Embrace A Feast For Social Capital

On Nov. 26， the State Council of China rolled out the Guiding Opinions on Innovating Investment and Financing Regimes in Major Sectors and Encouraging Social Investment. （hereinafter referred to as “Opinions”）

Pursuant to the Opinions， social capital will be allowed to enter the sectors of ecological and environmental protection， agricultural water conservancy， municipal infrastructure， railwayhighway-airplane construction， energy facilities， information and civilian space， as well as social undertakings.

The Opinions came as part of efforts made by China’s decision makers to guide the social capital into the market in the face of huge changes that are taking place due to Chinese economic structure adjustment.

A favorable environment for investment

“The roll-out and implementation of the Opinions will help further break industries monopolies， reduce market barrier， establish fair， open and transparent market rules， create an investment environment featured with equal rights， equal opportunities and equal rules， stimulate main bodies’ activities and unleash their potential， stabilize effective investment， and strengthen constructions in weak links，” says Li Pumin， secre-tary-general to the National Development and Reform Commission （NDRC）.

It is a clever move for decision makers to balance the relationship between economic development and social stability by reforming investment and financing regimes， breaking industrial monopolies and introducing social capital into the market.

On May 21， 2014， the NDRC released the list of China’s first 80 demonstration projects that are open to social capital， including projects of the coal railway transportation route from Western Inner Mongolia to central China， Beijing Metro Line 16， and the fourth natural gas pipeline from Shaanxi Province to Beijing City.

The move is to encourage and attract social capital， especially the private capital， to take parts in construction and operation of those projects by means of joint ventures， sole proprietorship and franchises.

Among those projects， the project of Western Inner Mongolia-central China coal railway transportation route is expected to attract over 160 billion yuan investment， while the investment in Beijing Metro Line 16 project is forecast to be around 37 billion yuan. According to a rough estimate， hundreds of billion will be pumped into those 80 projects.

“Now the local governments follow the move， making some projects open to the private capital， which helps speed up the reform of the investment and financing system， promote the diversification of investment sources， and further give play to the role of social capital. It also plays an important role in optimizing the investment structure， activating the vitality of the market， and promoting the sustainable and healthy economic development，” says Wang Wenxiang， deputy director of the Department of Investment under the NDRC.

The boldness and strength of reformational measures put forward in the Opinions far exceed expectations， according to Wang.

“The Opinions gives priority to broadening market access and puts forward seven major measures for it， including further innovating the investment and operation regimes for ecological environmental protection， encouraging social capital to participate in the investment and operation of agriculture and water conservancy projects， promoting the marketization of municipal infrastructure investment and operation， improving the transportation investment and financing regimes， encouraging social capital to strengthen the investment in energy infrastructure， promoting the diversification of investment sources of information and civil space infrastructure， encouraging social capital to increase investment in social undertakings. Those measures will effectively lower related sectors’ entry thresholds for investors， thereby pointing out the direction for the social capital to participate in the construction of major sectors，” explains Li.

A strong backup from government polices

It is noteworthy that at the operational level， China is pushing social capital into the market at an exceptionally rapid rate.

According to Li， the above-mentioned seven major projects have been approved by the State Council. Moreover， in order to accelerate the construction of those projects， the NDRC held a national teleconference and a major project coordination meeting for deployment， and established a work mechanism that requires major projects’ progress to be scheduled monthly.

“The NDRC will further make clear the responsibilities of all parties， strengthen the cooperation among departments， accelerate the pre-project work and construction， ensure construction funds， enforce the management of follow-up reserves and promote the progress of the national major projects， ” says Li.

Besides， the NDRC is compiling a guideline on the regimes of public-private partnership （PPP）， which is scheduled to be released in next few days， with a fundamental purpose of introducing social capital enhance the public supply capacity.

A bright prospect for future development

“It has a great historical and realistic significance to allow social capital into sectors of ecological environmental protection， agricultural water conservancy， municipal infrastructure， railway-highway-airplane construction， energy facilities， information and civilian space and social undertakings，” says an insider.

In the energy sector， for example， pursuant to the Opinions， social capital will be encouraged to participate in the construction and operation of electric power， power grid， oil and gas pipeline networks， storage facilities， and coal storage and transportation， inclusive of projects of hydropower， nuclear power， wind-solar-electricity power， biomass and high-efficient coal， etc.

“Monopolies in those industries are not only caused by the government policies， but also by high barriers to entry， inclusive of technical barriers and capital barriers. Therefore， private enterprises’ direct investments in projects of nuclear power， hydroelectric power natural gas pipelines were very few in the past，” Wang Xiaokun， a natural gas analyst with Zhuochuang Information Co.， Ltd.

Besides， due to the long engineering construction period and slow cash flow in the seven sectors， large-scale construction will put related industries and state-owned enterprises under financial pressure. To solve the problem， nuclear power companies are seeking diversified financing channels for their initial public offerings （IPOs）， while environmental protection enterprises are exploring a new PPP financing pattern. As a case in point， Beijing has absorbed 29 billion yuan social capital for water environment governance since 2013.

Insiders believe all above-mentioned projects are capital intensive with stable returns on investment. The move to encourage social capital into major sectors can not only diversify sources of funds， but also guarantee the security of enterprise investment， directing funds into the real economy.

To remove barriers for private enterprises to enter major sectors， China will firstly relax access conditions for social capital and then innovate in investment and financing approaches to accelerate the development of energy facilities， according to Liu Yijun， deputy director of China’s Oil and Gas Industry Development Research Center， China University of Petroleum.

“The specific operation may be mandatory during the period of project approval and construction stage， aligning with a new investment directory，” says Liu.

Liu adds that China’s next move is to release a negative list for infrastructure investment and financing.