projects, more and more PPP projects will be ready for asset securitization.
Three major problems on financing through PPP to be solved
A long existing problem of the promotion of PPP projects is the low implementing rate and involvement of social capitals. Though central and local governments have made great efforts to push forward the PPP model, data from the PPP center of the Ministry of Finance shows that as of the end of November of 2016, the total amount of PPP project library has reached nearly 13 trillion yuan, but only 1.56 trillion yuan worth of projects have entered the implementing stage. Most of the participants of PPP projects are central and local SOEs, and few are social capitals.
Behind this phenomenon is that financing problem has become the bottleneck restricting the development of PPP projects.
An expert engaged in PPP project financing says that there are three major contradictions in the PPP financing sector: firstly, mismatch of capital duration. Short-term money supply in the market and long-term capital demand of PPP projects are not match with each other. The duration of PPP projects usually lasts for 10 to 30 years. Risk during the construction period is huge, but risk during the operational period is relatively smaller, which result in varied demand for long-term and short-term demand.
Industry insiders pointed out that there are sufficient capitals in the current market, but there is a lack of appropriate PPP projects and low-cost and long-term capitals.
Bi Zhiqing, senior partner of Beijing Dayue Consulting Limited Company says that since most PPP projects has large investment scale and long term, traditional credit model of banks can hardly satisfy the financing demand of PPP projects. In addition, the procedure of bank loans is tedious, and it also requires pledges or guarantees, which also restrict medium and small enterprises’ involvement in PPP projects.
Secondly, there are few withdrawal channels for investors. PPP projects usually have long project cycle and involve huge amount of capitals. The cycle of recouping investment through operation of traditional PPP projects is long. Long-term capital investment chain can hardly be closed due to lack of exit channels.
Analyst of Everbright Securities says that asset securitization of PPP projects provide all participants of the project, such as enterprise, government, banks and project companies with exit channels. Through asset securitization, PPP projects can be translated into standard products for listed transaction and realize capital flow. For enterprises, to transfer heavy assets to off-balance sheet and asset securitization can help form business model close-loop, accelerating asset turnover ratio.
In addition, “another problem of PPP financing is the contradiction between high requirement for risk management of long-term capital and explosive growth of the project.” The above expert indicates that PPP projects requires long-term cash flow, but many projects failed on credit enhancement, and are not able to attract the inflow of long-term capitals.
He Yuanping is in the view that the following conditions should be met as to asset securitization: standard products, proper liquidity, and identifiable risks. Without good financing model, the development of PPP will meet bottlenecks. Excessive dependence on banks loans also imperceptibly increases leverage.
Industry insiders believe that though large scale asset securitization has not yet come, in the short term, asset securitization of PPP projects can stimulate bank lending. The introduction of policies on PPP asset securitization will also result in the expectation that risks of banks will be transferred to investors of securitized assets. It will increase banks’ lending to PPP projects and promote the continuous implementation of PPP projects.
Analyst of Everbright Securities hold the view that in the future PPP asset securitization will be in the following models: firstly, usufruct of PPP project. PPP project companies are usually the project sponsors that take the usufruct as the asset for PPP asset securitization; secondly, creditor’s right of PPP project. Such asset securitization products are similar to securitization of credit assets. The main sponsors are commercial banks or other financial institutions; thirdly, equity of PPP projects. After the PPP projects entered the operational stage, shareholders of project companies can act as the financier, and raise fund with the equity of project companies or usufruct of equity, to activate inventory assets of shareholders of project companies.
Assets securitization of charge usufruct will be the main direction of PPP asset securitization. Industry insiders indicate that considering the operational revenue after completion of operating PPP projects will be the major underlying asset of asset securitization, and operational revenue of such projects are mostly charge usufruct, asset securitization of PPP projects in the future will likely to be operated according to the way of asset securitization of enterprises. High quality PPP projects with stable investment income and good social benefit will be the top priority of asset securitization. Environment protection, transportation and civil engineering are expected to be the main directions of asset securitizations of PPP project in the future.
However, since PPP asset securitization is still at the starting stage, there are still a lot of problems. For example, the duration of asset securitization is not match with PPP projects. The duration of asset securitization is usually 5 years to 10 years, but the period of PPP project is longer, with operation period ranges from 10 to 30 years. The duration of any single asset securitization product cannot fully cover the full life circle of a PPP project; the detailed rules of asset securitization of PPP projects have not been launched yet, and the credit rating standards are not unified; the secondary market is incomplete, the liquidity as a result is insufficient.
According to the current situation, asset securitization only suitable for stable operation projects with high and assured yield rates, such as sewage treatment projects, says Zhu Chunyang, chief analyst with the environmental protection team of China Merchants Securities. In the future, how to securitize projects with low yield rates or unstable operation, and lowering the capital costs for PPP of such projects will be an important direction. It can even determine the future trend of the PPP industry.
Translated by Adam
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