Asset-Backed Securitization of PPP Projects: The Case of China

Abstract

Sustainable and robust infrastructure plays a critical role in a country’s economic growth and improving living standards. Public private partnership (PPP) is an efficient tool for financing infrastructure. PPP has gained attention globally as a way to access capital markets and enhance the implementation of infrastructure by boosting private sector participation. The higher efficiency and innovative technology that the private sector brings can fundamentally improve the performance of PPP infrastructure projects from an environmental, social, and governance (ESG) perspective. This paper extends the existing literature on China's experience in developing asset-backed securitization (ABS) of PPP projects. It aims to understand how ABS would encourage PPP investments through greater private sector involvement in infrastructure projects in developing countries. Conducting a qualitative case study in China, the paper elaborates on how ABS can facilitate the implementation of PPP for infrastructure in order to achieve sustainable economic development in China. It also analyzes the existing challenges in the implementation of PPP asset-backed securitization (PPP-ABS) and provides policy recommendations.

Keywords:

• Asset-backed securitization;
• China;
• ESG;
• infrastructure financing;
• public private partnership;
• PPP-ABS

JEL CODES:

• G12
• G18

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Beini Liu is a researcher at the Financing for Development Section at the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) in Bangkok, Thailand. E-mail: [email protected]. Masato Abe and Fei Xie are an Economic Affairs Officer and a Non-Reimbursable Loan (NRL) Expert, respectively, at the same section. E-mails: [email protected]; [email protected]. Tientip Subhanij is Chief of Financing for Development. E-mail: [email protected]. Patrick Martin edited the paper and provided useful comments that improved its quality.

2 From 1998 to 2018, China had experienced impressive economic growth of 9.5% annually, implying that on average China had doubled the size of its economy in real terms every eight years (National Bureau of Statistics of China, 2020). In terms of social development, China has lifted more than 850 million people out of poverty in the past decades.

3 In China, SOEs count as a private sector entity in PPP.

4 Phone interview with a PPP project manager in Beijing on 17 March 2020.

5 For more detail, please visit: http://www.csrc.gov.cn/pub/newsite/gszqjgb/gzdtgszj/201706/t20170627_319194.html.

6 Conceptually, a REIT is a type of investment vehicle that owns and operates real estate-related assets and allows individual investors to earn income from the ownership of commercial real estates without buying any assets (SEC, 2011). In the PPP market, the shareholders of the sponsoring company can issue securities based on the equity of real estate-related assets that raise necessary funds for the infrastructure project.

7 The State-owned Assets Supervision and Administration Commission (国有资产监督管理委员会) is a special commission of China, directly under the State Council. It is responsible for managing SOEs.

8 Private placement is a funding round of securities which are sold not through a public offering, but rather through a private offering, mostly to a small number of chosen investors.

9 Due to the large development gap between the eastern provinces and the western provinces of China, in 1999, the Chinese Government initiated a national strategy, named the Great Western Development Strategy (西部大开发), with the aim of developing local infrastructure, attracting foreign investment, enhancing ecological protection (e.g., reforestation) and promoting education in 12 Western Provinces in China (Lai, 2002).

10 The criteria of underlying assets usually include cash flow, issuers’ credibility, asset pool design and other relevant factors.

11 China categorizes PPP projects in 19 sectors, namely: municipal infrastructure development, transportation, energy, education, water conservancy, ecological construction, environmental protection, urban development, agriculture, forestry, science and technology, affordable housing, tourism, health care, pension, culture, sports, social security and government infrastructure.

12 Public rental housing is a type of affordable housing in China renting to medium-low-income groups at a below-market price.

13 In 2020, CSRC issued the Notice on Promoting the Work Related to the Piloting of Real Estate Investment Trusts (REITs) in the Infrastructure Sector (with NDRC) and the Guidelines for Publicly Raised Infrastructure Securities Investment Funds (Trial). Both documents further promote the application of REITs in infrastructure development in China. http://www.csrc.gov.cn/pub/newsite/zjhxwfb/xwdd/202004/t20200430_374845.html; and

http://www.gov.cn/zhengce/zhengceku/2020-08/08/content_5533339.htm.