| The year 2014 witnessed China’s all-round promotion of PPP models and its leading role in implementing the infrastructure connectivity under the Belt and Road initiative.Since the infrastructure-based PPP projects are characterized by large investment,long period,high risk and low return,project financing,which is limited recourse financing secured by the project assets and future earnings,is usually preferred internationally.Financial institutions are encouraged to develop innovative financial products for PPP projects,and supports are given for the limited recourse financing based on the project cash flow,and the establishment of a market-oriented governmental financing guarantee system.However,over the past 5 years,private enterprises have been troubled by the difficulties in accessing affordable financing due to the lack of a legal system on financing guarantee.Themed by the “legal issues concerning PPP financing guarantees”,focusing on three major issues: government guarantees,floating guarantees,and the intervention right of government and financiers,this paper proposes an idea of improving the legal system on PPP financing guarantees.Oriented to realistic problems,this paper examines the development background and evolution of China’s legal system on PPP financing guarantee,and defines three major legal issues required to be studied and solved urgently in PPP project financing:government guarantees,floating guarantees,and the intervention right of government and financiers-the realization of security right in Chapter 1.By reference to the international theory of state guarantee liability,and the experience and general rules of each country and international organizations in making laws on financing guarantee,Chapter 2 demonstrates the necessity for a country to perform the financial,takeover and other responsibilities after its transfer of government’s financing,construction and operation responsibilities by PPP models,in order to support the social capital financing and ensure the sustained delivery of quality public products and services,while concluding that the rules for tackling the three issues show each country’s performance of government responsibilities and are universal.Chapter 3mainly analyzes China’s current regulations on sovereign foreign debt and local government loan transfer guarantees,and governmental financing guarantee,demonstrates the role and mechanism of constructing and improving the legal system on government guarantees and supporting social capital financing,and dispels misunderstandings among those at home and abroad about the nature and function of China’s government guarantees.Chapter 4 focuses on the implementation of the pledge of charging right in China,explores the limitations of facility ownership and franchise mortgage financing,demonstrates the necessity and feasibility of solving the problems of the current limited movable property floating mortgage system such as the narrow scope of collateral and the lack of receiver mechanism,and explains the organic integration of the two to tackle the difficulties of social capital financing.Chapter 5 conducts an integrated study on the government as the ultimate owner of the assets of any PPP project,and the financier as the largest creditor of the PPP project,by analyzing and establishing legal rules for adjusting the intervention rights of the government and the financier and their concurrence,so as to enable the sharing and restriction of the interests of the government,social capital and financier.Additionally,the last three chapter,in the situation where the country is enacting PPP laws,proposes the options and suggestions on improvement of relevant legal systems.This paper sorts out the legal issues faced by China in terms of financing guarantee practice and legislation.In 1984,the Shajiao Power Plant B in Shenzhen,as China’s first BOT project,introduced the financing elements such as government guarantees,floating guarantees,intervention right of government and financiers,and limited recourse to explore the PPP model in step with the rest of the world.Since the country is shifting from planned economy to market economy,a modern legal system of guarantee has been gradually established.However,this still does not adapt to the special need of PPP project financing,which is mainly manifested by the following three aspects.The first aspect concerns the legal restrictions on government guarantees.Before the release of the Guarantee Law in 1995,in view of the fact that some state organs provided guarantees for the economic activities of enterprises and institutions and bore joint and several liabilities with administrative office expenses and wages,state organs were legally prohibited from providing guarantees.At present,the government needs to transfer its own responsibilities of infrastructure investment,financing,construction and operation to social capital,but it is difficult to relieve the risks of excessive social capital financing by financial guarantee and other means;local governments,often by establishing financing platforms,participate in PPP projects or provide government guarantees in a disguised way,which exerts a crowding-out effect on private enterprises.The second aspect concerns the legal defects of floating guarantees.In relation to the floating mortgage system for limited movable property stipulated in the Property Law in 2007,the financing forms advocated