Doxxing China s project capital system

Regarding project capital, I have actually shared a lot of content in passing in many articles.

In practice, we still have a lot of questions about this aspect, and today, I will devote an article to talk about China's project capital system.

Let's start with the term "project capital".

Project capital, itself is a relative noun, it is a relative concept.

What do you mean by "relative"?

If a project unit wants to build a project, there are usually two ways to raise construction funds, one is to use its own funds, and the other is to raise funds externally, that is, market-oriented financing.

When the project unit makes a fund-raising plan, if part of the funds of the plan needs to be financed by the external market, then the remaining part comes from the existing funds, which is the project capital of the project.

If the project is planned to be built entirely with its own funds, then there is no such thing as "financing" and there is no concept of "project capital".

Only with "financing" can there be "project capital".

Let's understand it first, and we'll use it later.

In 1996, China established a project capital system, the core of which is to stipulate the proportion of project capital, that is, how much project capital should be contributed to a project.

The state will adjust the proportion of project capital accordingly according to the macroeconomic situation, and the general principle is to appropriately increase the proportion when the economy is overheated, and appropriately reduce the proportion when the economy is in a downturn.

It should be easier to understand here, right?

The lower the proportion of project capital, the higher the proportion of external financing that the project unit can raise, then, the debt leverage of the project unit will be very high, and when the economy is overheated, it is necessary to press the debt leverage of the project unit, so the proportion of project capital will be increased accordingly.

The latest capital system to be followed is the Notice on Strengthening the Management of Capital Funds for Fixed Asset Investment Projects (Guo Fa 2019 No. 26) issued in 2019.

The capital requirements for all our current construction projects are basically in accordance with Circular 26.

Therefore, let's take a good look at Circular 26.

At the beginning of Circular No. 26, it is clear that:

The system is applicable to enterprise investment projects and business projects invested in China.

To analyze this sentence, we have to return to the "project" itself, China's projects have been divided into two types since the reform of the investment system in 2004

* Investment projects and corporate investment projects.

According to whether the investment project is operational, it can be divided into the non-operating project of the investment and the business project of the investment.

In other words, No. 26 is not applicable to non-operating projects of ** investment.

*What does the investment in non-operating projects look like in practice?

Usually, the ** functional department does the pure public welfare project of the project owner, such as the local transportation department to build a municipal road, or build a civic square, etc.

The biggest feature of this kind of project, because it is purely public welfare and the project owner is the first department, can not be market-oriented financing, all project funds come from financial funds, because there is no market-oriented financing, this kind of project does not exist the so-called "project capital" statement.

Readers who may be engaged in the special bond business have a question

We have a municipal road to apply for special bonds (special bond funds can be equivalent to a special financial fund), only 80% of the bond funds are allowed to apply, and 20% are required to issue capital.

Doesn't it mean that there is no concept of project capital for a purely public welfare project of a project owner like this kind of ** department? Why can't I apply for 100% of the special bond funds?

It seems to make sense, and everyone thinks there is something wrong or flawed in it.

We say that special bonds are used for quasi-public welfare projects with certain income, and quasi-public welfare projects with certain income are subject to Circular No. 26, and in the case of financing (special bonds are also a financing variety), there is a requirement for project capital.

The special bond itself cannot be used for pure public welfare projects, if the municipal road uses the special bond, it is contrary to the reasonable use of the special bond, so there is a "deviation" in practice, and the deviation in practice naturally leads to theoretical deviation and contradictions.

The capital of the investment project is the amount of capital subscribed by the investor in the total investment of the project, which must be non-debt funds for the investment project, and the project legal person shall not bear any debts and interest on this part of the funds; Investors may enjoy the ownership rights and interests in accordance with the law according to the proportion of their capital contributions, and may also transfer their capital contributions, but they shall not be withdrawn in any way.

Therefore, it basically comes from equity funds, such as the monetary funds left on the books of the enterprise, such as the funds that are included in the owner's equity through the issuance of perpetual bonds, and so on.

But there is a special point, and this special point is the local ** special bond.

In June 2019, the General Office of the Communist Party of China (CPC) issued the Notice on Doing a Good Job in the Issuance of Local Special Bonds and Supporting Financing of Projects (Ting Zi 2019 No. 33), proposing that "special bonds are allowed to be used as capital funds for qualified major projects", and they are mainly railways, highways, power supply and gas supply projects supported by the state.

This is the first time that local ** special bonds have been given "project capital", and it is also a special case for debt funds to be allowed to be used as project capital.

Is this not a conflict in the policy document?

In fact, there are two meanings here, which you can experience.

First, special bond funds are indeed a kind of debt funds, but it is also a special financial fund, which has the function of "** investment", and it is not a debt fund in the pure sense.

Second, Circular No. 26 states that the project capital is non-debt-based, and provides a certain supplementary explanation of "non-debt".

The project legal person shall not bear any debts and interests on this part of the funds, and the investor may enjoy the owner's rights and interests according to the proportion of its capital contribution in accordance with the law.

Special bonds are issued by the provincial government, it is the debt of the provincial level, when the provincial level of the province re-lends part of the amount to the municipal, district and county level, this part becomes the corresponding level of debt, when it is finally used in the project, it is through the "investment" into the project construction, and does not form the debt of the project legal person, and also enjoys the corresponding part of the owner's equity of the project.

To a certain extent, this is in line with the characteristics of non-debt funds.