by the government,such as the mortgage and pledge of charging right,franchise right,and facility ownership,are not covered in the subject matters,and the receiver mechanism,a unique way to realize claims for floating guarantees,is not introduced,so that the loans pledged by Chinese financial institutions cannot be automatically converted into recourse against the fixed assets of any project like floating guarantees,and the right to take over and operate the assets of the project company or replace the project company is not enjoyed.Therefore,financial institutions prefer the traditional enterprise financing secured by the fixed assets of enterprise,which brings higher participation thresholds and risks to private enterprises.The third aspect concerns the lack of legislation on the intervention right.As the main bases for promoting the PPP model in China,neither of the Administrative Permission Law nor the Government Procurement Law has specified the right of government and financiers to intervene in projects,and in particular,under the laws,financiers have no right to replace the project company on their own or by a third party,as advocated by general international rules.In practice,local governments often abuse the right of "temporary takeover",while financial institutions lack the awareness and ability to intervene in any project company’s protection of its creditors’ rights,which calls into question the PPP credibility and strengthens the dependence of financial institutions on implicit government guarantees.Once the project company applies for bankruptcy and liquidation,the liability for risk compensation may be transferred to the government.The three legal systems above integrate the interests of the government,social capital and financing institutions,which complement each other and constitute three key fulcrums of the PPP financing guarantee system.In the past,focus was mainly put on a specific issue,making it difficult to discover the latent risks of system integration.Analyses are made on the basic theories and legal rules of PPP financing guarantees at an international level.Advanced countries that promote the PPP model usually explain the relationship between the retention and transfer of state liabilities after privatization of supply,the form of transfer of states’ supply liabilities and associated risks,and the role of guarantee measures in transferring and coping with risks based on the theory of state guarantee liability,the theory of PPP model,and the project financing theory respectively.Further research on the PPP laws,instructions,guides to contracts and other laws,regulations and practical cases of international organizations,EU and related countries reveals an underlying pattern or a “lockup mechanism”,that is,government guarantees,floating guarantees,and the intervention right of government and financiers are always organically combined by PPP project financing in an extremely unique way to constitute a legal framework system of financing guarantee,so as to block risks and lock in benefits among the government,social capital and financiers.First,as the initiator of a PPP project,the government has the responsibility to consider the feasibility of financing the PPP project,and generally by granting a franchise or purchasing services,establishes two mechanisms:user payment and government payment,and provides the project company with necessary loan guarantees,payment guarantees and other government guarantees and commitments.Second,social capitals usually isolate the investment risks faced by the parent company by establishing a project company and by means of project financing,that is,project assets and future income are used as mortgages and pledges of guarantee financing from financial institutions,which means that the project company repays bank loans through the two payment mechanisms provided by the government and necessary government guarantees as the first source of income,and through the facilities built with bank loans-fixed assets as the second collateral.Once the project company defaults on its debts,the bank can take over,operate or replace the project company to prevent the company from going bankrupt.This shows the floating guarantee and its unique way to realize claims-receiver mechanism.Third,the government,as the ultimate guarantor of the ongoing provision of public goods and services,and the ultimate owner of project assets,has the right to intervene in and take over PPP projects under specific circumstances,such as when the project company acts in a manner that endangers public safety and interests or commits a material breach.As the largest creditor of the project company,the financier,with the government’s consent,has the similar right as the floating guarantee receiver does,which is to intervene in or replace the project company for ongoing provision of public goods or services when the project company defaults on its debts.Accordingly,as mentioned in the Legislative Guide to Privately Financed Infrastructure Projects issued by the United Nations Commission on International Trade Law(UNCITRAL),“the possibility of preventing agreement termination and providing an alternative chartered company gives financiers an additional guarantee against the effect of the chartered company’s default”.In view of the importance of government guarantees,floating guarantees,and intervention right of government and financiers in promoting PPP project financing,the above-mentioned guarantee methods have been included in and recommended to all countries by the Legislative Guide to Privately Financed Infrastructure Projects and the Model Legislative Provisions for Privately Financed Infrastructure Projects issued by UNCITRAL.With regard to the ways to solve the special problems faced by China in terms of financing guarantees,the basic viewpoints are described as follows:Government guarantees in PPP financing in China: in terms of the fact that Chinese scholars have long defined the government guarantee in the PPP model as a guarantee in the sense of public law from the view of legal nature to circumvent the constraints of the Guarantee Law,effort should be made to demonstrate that government guarantee is actually a guarantee in the sense of private law,and explains that the scope of Chinese government guarantee falls within the scope under the private law of civil claims,and the government guarantee is qualified as a subject to meet the legal conditions for settling debts for others.The form of government guarantee is not limited to the legal form of guarantee as a third party,and the scope of subject matters under government guarantee includes the performance of contracts with monetary compensation.On this basis,through analysis of the background and causes of the prohibition of government guarantees,based on the useful experience of foreign countries in providing government guarantees,evaluation should be made on the value-for-money and financial affordability to release the solvency of government guarantees,and efforts are needed to improve relevant supporting laws to lay an institutional foundation for government guarantees,build the legal sense that providing necessary government guarantees is to enhance national governance capabilities,and reveal the necessity and feasibility of reshaping the legal status of government guarantees.Focus is placed on the explanation of the concept and rules based on which government guarantees are used in developed countries such as the United Kingdom,the United States,Japan and South Korea and the BRICS countries including Russia,India,South Africa and Brazil,as well as the evolution characteristics of China’s regulations on government guarantees over the past 70 years.Empirical analyses are carried out on the role and limitations of sovereign foreign debt and loan transfer guarantees under the Guarantee Law of China,local government loan guarantees under the Budget Law,government financing guarantees under the Law of the People’s Republic of China on Promotion of Small and Medium-sized Enterprises and the Regulations on the Supervision and Administration of Financing Guarantee Companies in supporting PPP financing.It is required to demonstrate that maintaining necessary and appropriate government guarantee means can not only protect the interests of taxpayers and prevent government debt crises,but also effectively promote PPP financing and provide more high-quality public goods and services,provided that the mechanism of legal control over the government’s financial commitments is improved.Accordingly,it is advisable to prepare government guarantee application rules for PPP financing in China,including by defining the risk scope of government guarantees,restricting the responsible entities of government guarantees,and establishing specific rules and implementation steps for government guarantees.Floating guarantees in PPP financing in China: case research is made on toll roads to demonstrate the financing by pledge of the road charging right as the first source of repayment to banks,the financing by pledge of real estate of road facilities as the second source of repayment to banks,and the financing by pledge of the road franchise right for addressing legal obstacles faced by banks to the intervention in or replacement of project companies.By reference to the floating guarantee systems of the countries under the common law and civil law,proof by contradiction is used to demonstrate the reasonableness of listing the above-mentioned pledges and real estate as the subject matters of floating guarantees in China and establishing an additional receiver mechanism,or the necessity of granting the pledge of franchise right a similar legal effect as floating guarantees exert,and China should establish a legal system on floating guarantees as required for PPP financing.Intervention right of the government and financiers: through comparative analysis on the legal systems of China,and overseas countries and international organizations regarding the intervention right,it is concluded that financiers exercising the intervention right have no power to replace any chartered company,for which the main reason lies in the fact that the public power attributes of the government’s intervention right are purely defined without considering that the granting of the franchise right by the government is concurrent between the public law and the private law,that is,the public-private attribute characteristics of the intervention right of the Chinese government are proposed: the intervention right of the government represents the legal obligation of the government to fulfill the state guarantee liability,the privilege and discretion of government administration,and the subrogation right of the government to preserve contracts.Through analysis of the fact that the legal system