To understand it well, if a state-owned enterprise undertakes a special bond, it will not be counted as a "bond payable" because it is not a debt of the state-owned enterprise.

Although it is said that the special bond does need to repay the interest and principal, the special bond itself is to repay with the **sexual income or the special income of the project, and the repayment only corresponds to the project, not to the project legal person.

In this part, readers do not need to delve into it, and generally understand that special bonds are a special case of project capital.

Take a look at the core requirements of Guo Fa 2019 No. 26, the proportion of project capital requirements.

For port, coastal and inland waterway shipping projects, the minimum capital ratio of the project has been adjusted from 25% to 20%.

The minimum capital ratio for airport projects will remain unchanged at 25%, and for other infrastructure projects, it will remain unchanged at 20%.

In a word,Only airport projects have a minimum capital ratio of 25%, and the minimum capital ratio for projects except airport projects is 20%.

This is not the case in any special cases.

Infrastructure projects in the fields of highways (including toll roads), railways, urban construction, logistics, ecological and environmental protection, and social and people's livelihood can appropriately reduce the minimum capital ratio of the project under the premise of a clear return on investment mechanism, reliable returns, and controllable risks, but the reduction shall not exceed 5 percentage points.

For projects subject to the approval system, the examination and approval department may clarify the proportion of capital of the investment project reasonably determined by the project unit in accordance with this provision.

For projects subject to the approval or filing system, the project unit and the financial institution may independently adjust the capital ratio of the investment project in accordance with this provision.

Normally, we don't need to pay too much attention to special circumstances, after all, the project unit needs to prove in detail that "the return on investment mechanism is clear, the benefits are reliable, and the risks are controllable", and the approval department needs to go through the demonstration process to recognize.

People usually don't bother with anything.

Okay, a leader asked:

Teacher, some consulting agencies have told us that the capital ratio of rail transit projects should be at least 40%, and the capital ratio of railway projects should be at least 50%, which is different from the standard mentioned in Circular 26.

In 2021, the General Office of ** issued the "Notice on Further Improving the Opinions on Railway Planning and Construction", mentioning:

Properly handle existing debts and strictly control new debts. Increase the capital of railway construction through various channels**, and ensure that the proportion of equity capital of railway projects in the central and western regions is not less than 50% in principle.

Second, the proportion of equity capital shall not be less than 50%.

As we said earlier, special bonds can be used as project capital for railways, but special bonds are debt funds, this sentence actually means that all special bond funds cannot be used as project capital for railways, and at least 50% of the capital must be the company's own funds or the capital of the issuance of equity.

Let's look at the statement about 40% of rail transit projects.

In 2018, the General Office issued the "Opinions on Further Strengthening the Management of Urban Rail Transit Planning and Construction", mentioning:

Except for projects that explicitly adopt the franchise model in the urban rail transit construction plan, the total investment of the project shall not be less than 40% of the financial capital investment.

Although the financial funds, as non-debt funds that do not need to be repaid, can be used as all the project capital, this depends on the way the financial funds are invested.

When financial funds provide financial support to operating projects through "** investment", there are two ways: "capital injection" and "investment subsidy".

The project capital is formed under the "capital injection" method;

The formation of non-project capital under the "investment subsidy" method may not necessarily form project capital with financial capital investment.

Here, only the financial investment is required to be not less than 40%, then the capital ratio of rail transit projects can still be 20%, and the other 20% is invested through "investment subsidies".

Here, I would like to extend one more question.

Special bonds can be used as project capital in 13 major areas

Railways, toll roads, trunk lines and regional airports in the eastern region, inland avionics hubs and ports, urban parking lots, natural gas pipeline networks and gas storage facilities, urban and rural power grids, water conservancy, urban sewage and garbage treatment, water supply and drainage, new energy projects, coal storage facilities, and infrastructure of national industrial parks.

The approximate reasons are:

These projects generally have a large total investment, a long construction period, a certain amount of special income, and are usually major key projects (the detailed answer can be reviewed).

Okay, so there are railways, toll roads, airports, and ports, have you ever wondered why there is no urban rail transit?

Doesn't the urban rail transit project basically meet the above characteristics?

Because, in the "Opinions on Further Strengthening the Management of Urban Rail Transit Planning and Construction", there is another sentence:

Except for projects that clearly adopt the franchise model in the urban rail transit construction plan, the total investment of financial funds in the project shall not be less than 40%, and it is strictly forbidden to use all kinds of debt funds as project capital.

Therefore, in many cases, stipulating "doing something" and "not doing something" have their own reasons, and they are not policies that pat their heads indiscriminately.

All types of funds raised through the issuance of financial instruments and other means, which should be classified as equity instruments in accordance with the national unified accounting system, may be recognized as the capital of investment projects, but shall not exceed 50% of the total capital.

In our view, one of the purposes of the funds of policy-based financial instruments is to supplement the capital of major projects, including new infrastructure, but not more than 50% of the total capital;

The use of funds for perpetual bonds can be used as project capital under certain conditions, and can only be used for 50% of the project capital.

In fact, it is all based on the provisions of this article.

After everyone has mastered the basic knowledge of the bottom, they can really use it flexibly.

In the future, the state will innovate some new financial instruments or instruments with rights for project capital, and you don't have to deliberately look at the regulations, and you can know that it can only be used for 50% of the project capital, or even less than 50%.

Okay, that's it for the project capital.