regarding the intervention right of financiers originates from the receiver rules under the English law,the assignment of claims under the American law and the third-party benefit clause under the French law,this paper demonstrates that financiers should be granted the right of private remedy,namely the right to replace any chartered company in person or by a third party appointed.Accordingly,a number of rules are established for the Chinese government and financiers to deal with the concurrence of intervention rights: the government and financiers determine the basic legal relations between the causes of concurrence,and the government intervention is given priority for “public security” reasons,while financier intervention is given priority for financial security reasons;there are exceptional disposals of any default of project companies caused by the government default;the government reserves the final discretion for the project life;the government protects the financiers’ right to replace any project company;the government protects the financiers’ rights and interests after the early termination of any project contract.This paper envisions ways to improve China’s legal system regarding the aspects of government guarantees,floating guarantees,and the intervention right of government and financiers.Against the backdrop of the country enacting the Civil Code and promoting Public-Private Partnerships(PPP)legislation,this paper proposes the following options and suggestions based on the principle of progressive advancement and economizing on legislative resources.The first option concerns the law enforcement level.According to the Law of the PRC on Promotion of Small and Medium-sized Enterprises and Contract Law of the PRC,the government should revise PPP-related regulations and guidelines on the basis of competitive neutrality,and establish ring-fenced PPP funds and dedicated agencies to guarantee adequate funding,with the government as the endorser,to alleviate the difficulties faced by private enterprises in accessing affordable financing and the relevant high risks;acknowledge the right of financial institutions acquired by the transference of the project company’s equity and all contractual rights,which is similar to floating guarantees and receivers’ right.The second option is from the judicial level.The Supreme People’s Court can refer to the precedent of formulating a judicial interpretation of “independent guarantee” while excluding the scenarios that apply to the Guarantee Law of the PRC.In line with international practices related to franchise mortgage(similar to floating guarantee)and creditor takeover enforcement as stipulated in the UNCITRAL’s Model Legislative Provisions on Privately Financed Infrastructure Projects and Model Law on Secured Transactions,the Supreme People’s Court can formulate the judicial interpretation of establishing security interests with franchise rights in PPP project financing,so as to solve the non-applicability of the movable floating charge in Article 181 of the PRC Property Law.The third is about the legislative level.For legislative considerations,the standards of establishing PPP laws by the Standing Committee of the National People’s Congress or PPP regulations by the State Council should not be lower than the basic standards of UNCITRAL’s Model Legislative Provisions on Privately Financed Infrastructure Projects.We can draw on the special legislation and framework legislation adopted by Germany’s Law on Accelerating the Implementation of the PPP System and Improving the Conditions of Its Legal Framework,meanwhile highlighting the practical characteristics of PPP in China and resolving conflicts with other laws.Specifically,on the basis of the PPP Law(Draft)drafted by the Ministry of Finance and Regulations on PPP in Infrastructure and Public Utilities(Draft)primarily drafted by the Ministry of Justice,we should clearly define the two legal forms of government guarantees — “state agency(financial department)guarantee” and “governmental financing guarantee” for market-based operation;allow social capital or project companies to use all its existing and future assets,including equity,charging right,franchise right,real estate of project facilities and other assets as mortgages and pledges for financing,and ensure that they have the right to take over the intervention right of the project company.The “reorganization”procedure and the “administrator” responsibilities of the Bankruptcy Law can be applied mutatis mutandis to its rules and responsibilities for taking over.The duties of the administrator of China’s bankruptcy law are comparable to those of the British floating guarantee receiver in The Insolvency Act 1986.We can also consider restoring the original legislative draft of 1995,when the state organs promised to limit guarantees to “specific matters”,as the Standing Committee of the National People’s Congress amended Article 8 of the Guarantee Law.In this way,we can resolve issues that do not meet national development needs,such as state sovereign foreign debt and local government loan transfer guarantees,set up and improve the legal mechanism in which central and local government loans are bound by guarantees,and authorize the State Council to formulate approval procedures for government guarantees and be responsible to the National People’s Congress. |
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